Acquisitions and Investment: Quality and Regulatory Due Diligence

Two activities regularly follow an acquisition or investment with inadequate quality and regulatory due diligence or no due diligence at all: recalls and remediation.  Medical device manufacturing firms eager for investment or acquisition may be taxed for resources and eager to present a rosier picture than truly exists.  This can lead to quality and regulatory breakdowns with little or no visibility to the investor or buyer.  This article reviews three of the significant breakdowns I’ve observed and how these complications went unnoticed with inadequate quality and regulatory due diligence.


In seeking to increase market share and win over key opinion leaders to champion their products, an implant manufacturing firm expanded several product lines.  Several of these product line extensions were outside of the scope of FDA clearance.  Letters to file were written to justify only some changes to products that were implemented without refiling.  In some cases, the changes were arguably within the scope of the original clearance but nonetheless challenging to defend in an FDA inspection.  Other product line extensions included significant dimensional and geometry changes well outside of the bounds cleared by the FDA in the 510(k) applications for the product lines.  Furthermore, these parameter changes resulted in new risks and exceeded parameters of other existing products marketed by other companies.  This oversight resulted in significant regulatory and legal liability for the new owners of the company.  The resulting recall of unapproved products impacted the company’s reputation and resulted in scrutiny by the Food and Drug Administration.

How did this happen?  The target company was careless in extending product lines and changes were made without the appropriate authorization from the company’s regulatory department.  The due diligence team of the buyer reviewed regulatory submissions and letters to file but did not review the product technical documentation for regulatory compliance.  Since no submission was filed and no letter to file was generated for the product family in question, the team did not identify this non-compliance.


A company with a seemingly lucrative contract for OEM manufacturing was an appealing target for acquisition due to the high revenue generated in part by the contracted products.  The OEM products were all single-use, sterile surgical instruments.  The due diligence team evaluated samples of finished, packaged product provided by the acquiree and reviewed some technical documentation including product specifications.  The products and product packaging appeared appropriate and equivalent to similar, competing products.  However, multiple problems were identified after acquisition:

-          Inappropriate packaging material selection resulting in packaging debris within some packages

-          Improperly designed packaging systems resulting in packaging damage during shipping and thus non-sterile product

-          Sterile packaging process errors resulting in non-sterile product

-          Improper sterilization validations possibly resulting in inadequately sterilized product

-          Erroneous labeling due to inadequate labeling controls

The cost of the resulting recall, redesign and testing of the packaging, labeling corrections, and sterilization validation resulted in a substantial loss immediately after acquisition.  The products were backordered for months during these product remediation activities.  Furthermore, the related quality system remediation significantly tied up internal human resources.  Lastly, the relationship with the own-branding company was damaged and the revenue calculated during due diligence decreased significantly.

How did this happen?  Egregious lack of basic quality management at the target company resulted in failures with process validation, process control, design control, and packaging validation.  The company maintained the required procedures for these activities, but employees did not follow them.  No employees had undergone training in these areas and there was absentee management across all quality and regulatory areas.  The due diligence team reviewed product documentation and high-level process documentation but did not probe records generated through these activities.  No assessment of training records or on-site evaluation of operations was performed by individuals with quality or operations experience. When product samples were requested, they were “cherry-picked” to provide the best-looking packaging.  An auditing approach to due diligence may have prevented this acquisition or, at least, resulted in a more appropriate valuation of the target.


During due diligence for an acquisition, the acquiring company requested complaint files and adverse event reports (both terms having specific definitions in the medical device world).  The target company provided records which demonstrated that few complaints were reported and very few adverse events had occurred during the use of the device. 

After acquisition and during integration of quality system processes into the parent company, the quality personnel discovered that numerous reports alleging product failures were received by the company but were not categorized as “complaints” or “reportable adverse events”.  Due to the use informal and incorrect terminology, these events were categorized as:

-          “pre-complaints” indicating that the information may constitute a complaint, but a final determination was not pursued

-          “non-complaints” because the company erroneously determined the information did not constitute a complaint

-          “non-events” because the company’s regulatory consultant falsely determined that the adverse event did not meet the criteria for reporting

Furthermore, most product failures were associated with one accessory – the top selling accessory used in each surgery.  Numerous adverse event reports were filed with the FDA by one user facility, prompting an investigation by the FDA into the reported events.  The following activities were required to rectify the situation:

-          Retrospective reporting of adverse events to the Food and Drug Administration

-          Customer advisory notice (classified as a recall) to prevent product failures during use of existing hospital inventory

-          Quality system corrective and preventive actions with the resulting actions reported to the FDA per their mandate (including the revision of procedures and retraining of all employees)

-          Redesign of the accessory to prevent failures

-          Revisions to the instructions for use to prevent failures and adverse events

How did this happen? The target company was eager to stifle bad news about their products and was fearful of action by FDA in response to reporting product issues.   The company attempted to be creative with the regulatory definitions and requirements (not an altogether uncommon practice) to justify decisions and developed their own terminology to skirt requirements.  The due diligence team, blinded by optimism and eager to close the deal, did not delve further and trusted that the provided information was the totality of information regarding product failures.  The due diligence team specifically requested product complaint files and adverse event reports.  Since they inadvertently limited the scope of their request, not all information related to the performance or product in the field was divulged.  Auditing techniques that would have identified this information were not employed by the due diligence team.


As you can imagine, the case studies above do not represent the only problems in each target company.  However, these situations were chosen to succinctly highlight the importance of thorough due diligence using publicly available information to maintain confidentiality.  In performing due diligence for an acquisition or investment, I recommend the following:

-          Hire a quality and regulatory consultant and auditor with experience working with numerous and varied companies to ensure adequate investigation and probing.  If you have had some exposure to quality and regulatory matters, don’t assume a basic understanding is adequate to identify risks like those described above.

-          Ask open-ended and general questions to avoid receiving limited information, be mindful of any inadvertent restrictions in how you phrase requests.

-          Use a top-down assessment of the Quality Management System in addition to product-specific reviews.  Quality processes can have a substantial impact on product.

-          Perform a checklist and process-based assessment of the quality management system and regulatory files to ensure a thorough assessment.

-          Don’t let the excitement of the acquisition or investment prevent you from investigating adequately.  Identifying compliance or liability issues won’t necessarily terminate the deal; it will allow a fair valuation.

If you would like expert quality and regulatory support for due diligence, contact Brosseau Consulting LLC by email to or by telephone at 770-855-7372.  I can help prevent buyer’s remorse by providing experienced quality and regulatory support during due diligence.