Common mistakes in the process of Legal Due Diligence of pharmaceutical M&A transactions in Vietnam

Mergers and acquisitions (M&A) transactions in the pharmaceutical sector are a complex process that requires a significantly higher level of Legal Due Diligence (LDD) than in other sectors. This strictness stems from the nature of the transaction's target asset, which is primarily intangible. Besides, there is a close binding of this field with health management agencies with somewhat strict regulations. A comprehensive LDD is not just a legal requirement but a vital strategy for buyers, helping to assess risks and liabilities before making an investment in the target company.

Some common mistakes in recent times

From practical experience, we have noticed some common mistakes in the legal due diligence process of the target company can be mentioned below.

Firstly, errors in determining intellectual property rights

Intellectual Property (IP) is a core asset in the pharmaceutical industry, and IP due diligence is the backbone of LDDs in this field. An IP due diligence error is not merely the loss of a patent, but a deficiency in the integrity of the title chain and the legal sustainability of the asset, creating the risk of costly litigation for the buyer.

Many deals in Vietnam neglect to check the validity and ownership of patents, trademarks, and trade secrets related to pharmaceuticals. In many cases, the patent owner may not have made a full transfer of rights to the company, leading to a "hole" in ownership. If the patent or trademark has not been registered in Vietnam, the target of purchase may not be effective. In addition, intangible assets such as technological know-how or biomedical data are also often neglected. For the medical and pharmaceutical industry, these assets are very important but are often overlooked in due diligence. In fact, "determining the right to operate professionally, manage intangible assets such as medical records, medical data, ownership of drug trademarks... are often the main cause of disputes" in M&A in the medical sector in Vietnam. Therefore, errors or omissions in IP checks can reduce the value of the deal or lead to the risk of losing intellectual property.

Secondly, shortcomings in the assessment of compliance with specialized legal regulations

Vietnam has very strict regulations on pharmaceutical production and business licenses. A common mistake is not carefully checking the target's GMP/GDP certificate and drug registration certificate. According to the latest amended Pharmaceutical Law, manufacturing facilities must have a valid GMP certification. According to current laws, Vietnam recognizes WHO-GMP, EU-GMP, US-cGMP... and the certification must be valid at the time of application and at least 6 months thereafter. Similarly, distribution facilities need a certificate of Pharmaceutical Business Conditions (GDP) issued by the authorities. If this license expires or does not comply with regulations, the batch of drugs may be suspended from circulation. In addition, the registration of new drugs in Vietnam also has complicated procedures, including clinical records and imported drug certificates (CPPs). Therefore, missing the relevant registration or license records may make the target's main products unmarketable.

Third, deficiencies in determining access to and ownership of clinical data

In Vietnam, the issue of medical and clinical data is also increasingly important. A common mistake is that it is important not to verify the right to use clinical trial data for pharmaceuticals in the R&D process. According to the soon-to-be-come Personal Data Protection Law, the processing of personal data relating to a health condition requires the explicit consent of the individual concerned. Therefore, in due diligence, investors need to consider whether the target company is compliant with data protection regulations. Shortcomings in this assessment can lead to legal risks if personal data is used unauthorized after M&A. Failure to verify the validity of consent and security protocols can turn core clinical data into malicious assets. If data is collected without valid consent or not protected by strict encryption protocols, it may not be lawfully used in the future, losing the value of the entire R&D trial.   

In addition, clinical trials often involve the collection and transfer of personal data across borders. The LDD must ensure that the target company has established valid legal mechanisms of countries and regions and has clear, transparent consent to transfer clinical data across borders.

Fourth, errors in contracts and business structures

Many errors arise from not carefully reviewing drug distribution contracts, agency contracts or raw material supply. For example, distribution contracts often have an exclusivity clause and a "change of control" (CoC) clause. The due diligence process often faces great challenges in identifying and fully interpreting the unusual "change of control" provisions in the initial R&D and licensing agreements. While the CoC clause in public M&A is often a defense against mergers, in the life sciences industry, it has a completely different and more dangerous meaning: it is the clause inserted by former R&D partners to protect their interests.

