As the pharma services sector grows, regulators at the Department of Justice and Food and Drug Administration are placing everything from clinical trials to site management under the microscope. McGuireWoods partner Clint Narver speaks from experience: He joined the firm after serving in leadership roles at both agencies.

With host Geoff Cockrell, Clint helps industry stakeholders understand regulators’ enforcement priorities. He covers the responsibilities of clinical research organizations (CROs), the impact of decentralized clinical trials on regulatory oversight, and the importance of corporate compliance in avoiding enforcement actions. To investors looking at acquiring a company, Clint notes that DOJ’s recent Mergers and Acquisitions Safe Harbor policy is designed to incentivize the disclosure of corporate crime that is uncovered through the due diligence process. 

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell. Here at the Corner series, we try to bring together deal-makers and thought leaders at the intersection of healthcare and private equity, talking about issues confronting investors and some of the different types and avenues of investment. I'm thrilled to be joined by my partner, Clint Narver. He's joined us recently from the Department of Justice, where he had an active enforcement role. Clint, maybe give a little bit of your background at DOJ and then we can jump into some questions.

Sure thing, Geoff. I would be happy to. Thank you for having me today to talk with you. I joined McGuireWoods about two and a half months ago. I joined from the Department of Justice where I was in the consumer protection branch of Main Justice, and the Consumer Protection Branch has a number of responsibilities. One of them is overseeing litigation, both civil and criminal enforcement efforts involving the Food Drug and Cosmetic Act. And that's the body of law that really is interpreted by the FDA, and that applies to pharmaceuticals, medical devices, clinical research, food, dietary supplements, and a variety of other products.

My role at DOJ's Consumer Protection Branch most recently was I was an Assistant Director, and in that capacity I supervised a number of attorneys that were conducting primarily criminal investigations and litigation in this space. Prior to that, I served as a trial attorney in the consumer protection branch, where my role was to personally conduct investigations and litigation, and a lot of the work that we did at the branch we did in-house. So there's about, I think at this point around 150 lawyers there. But an awful lot of that enforcement work is also done out at the US Attorney's Offices across the nation, and we worked with those US Attorney's Offices in various capacities too.

Prior to my time at DOJ, I was actually at the Food and Drug Administration for about five years. I worked in the Office of the Chief Counsel, and I would describe my role there as essentially being an in-house advisor to the FDA, a legal advisor. I did a lot of work around medical products, so medical devices, pharmaceuticals, and a big component of that involved clinical research. And I moonlighted to some extent as a Special Assistant US Attorney. So in addition to providing advice and regulatory guidance to the agency, I was also actively working on investigations and litigation, in tandem with colleagues at US Attorney's Offices. And I graduated from the University of Pennsylvania Law School prior to that.

So Clint, maybe narrowing our focus a bit from the overall kind of pharmaceuticals business to an area where we're seeing a ton of investment activity, and that being pharma services. Pharma services obviously covers an array of types of business services surrounding the development, testing, commercialization of pharmaceuticals. It's a massive industry. From where you sat at DOJ and the FDA, what are some of the current enforcement priorities of the government as it relates to the pharma services arena?

I'm happy to address that. There's a lot going on in pharma services, and as you pointed out, Geoff, it's a really massive industry and it seems like it just is continuing to grow all the time. So in my experience in government, I sort of saw, I think I was earlier on at the FDA and there I saw pharma services sort of start to become more of a thing. And even that lingo, pharma services, when I first started practicing in this space, which was before my time at FDA, that wasn't as much of a term. I saw that develop. And then certainly in my time at the Department of Justice, it became really front and center.

