Heading For An M&A? Understand The Risks And Mitigation Strategies For Clinical Trial Agreements

By Kate Hardey, partner, healthcare and life sciences, Katten

Changes in ownership in the clinical trial ecosystem can facilitate product pipeline advancement, expand geographic reach, and create operating efficiencies. These transactions also require precise navigation of significant contractual, regulatory, and operational risks. Clinical trial agreements (CTAs) sit at the center of that complexity. Failure to properly review and navigate CTAs during the transaction process can stall closing, trigger regulatory scrutiny, or disrupt ongoing studies.

This article distills key considerations to help anticipate and mitigate the risks that CTAs and diligence in the clinical trial space present during mergers and acquisitions (M&As).

Transaction Structures Shape CTA Review Strategy

The transaction structure — stock purchase, merger, or asset purchase — drives both the legal mechanics and the practical approach to reviewing CTAs in a transaction. For example, in a stock transaction, the target entity and its contracts generally remain intact, and most CTAs continue under the new owner. However, change-of-control notice or other notice or consent requirements are common. By contrast, an asset purchase transaction requires the buyer to identify each CTA that must be assigned to the buyer and often requires securing written consent before closing. These contract assignments can prove time-consuming, especially when dealing with public or non-profit institutions whose contracting offices frequently face heavy volumes and lengthy internal review cycles. Early mapping of all CTAs for each transaction type can mitigate closing timeline risk and provide a realistic view of transaction timing considerations.

Clinical Trial Diligence: Identifying Hidden Liabilities

Beyond confirming contract transfers and assignability, buyers in the clinical trial space should conduct comprehensive regulatory due diligence. Key areas for buyer evaluation include:

• Regulatory compliance: This includes a broad scope and may vary based on the clinical study phase. Early-stage clinical trial diligence may focus more on drug development targets and safety signals, whereas later-phase clinical trials may focus more on data integrity, protocol compliance, and regulatory filings. Key diligence review areas include  investigator compliance, protocols and protocol compliance, adverse events, institutional review board (IRB) approval, and required filings with the FDA or foreign agencies, as applicable.

Regulators continue to scrutinize clinical research activities. Recent U.S. Department of Justice (DOJ) enforcement actions continue to focus on areas such as data falsification, billing fraud, and concealment of adverse events. In this regard, buyers should evaluate the target’s compliance program effectiveness, including policies and procedures, training records, and monitoring reports. Weak compliance systems could expose buyers not only to inherited liabilities but also to reputational damage post-closing.

• Data integrity: Data privacy and cybersecurity present parallel risks. It is important to review adherence to recordkeeping standards, including 21 CFR Part 11 electronic systems validation. Studies involving protected health information (PHI) in the U.S. should have Health Insurance Portability and Accountability Act (HIPAA) authorizations, data use agreements, or business associate agreements, as applicable. Studies in the EU may implicate the General Data Protection Regulation (GDPR) compliance.

• Billing and reimbursement: Billing errors represent another fertile ground for potential enforcement. For example, misallocating research costs to government payors can potentially create exposure under the False Claims Act. It is important to understand a target’s clinical trial billing processes, policies, and procedures to ensure that any routine care services are billed appropriately and research-related services are charged to the study budget.

• Financial Terms: In addition to billing and reimbursement, CTA diligence should include a thorough understanding of all site payment schedules and pass-through cost structures to understand funds flow and prepare for future budgeting needs.

• Indemnities and Insurance: It is also essential to understand the scope of any sponsor indemnification obligations, the dollar caps on liability, and any liability carve-outs.

A disciplined, phase-tailored diligence review can help transaction teams allocate resources to focus diligence efforts on where they matter most and avoid over-engineering low-risk areas. As discussed below, red flags uncovered during diligence can influence critical deal terms such as purchase price adjustments, special indemnities, escrow holdbacks, or covenants requiring pre-close remediation.

Negotiating Purchase Agreement Protections

Findings from the diligence review can inform the scope of representations, warranties, and indemnities in the purchase agreement. Typical purchase agreement representations in the clinical trial space address material compliance with FDA, Good Clinical Practice (GCP), and comparable foreign regulations; an absence of unresolved Form 483 observations or warning letters; completeness and accuracy of clinical trial data; valid informed consent documentation; and compliance with fraud and abuse risk areas, such as the Anti-Kickback Statute, the Physician Payments Sunshine Act, and other federal and applicable state fraud and abuse laws.

Where diligence uncovers open issues, such as concerns with FDA inspections, data discrepancies, or threatened litigation, buyers often negotiate special indemnities, longer survival periods for certain representations, or escrow holdbacks. Additionally, pre-closing covenants may require the seller to remediate identified deficiencies, obtain missing consents, or take other corrective actions prior to closing.

Post-Closing Integration And Continuity

Importantly, diligence risk management does not end at closing. Buyers must integrate inherited CTAs into their own business and clinical quality-management systems, update standard operating procedures (SOPs), and harmonize data privacy processes and controls. Creating a central database of all active and archived CTAs during the diligence process facilitates ongoing monitoring of milestone obligations, publication rights, and any retention requirements, as applicable.

Equally important in the transaction process is proactive communication with study sites, CROs, and regulatory oversight bodies. Integration teams should prepare continuity plans to ensure there are no material compliance or operational gaps. Clear messaging about changes to legal entity names, payment instructions, and points of contact maintains goodwill and can facilitate a smooth transition. Where the transaction requires updates to regulatory filings, such as IND applications or ClinicalTrials.gov listings, the buyer should submit amendments promptly to avoid potential noncompliance.

Conclusion

CTAs and related clinical trial activity involve a complex legal and regulatory framework. In the context of M&A, it is crucial to understand the key CTA and diligence risk areas to coordinate a tailored diligence approach that efficiently navigates contractual and regulatory challenges, preserving operational value and maintaining robust compliance post-close.

About The Author:

Kate Hardey combines deep industry knowledge with a focus on delivering effective client solutions. Kate is a reliable leader in navigating the regulatory and transactional challenges affecting companies in the health care provider, life sciences, and food industry sectors, including pharmaceutical and medical device manufacturers, clinical research organizations, laboratories, pharmacies, physician groups, hospital systems, food manufacturers, and related food industry entities.  Private equity firms and strategic acquirers frequently seek Kate's counsel on major acquisitions and mergers. Clients with products regulated by the FDA, including human and animal pharmaceuticals, medical and digital health devices, cosmetics, over-the-counter medications, dietary supplements, and food and beverage products, rely on Kate’s extensive experience with transactional strategies and regulatory knowledge to navigate complex legal and regulatory frameworks effectively.