merger and acquisitions

Trust but Verify: It’s OK to Ask Questions

From due diligence for investments and M&A to internal and supplier auditing, being bold enough to ask questions may ultimately save your organization and reputation.

In the medical device and biologics industries, there is a lot of pressure to keep the ball rolling while also keeping it in bounds.  Navigating financial progress must be made while remaining compliant to regulatory requirements and ensuring safety for the patients and users of your products.  Such a tightrope is a challenge but is also certainly possible with the right resources and skills.  This article evaluates one approach that individuals can take in any role and at any level in an organization: asking questions.

I continue to marvel with disgust at the massive ruse Theranos management deployed against patients, medical professionals, investors, business partners, regulators, and the public at large.  This was one of several recent debacles that stain the reputation of a largely compassionate and honest industry.  As I learn more about the Theranos debacle, my curiosity digs at the endless stream of lies perpetuated (whether intentionally or naively) by Elizabeth Holmes, her executive leadership, and top shareholders.  How could they have such audacity and fearlessness in leveraging such lies to advance the company?  Why did investors, potential business partners, and more media outlets not question the many claims that have now been exposed as total lies?  Why were outsiders so accepting of Theranos’ inability to offer concrete evidence of any claims?  In my own work, I’ve instantly identified more subtle cases of false and misleading information – why did it take so long for that to happen with Theranos?  Let’s probe some examples so you understand my bewilderment and how I would’ve responded as a certified auditor and experienced due diligence professional.

First, Elizabeth Holmes claimed that the Theranos diagnostic device was deployed in medevac helicopters in Afghanistan by the Department of Defense.  A second whopper was that the Theranos device did not need FDA approval to be marketed in the US.  To her credit, Ms. Holmes stated that although the device did not require marketing authorization, they would seek FDA approval (actually, this supposed strategy highlights the possibility that Theranos had no regulatory affairs staff or consultants).  The final fib we’ll discuss is how Theranos convinced potential investors that pharmaceutical companies were using the device in clinical trials.  I understand the need for tact during discussions regarding acquisitions, mergers, or investment and the hesitation to appear incredulous.  But these are perfect opportunities to probe for information simply on the grounds of genuine curiosity!  If the negotiations are so fragile that asking legitimate questions will jeopardize the deal, that may highlight the suspect nature of the idea or organization for sale.

As an auditing and executive professional, some questions I would’ve asked when faced with the claims of medevac use would have been:

·        What is the use and even advantage of the technology on a medevac helicopter?  How does the technology in this application meet user needs?

·        What feedback has the company received from combat zones on the advantages compared to other methods of testing?

·        How is a precision instrument running 200 tests on two drops of blood validated to function in such a rough environment?

·        What documentation is available demonstrating DoD or FDA approval for such use of the device?

·        Do you have a photograph or video of the product being used in this application?

·        What training was provided for use of the device?

Regarding the claim that FDA approval is not required for such a device, did anyone question such a definitive statement lacking any supporting detail?  As a regulatory expert, I understand I approach this with much more knowledge than the average individual.  However, did such a bold claim with such serious financial and safety implications not warrant some insistent questioning or background investigation?  During due diligence, taking information at face value is a dangerous gamble.  In this situation, I would’ve asked for:

·        An FDA response to a  513(g) Request for Information;

·        FDA pre-sub meeting minutes;

·        Even informal documentation from FDA such as email correspondence; or,

·        A regulatory strategy or rationale from a qualified regulatory affairs professional.

When Theranos implied the device was being used by pharmaceutical companies in clinical trials, were no follow-on questions posed by these investors?  At a minimum, some additional information or verification would have been possible if this claim was true and asking for confirmation would not be out of line.  If presented with papers documenting clinical performance of the device and branded with the logos of major pharmaceutical companies implying a partnership, I would ask:

·        Which of the 200 tests performed by the Theranos device were being used in each study and why?  Any investigational use (drug or device) should correspond with an entry on clinicaltrials.gov (hint, hint!).

·        What feedback did Theranos receive from the investigators?

·        Most importantly, would Theranos provide references or contacts at the pharma companies?

Theranos may very well have responded citing a cloud of secrecy and insisting confidentiality.  Which in turn would prompt another question – given the supposed confidentiality, why leverage the relationships in the first place?  Without a reference or some evidence of legitimacy, I would treat that information as null and possibly counterfeit.  To proponents of a deal, this may seem extreme but skepticism is entirely reasonable without evidence.

Why was there seemingly such eagerness to patently accept the claims made by Holmes et al.?  Why did such shallow and unsubstantiated lies prop up Theranos so long and enable them to receive billions in investments?  It seems that the answer to this question is that the right questions were not asked or there was no persistence in the line of questioning.  In my extensive history of auditing and performing due diligence assessments, I’ve never regretted asking questions, I’ve only regretted not.  At the worst, my research and analysis were ignored.  But even in those situations, the pressure test I applied to the organization was suitable to have identified any egregious violations. 

Ensure you have the right team involved in auditing and assessing target companies and recipients of your investment funds; qualified quality and regulatory personnel are essential.  During acquisitions and investment due diligence, don’t let the excitement blind you to reality.  When auditing, hold firm on your line of questioning and don’t allow yourself to be distracted or placated.  The sting of regret from poor due diligence outlasts and outweighs the excitement of the accomplishment.  As stewards of the finances, safety, and well-being of so many, we must ask questions even if it’s uncomfortable.  As penned by Suzanne Massie (Ronald Reagan’s adviser on Russian affairs) and stated often by President Reagan during diplomacy with the Soviet Union, “Trust, but verify.”  No one should criticize you for asking legitimate questions; if verification were not necessary, due diligence and audits wouldn’t be performed in the first place.

Brosseau Consulting is available to assist your organization with due diligence, auditing, or other business matters requiring keen evaluation and analysis.  Please contact Bryan here for more information and a complimentary initial consultation on how Brosseau Consulting can assist you in meeting goals and minimizing risk.