In terms of enforcement priorities. I sort of think of it as, as the pharma services sector has grown, it's just a lot of DOJ and FDA attention are being paid to ways in which the regulation has not, new activities that have not historically sort of clearly been regulated in a particular way. Clinical research has been one area that I think has gotten a lot of attention in recent years. That is to some extent clinical trials, but in fact, it also encompasses non-clinical research as well. And this is going to be research that is in support of an FDA product application. So research supporting a pharmaceutical or research supporting a medical device, with the intention that it'll ultimately be submitted to the FDA. That's been a pretty significant area of attention from the department and from the FDA.

Maybe drilling down a little bit further, Clint, into kind of CROs. Maybe articulate some kind of fact patterns. If a CRO is going to start to get into deeper water from an enforcement perspective, what are the types of things that kind of cause that?

Sure. So CROs have a pretty important role in the oversight and conduct of clinical research. And as you know, Geoff, CROs can take on different shapes and forms. They're not all the same, but a core of most CROs responsibilities in any given clinical trial is going to be providing some oversight over the actual clinical investigators, who are really the folks on the ground who are enrolling the patients and doing the day-to-day research activity. And so the CRO has a responsibility in most cases, to sometimes retain those investigators. They do it on behalf of the sponsor, but they actually are the ones who are retaining and hiring these investigators. And the investigators are the medical doctors who are conducting the studies.

And the CROs also have an oversight role, which is to monitor the progress of this study. And so one of the ways that CROs could potentially get into hot water is around that monitoring role. There are situations where in most cases we like to think that investigators are out there doing everything by the book 100%, so the monitoring role will be pretty straightforward. But there are situations and there's been a number of situations that have come up at the Department of Justice involving fraud in clinical research. And some of that fraud that has historically been investigated and prosecuted has been at the investigator level, and the CROs have been positioned to be in an oversight role over these investigators. Sometimes in those types of matters, questions can come up about the extent to which a CRO should have discovered the misconduct on the part of the investigator, or could have even been in some way complicit in the misconduct of the investigator. I think that that's one of the ways that CROs can potentially get in the crosshairs of a government investigation.

I think in many cases there are CROs who are operating appropriately, pursuant to procedures and well-thought out policies, are able to really put themselves in a spot where they can mitigate the risk that would come in these situations.

Another area where we see a lot of investment activity is kind of an offshoot of that, in the context of site management. You often think historically is the site and location of some of that testing is being centralized and people come into a central area. That's become much more diffuse as site management has become much more critical in managing a very diffuse kind of army of investigators. How have people gotten in trouble from the perspective of site management businesses?

So I think that with respect to site management, I mean, I tend to view it as similar to CROs, in that there's a wide variety of site management organizations out there that are really serving more as just managers. And then there are some that are on some of the other end of the spectrum that incorporate all the nuts and bolts of the research activity. And so they're able to really, they may not have the principal investigators working for them, but they have the research staff and the research facilities.

So I think the extent to which I've historically seen site management organizations get involved in investigations and potentially get into trouble, I mean, it's been similar to what I was describing for CRO. I think that, imagine instances where a site management organization that is actually contributing to conducting the clinical trial, maybe it has study coordinators in place, it has other staff who are doing the day-to-day, supposed to be helping to enroll patients, to monitor patients. They're not doing what they're supposed to be doing in accordance with the protocol. Now, that can take on a variety of shapes and forms. It can be, there's intentional misconduct, which is going to be at one end of the spectrum, or it can be that there's something more akin to negligence, which is really the other end of the spectrum. The government sometimes gets involved in either scenario and in terms of investigating and trying to figure out what's going on.

One other aspect to it that I should note is there is a, from my roles at FDA and at DOJ, I think there is really a continuum of enforcement possibilities, I guess I'd say. A lot of enforcement activity will begin with the FDA. And so it will begin with the FDA conducting a regulatory inspection of a site management organization, or of a clinical investigator, or of a CRO even. And that regulatory inspection will gather some evidence about a specific issue, and depending on what's found, that could lead to further enforcement activity from the FDA, such as warning letter. It could also lead to a referral to the FDA's Office of Criminal Investigations, which investigates these matters criminally and/or a referral to the Department of Justice. So that continuum becomes important when you're looking at sort of the severity of the problems that are encountered at these different organizations.

