Life Sciences and Healthcare Enforcement and Litigation Activity is Increasing

Key Takeaways

  • In the U.S., site inspections by the FDA are up, and investigators are focused on how well manufacturers maintained quality and good manufacturing practice (GMP) compliance during the COVID-19 pandemic. 
  • China is developing new GMP guidelines. Chinese inspections of sites outside China are increasingly focusing on compliance discrepancies with Chinese GMP requirements.
  • The U.S. Department of Justice (DOJ) is likely to make clinical trial fraud an enforcement priority and to use the False Claims Act (FCA) to target rebate arrangements perceived to undermine drug pricing competition.
  • The U.S. Department of Justice (DOJ) continues to investigate life sciences companies’ healthcare fraud and abuse compliance programs.
  • Overseas clinical trials, physician interactions, and routine healthcare provider interactions — such as sponsoring conferences — risk violations of the Foreign Corrupt Practices Act (FCPA).
  • Molecules and substances, rather than products, are increasingly being targeted in product liability litigation.
  • Life sciences companies should expect a continued focus from Securities and Exchange Commission (SEC) enforcement authorities on public disclosures and accounting issues.
  • Life sciences companies are increasingly looking toward trade secrets protection as a complement to their patent portfolio.

Across the U.S. healthcare sector, we are seeing increased activity by the Food and Drug Administration (FDA), the Department of Justice (DOJ), the Federal Trade Commission (FTC), and the Security and Exchange Commission (SEC). We are also seeing increased litigation under the Foreign Corrupt Practices Act (FCPA), and generally around product liability and trade secret issues.

FDA Inspections are on the Rise

Inspections have returned to pre-pandemic levels, including unannounced inspections in both the U.S. and India and likely China once travel restrictions are fully lifted. Companies whose pharmaceutical supply chains are reliant on manufacturing sites located in India or China should take steps to assess these sites’ GMP compliance and shore up their operations or consider alternative manufacturing sites for key materials. We predict a trend of increased public regulatory enforcement by FDA, such as warning letters and import alerts, including for product quality issues that occurred due to COVID-related staffing and supply chain restrictions.     

Remote Regulatory Assessments (RRAs), a tool piloted during the COVID-19 pandemic, are also expected to continue. Due to the pandemic, many manufacturers have not been the subject of in-person inspections from FDA or other health authorities in years. This lack of experience can be compounded by the loss of key personnel and subject matter experts who had experience hosting an inspection. Additionally, RRAs, which can include numerous rounds of records requests and/or the use of assisted reality technology for facility tours, can be resource intensive and further challenge already stretched quality organizations; the use of new technology can also create issues. Pharmaceutical companies should therefore ensure the inspection readiness of their sites. Being prepared means investing in the technology that can support an RRA and undertaking proactive steps, including mock audits, to increase the potential for a successful RRA or inspection.

Life sciences companies should make sure they respond to the potential concerns of whistleblowers through their compliance programs, including through the detailed documentation of the steps that have been taken to address any issues that were raised to their attention during the pandemic. In China, the National Medical Products Administration (NMPA) is also developing new GMP guidelines. These will have a significant impact on life sciences companies, particularly in relation to products to be tested in clinical trials, such as blood products and cell therapies. The NMPA’s GMP inspections of sites outside China are increasingly focusing on compliance discrepancies between the Chinese GMP requirements and those of the country in question and on a lack of compliance with the China product registration standards.

The DOJ and FTC are Focused on Middlemen Relationships

In 2023, we should expect continued scrutiny of the relationships between drug companies and pharmacy benefit managers (PBMs). Both federal and state authorities are known to be monitoring for fraud or anticompetitive practices in this area. In 2022, the FTC announced an investigation into PBM practices and separately announced that it would increase enforcement against illegal bribes and rebate schemes that block patients’ access to competing lower-cost drugs. Also, in 2022, several drug companies disclosed in SEC filings that they had received inquiries from the Ohio and Illinois Attorneys General relating to trade and pricing practices and PBM relationships. This flurry of activity is consistent with a pattern of increasingly active state Attorneys General, who often launch independent investigations that mirror or expand federal probes.

The SEC is Targeting Channel Stuffing

In 2023, we expect to see life sciences companies aggressively pursued in relation to public disclosures, insider trading, SPACs, and accounting and disclosure-related offenses. The area of so-called “channel stuffing,” where companies inflate sales or revenue numbers by sending more product than customers ordered, is likely to be a focus. For example, the SEC brought an enforcement action against a surgical implant manufacturer for allegedly masking disappointing sales numbers by shipping future orders ahead of schedule, in order to accelerate revenue. The SEC also filed charges against a medical supply company, as well as its former CEO and COO, for allegedly inflating the company’s financial results by creating sham sales that it reported as revenue on its financial statements. 

FCPA Enforcement will Target Clinical Trials and Physician Interactions

Enforcement activity under the FCPA against life sciences companies is also expected to accelerate in 2023. The Biden administration has announced that it will dedicate significant resources to anticorruption efforts. Recent enforcement actions have made clear that routine healthcare provider interactions, and such as sponsoring conferences, speaking engagements, advisory boards, and training may be considered violations of the FCPA. Another area of FCPA risk for life sciences companies stems from the significant increase in clinical trials conducted overseas, including in markets that are considered higher risk from a corruption perspective. 

Whistleblowing in Life Sciences Companies is on the Rise

In 2023, as the broader economic slowdown continues, we expect there to be an increase in the number of personnel who will consider whistleblowing. The risk may be particularly acute among life sciences employers who are implementing reductions in the workforce. Indeed, we have already seen a number of large government investigations stemming from whistleblower complaints in the second half of 2022, and we expect this trend to continue into 2023. We are also seeing the DOJ and whistleblowers continue to bring False Claims Act actions against life sciences companies, particularly those that lack the fundamental controls necessary to comprise adequate healthcare fraud and abuse compliance programs.

Molecules and Substances are Garnering Interest in the Product Liability Space

In recent product liability litigation, there has been significant attention given to molecules and substances rather than to discrete products. Products that share the underlying chemical composition of a product, or a characteristic of it, are therefore at risk of becoming subject to the next product liability litigation. Life sciences companies can keep their finger on the pulse of which types of molecules, substances, and devices the FDA and other U.S. regulators are concerned about by regularly tracking recalls and company press releases. Reviewing the relevant publications with an eye toward products that share characteristics is a useful way in which to avoid being caught off guard by claims.

Trade Secret Protection on the Rise, and so is Trade Secret Litigation

There has been a substantial increase in trade secret litigation by life sciences companies. This rise has largely been driven by the fact that patent protection in the U.S. has become somewhat unpredictable. Increasingly, life sciences companies are less certain that they will be able to adequately protect their technologies and products through patents or to get their investment back through the enforcement of their patents. The result is that companies are increasingly looking toward trade secrets protection because it means that instead of disclosing details of their inventions to the public in a patent, they can instead protect some of their IP from competitors by keeping them as trade secret.

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The views expressed in these articles are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
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