If the buyer does not anticipate the cancellation of the contract when acquiring the company, the main distribution channel may collapse. The buyer needs to check all pharmaceutical business licenses of the target and transfer conditions, such as the right to circulate drugs that cannot be transferred to foreign investors without a separate import license. Omitting this regulation can cause the deal not to achieve the expected results.

The risk of reviewing the CoC/LOE[1] is a factor that fails the main valuation. Many pharmaceutical M&A deals are made with the main purpose of taking over a proprietary technology, a good distribution system that has formed over the years.

Fifth, shortcomings in the verification of corporate documents and potential disputes

A comprehensive LDD must pass a surface inspection to delve into the governance structures and historical records of the target company. A common mistake is not to scrutinize the warranties and indemnities in force in mergers, acquisitions, or licensing agreements that have taken place in the past. These terms may give rise to unforeseen liabilities after the transaction closes. Buyers will incur lingering financial or legal obligations from transactions in which they are not directly involved.

The LDD must include a meticulous review of meeting minutes, shareholder agreements, and other governance records. Failure to consider existing litigation threats or internal disputes that have not been made public may result in legal disputes or unforeseen financial losses. This omission reduces the buyer's ability to accurately assess the target company's overall regulatory environment.

The pharmaceutical industry is a high-risk sector in terms of product liability. Although Vietnam has not had as many major pharmaceutical lawsuits as in the US, drug recalls due to manufacturing errors or side effects still occur. Therefore, the appraisal must include a review of drug safety books, reports and complaint records (if any). A common mistake is not checking the product recall history or lack of product liability insurance, resulting in the buyer suffering financial consequences if there is a claim later. In addition, new regulations on side effect monitoring must also be considered, as violating safety monitoring regulations is also a legal risk for the deal.

Solutions for effective LDDs in the pharmaceutical industry

To avoid critical errors and ensure the strategic value of the pharmaceutical M&A transaction, buyers need to adopt a multi-sector LDD strategic framework and proactive hedging.

Firstly, use a dedicated LDD team

LDD in the field of life sciences cannot be carried out by ordinary lawyers but lawyers who are specialized and have many years of experience in the field of pharmaceuticals as well as the life sciences industry. Therefore, the selection of law firms and lawyers specializing in conducting transactions in the pharmaceutical sector is very necessary and important. Besides using professional legal services, the use of experts in the relevant field should also be considered.

Secondly, it is necessary to develop a reasonable LDD strategy and ensure smooth coordination between relevant parties

Post-transaction indemnity terms must be negotiated based on the specific risks of the pharmaceutical industry identified in the LDD:

It must be affirmed that LDD activities in the field of pharmacy are very complicated, in addition to professional knowledge of law, LDD activities in this field are also related to specific specialized scientific knowledge. Each target company usually operates in different sub-sectors of the pharmaceutical field, there is a unit specializing in R&D for product development, there is a unit that manufactures brand-name drugs, there is a unit specializing in processing generic drugs, there is also a mere commercial business unit. Therefore, law firms and lawyers when participating in the implementation of LDDs need to clearly define the activities of the target company to determine the corresponding LDD strategy accordingly. In addition to the internal team, law firms/LDD units can fully consult with relevant experts such as pharmacists, doctors, scientists,... in case of necessity.

Third, develop a reasonable risk remediation plan/solution

Not only should the LDD end with a risk report, but it should identify systemic compliance gaps and plan a detailed budget and timeline to remediate them immediately after closing the transaction. This helps the buyer proactively minimize the risk of heavy fines from the management agency. More importantly, LDDs need to ensure that the target's technology and processes can be seamlessly integrated into existing systems and the buyer's stricter data privacy. System incompatibility is a major operational and legal risk that needs to be addressed from the due diligence stage.

In general, legal due diligence in pharmaceutical M&A must be careful in all aspects: from business licenses, regulatory compliance, to contracts and litigation risks. Any error, especially in international transactions, can reduce the value of the deal or lead to disputes later.

Lawyer Nguyen Van Phuc

HM&P Law Firm