Pharma Executives: Consider Contract Compliance Audits at Four Key Times in M&A Transactions

BlogContract Compliance AuditRisk
Updated on: April 16, 2024

COVID-19 has shown that pharmaceutical executives face contract compliance challenges that can result in big mistakes and public scrutiny, especially in times of growth in new markets. The value of contract compliance can prove to be essential to not only saving money for your company but also helping to improve and protect the well-being of your customers.

Reaching national news in April 2021, the Food and Drug Administration found poor conditions at a Baltimore plant that was producing the Johnson & Johnson (J&J) vaccine through a third-party, ruining millions of J&J vaccine doses that could have helped millions of Americans in the fight against COVID-19. This real-world example proves the necessity of a contract compliance audit to regulate and oversee third-party suppliers to ensure contracts are being upheld and to protect your company’s reputation and financial health.

On top of these public safety issues that we’ve seen since COVID-19, pharmaceutical executives must also concern themselves with everything from global regulatory issues and scrutiny to increased competition and outsourcing risk.

Facing Regulatory and Competitive Pressures

As the pharmaceutical industry has been forced to quickly evolve through the turmoil of the pandemic, executives are facing pricing pressures from healthcare reform and increased scrutiny from potential regulatory noncompliance. Additionally, pressure is mounting due to a lack of visibility, transparency, and communication in the supply chain. As referenced above in the example of J&J’s Baltimore plant ruining millions of vaccines, if there had been clear visibility into the third party’s process, transparency of challenges arising, and communication from the third party to J&J, the entire situation could have been avoided.

Pharmaceutical companies are also encountering greater competition from branded and lower-priced generic drugs. As a result, they are losing revenue in the costly cycle of research and development, innovation of new products, and the expiration of patented drugs.

In fact, MedCityNews reports that $194 billion in brand-name pharmaceutical sales are at risk during the 2017-2022 period, with an anticipated loss of $31 billion due to patent expirations in 2018 alone.

Rising Merger and Acquisition Activity

To help counteract these pressures, many pharmaceutical companies continue to explore strategic mergers and acquisitions (M&A) to spur growth and revenue.

Pharmaceutical mergers and acquisitions from drug makers Celgene and Sanofi total more than $26 billion alone. These deals, along with others that have been announced, have led to the sector’s strongest start for deal-making in more than a decade.

Smaller acquisitions have also been frequent due to a growing number of new and non-traditional companies entering the healthcare ecosystem. Life sciences companies are looking to partner with these companies to access data, technology, and retail connections.

Four Times to Consider a Contract Compliance Audit

To help maximize transparency and the return on investment of their mergers or acquisitions, many pharmaceutical executives are strategically conducting contract compliance audits.

For instance, if a company has recently been involved in a business combination, chances are that the new organization inherited conflicting or redundant contracts with third parties. Managing those transitions is difficult for third parties that previously worked with each company before the business combination. An audit can validate that the third parties have accurately applied the most favorable pricing terms and identify any transactions occurring outside of the existing agreements.

In particular, pharmaceutical companies should consider completing contract compliance audits at four essential times during and after a business combination:

  1. During significant personnel change:
    1. Audits are vital to ensure continuity and efficiency, minimizing the potential for risks by verifying that procedures are continuing to align with contract provisions. Stakeholders that are inheriting ownership of a contract may not be familiar with all the nuances within the customer and third-party relationship. An in-depth examination of the activities between the parties versus their respective contracts will provide valuable insights and transparency while accelerating the incoming stakeholder’s learning curve.
  2. Prior to ending third-party contracts:
    1. Companies should perform contract compliance audits to identify any non-compliant charges prior to the conclusion of the relationship. Issues identified during an audit become increasingly difficult to remediate after the contract terminates and final payment for services has been issued. Conducting audits prior to transitioning the business also allows for learnings to be applied to the relationship with the incoming third party.
  3. Prior to contract renegotiations or sourcing events:
    1. It’s not uncommon for mergers and acquisitions to result in overlapping contracts with the same third-party or several different third parties performing the same services. If the combined organization is renegotiating its current contract with a third party or putting the business out to bid to consolidate the third-party population and corresponding spend, audits performed prior to negotiations or sourcing events can produce significant insights and leverage resulting in more favorable terms going forward.
  4. Throughout long-term supplier contracts:
    1. Companies should perform contract compliance audits on long-term third-party contracts to strengthen every stage of the relationship and avoid losses due to non-compliance which can compound significantly over an extended period of time.

As mergers and acquisitions continue in the pharmaceutical industry as a way to rise above various revenue-growth hurdles, contract compliance audits can act as a strategic tool to bring clarity to third-party relationships during complex business situations.

A well-executed examination of third-party contracts and their corresponding transactions—during and after a merger or acquisition—can create greater transparency and alignment, strengthen relationships, enhance existing processes and maximize the return on the relationship.

To learn more about how to develop greater transparency, accountability, and trust with key third parties, click here for more insights from SC&H Group’s Contract Compliance Audit team.

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