Geoff, you had mentioned the research becoming more diffuse. I think that's a key point, and there's a lot of attention that's been paid in recent years and increasingly even in this calendar year, to decentralize clinical trials. And I'd be happy to talk about that a little because I've sort of seen that as being a growing area of interest for the FDA and the Department of Justice.

Sure. As you move into kind of more diffuse trial sites and trials in general, what are the areas where the government has got greater interest?

So I think that on the one hand, there is the goal with these more diffuse trial sites, decentralized. It's viewed by the government at large, I think, as something that's very promising. As something that provides this to move away from the traditional on-site clinical trial, which sort of what you were talking about earlier, that was a situation where all the patients had to show up at a physical location. Depending on the nature of the particular study, they may have to show up every week, maybe even more than that. It can be complex, economically, geographically, logistically for these people to do that. In some instances, that's a barrier to research, it's a barrier to getting folks to enroll in clinical research. So the decentralized clinical trials sort of flip that paradigm, and they at a high level are bringing the research to the research participant. And so maybe the research participant can be in a clinical trial from their home and can have largely telehealth visits, or can use digital technology to monitor their progress during the course of the study, as opposed to physically going into a medical clinic.

In other situations, a research participant might be able to go to a local doctor, as opposed to having to go to the actual clinical investigator to facilitate that convenience. And so this is viewed, I think, very favorably by the government because it's a way to broaden the research population, to increase diversity, and ultimately to get more targeted and useful data that really reflects the patient population that would ultimately take a drug or use a medical device.

But it raises enforcement and compliance concerns too. And one of them at a high level is that in theory, it becomes a little bit harder to monitor what's going on in a decentralized clinical trial. And just to unpack that a little, FDA has this ability, for the most part, to go and inspect a clinical trial site. And so when everything's taking place at one location, FDA can show up at that location and should be able to largely do its job by looking at what's going on there. But when you have research activity taking place all over the map in a given clinical trial, that becomes a little bit more complex and how complex will depend on a specific clinical trial and exactly how diffuse it is. But it certainly raises some issues around being able to monitor and fully understand what's happening everywhere.

I think that some of that can be mitigated by things like using appropriate technology to ensure that data is honest and accurate. And it can also, I think one of the other ways that that can be addressed is many trials are not going to be fully decentralized. They're not going to be completely diffuse. There will still be some aspects of the trial that will take place at a primary location. And that sort of adds a double check potentially on any errors, on any oversights and helps us have additional assurance that everything is being done by the book.

For an investor that's looking at a pharma services investment, do you have any kind of red flag items or topics that they should be on the lookout for as they are starting to some initial diligence with respect to a target?

Yeah, there definitely are certain red flags. I think that those red flags will depend to some extent on where in the farmer services spectrum the investor is looking. We talked about clinical research being one area where there's a lot of pharma services businesses out there and different types of businesses. You essentially have pharma services across the product lifecycle, for drugs and devices. So you have the research-oriented firms, you have the manufacturing-oriented firms. You even have the drug development-oriented firms. And then once a product is approved by the FDA, you have farmer services companies that will help with things like marketing, packaging, and regulatory affairs and medical affairs.

So I think that the red flags are going to depend to a large degree on where in that food chain, essentially you're looking at an investment. For pretty much all of them. I mean, one of the red flags I would say is a big red flag and may have somewhat obvious, but has the FDA conducted an inspection of this establishment? And has there been further regulatory interaction between the FDA and this establishment, such as, has the FDA issued a warning letter? What is the current status of that warning letter as the company? Has the company brought itself into compliance in the FDA's eyes, or is this still a matter in which the FDA is seeking the firm to bring itself into compliance?

I would say that the fact of an FDA inspection, it's something you want to know about. So in that sense it's a red flag, but the fact of an inspection in and of itself should not be viewed as a deal breaker by any means. I mean, inspections can have a variety of results. Sometimes somebody can essentially pass an inspection successfully, and even when the FDA cites you for violations, it is possible to bring yourself into compliance through a process of interacting with the agency and addressing their concerns in a way that the FDA then is essentially okay with what's going on at that particular firm. But that would be looking at the FDA regulatory record, there would be one particular area of focus.

In the context of something like, say, just to take another example, CMOs contract manufacturing organizations. One would want to look at what are called CGMP requirements and the extent to which that manufacturing operation had implemented and was complying with CGMP requirements. There's a variety of ways that one can do that, but essentially it's taking a close look at the specific regulatory requirements that apply to that part of the industry.

So Clint, a lot of DOJ enforcement activities are kind of focused at individual bad actors, and there certainly can be from an investor perspective, the concerns can be broader of like, assuming that there's not specific, horrible criminal activity happening in your organization, you can still as a large business run yourself into trouble with the DOJ or with the FDA. How should a larger organization think about corporate compliance and how does the FDA and DOJ think about those topics?

Sure, a very good question. I think that it's fair to say that the Department of Justice has been focusing on corporate compliance in recent years, and that focus has really just continued year by year, certainly at my time at DOJ. I would say that that's not a substitute for the department looking at individuals, obviously looking at individual misconduct, but it's sort of just a supplementation.

And one of the ways that that has manifested is through DOJ initiating various policies and guidances around corporate compliance. So one key factor I think, for any company that's trying to navigate this space is to have a corporate compliance program in place. This is something that DOJ prosecutors look at essentially in any potential corporate criminal case, they'll look at the company's compliance program and they'll evaluate the extent to which that compliance program was appropriate and tailored to the company and its operations. And so in the FDA regulated space, that raises some specific issues.

One of the things that I think is interesting, maybe interesting for investors, is that in addition to this focus on corporate compliance and having clients agreement in place, there's been a significant focus by DOJ on actually looking at the due diligence process. Sort of incorporating that into its analysis of whether a corporation is essentially a good actor. And one of the ways that that's been done is there was a recent Mergers and Acquisitions Safe Harbor policy that was issued by DOJ. And what that policy essentially says is that if an acquiring company discovers criminal conduct in the process of a corporate merger and discloses that conduct to the department within six months of closing the transaction, then the department will not pursue a criminal charge against that company, that acquiring company, and subject to other conditions.

This is an interesting aspect in the FDA regulated industry space for a number of reasons. One of them though, is that there's many ways in which companies can technically violate laws in the FDA world. You're operating in a framework that has essentially a strict liability set of regulations, and a lot of violations could, in theory give rise to enforcement activity. So while we discovered something in the context of diligence, should we disclose it to the department? Raises very, very nuanced, I would say, kind of questions around, well, is this a violation that's meaningful? Is this a violation that's significant? Is it actually something that needs to be disclosed to the Department of Justice?

And in terms of the FDA, I think the FDA looks at corporate compliance too in its own way. I mean, certainly a lot of the companies it regulates, the FDA is looking closely at the conduct of the company. I mean, looking at individuals to some extent too, but they're looking closely at the conduct of the company acting in an effort to get these companies to bring themselves into compliance.

Clint, I think we could talk about that for quite a while, but let's end it there. These topics, obviously for any investor looking at making an investment that is related to the FDA or pharma services in general, it behooves them to understand the lay of the land from a regulatory and enforcement perspective, and be your last topic there, were figuring out what to do if you discover a problem. Those can be very, very subtle discussions as to kind of probability and magnitude and remedies are difficult in the context of a transaction. And it really benefits having your expertise as to how the government would view those things. But thank you so much for joining, this has been a ton of fun.

Yes, thanks very much, Geoff. Thanks for having me.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host, Geoff Cockrell, at gcockrell@mcguirewoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.