Frayed gasket delaying Astra’s ZS-9 shows pharma M&A perils

When AstraZeneca plc paid $2.7 billion for an experimental drugmaker in 2015, it had its sights set on a potential blockbuster medicine. Instead, it got a Texas factory riddled with defects and two scathing reviews from U.S. regulators rejecting the treatment.

The facility run by ZS Pharma in Coppell, Texas, is at the heart of the Food and Drug Administration’s objections, which noted a damaged gasket, a cracked ceiling and slack controls at the plant, according to documents obtained by Bloomberg News through a Freedom of Information Act request. That’s prompted European regulators to conduct their own inspection of the factory, while putting on hold their approval process.

The purchase of ZS Pharma was one of a series by Astra CEO Pascal Soriot in 2015 as he sought to bolster growth after rejecting Pfizer Inc.’s $117 billion takeover offer. He wasn’t alone: global pharmaceutical and biotech acquisitions surpassed $225 billion that year. Such frenzied dealmaking has at times masked the risks, leaving in its wake buyers including Pfizer and Mylan NV grappling with flawed assets.

“The pressure to do a deal is immense,” said John Rountree, a partner at pharma consulting firm Novasecta Ltd. in London. His company runs checks for buyers, but wasn’t involved in the Astra deal. “If it looks right, the message on due diligence may just be, ‘just make it work because we’re going to do this deal.’"

The manufacturing process for ZS-9, a treatment for a deadly blood condition linked to dangerously high blood levels of potassium, is complex and Astra is working to resolve the issues, a spokesman for the drugmaker wrote in an emailed response to questions. The long-term potential of the medicine will be unaffected by the delays, he said. The Cambridge, England-based company didn’t respond to questions about its due diligence process.

Shares of Astra dropped 0.2 percent to 47.12 pounds as of 10:30 a.m. in London trading, paring its gains this year to 6.4 percent.

When Bloomberg reported in September 2015 that Swiss biotech Actelion Ltd. had made a bid for ZS Pharma -- a company with no revenue and one experimental treatment -- Soriot had already had his eye on the San Mateo, California-based company, according to a person with knowledge of the matter.

Within days, Astra made a counteroffer, according to people familiar, who asked not to be identified as the discussions were confidential. Soriot sealed the deal less than two months later, offering a 54 percent premium over where the stock traded before Actelion’s interest became public knowledge.

Astra moved quickly because the drugmaker thought it knew the business, having watched it from afar for years before entering into talks, one of the people said. ZS-9 was poised to get FDA approval in May 2016, with annual sales expected to exceed $1 billion, Astra forecast in November 2015.

The trouble began in March 2016 when an FDA inspection report cited a “reddish-brown substance’’ resembling rust in the tanks at the Texas facility. Reactors that were supposedly clean were found to be “soiled’’ with a white residue. The inspectors also found a crack almost four feet long in the ceiling, the documents show.

Two months later, Astra made the FDA’s rejection public and pledged to resolve the issues in a timely way.

When inspectors returned to the facility, they found a number of new issues including a worn-out, torn reactor gasket with pieces missing, the agency said in a January report. Black particles were scattered on the face of the gasket, and the plant’s facilities weren’t maintained to ensure the quality of products.

Astra vowed, one more time, to resolve the issues “as soon as possible.”

The effectiveness of ZS-9 isn’t in question, and the company hasn’t been required to conduct more tests. But the second rejection by the FDA prompted a key European Medicines Agency division to put on hold its February recommendation to approve the drug. The regulator is now awaiting a final report from its own inspection of the factory in September, after which that recommendation will be reconsidered, a spokesman said this week.

Meanwhile a competing drug from Vifor Pharma AG has won both European Union and U.S. approval, underscoring the competitive pressures in an industry where regulatory delays can often lead to rival medicines gaining an edge with doctors and patients.

Buyers often focus on a particular product or technology that’s the impetus behind the deal, trusting that other problems can be fixed down the road, Adnan Qamar, a managing director with consulting firm KPMG LLP, said in an interview.

“The accuracy and control of quality systems aren’t going to drive whether you’re going to buy a company or not,” said Qamar, who often conducts the due-diligence process for potential buyers.

Larger rival Pfizer suffered its own woes after buying Hospira for $17 billion in September 2015, with product recalls and delays when the FDA found manufacturing violations. A Pfizer spokesman said the problems were identified during the due diligence process, though rectifying them is taking longer than anticipated.

Similarly, in 2015 Mylan ran into quality issues at Indian plants it bought, with the FDA listing violations including the use of torn gloves and complaints that weren’t investigated. Those problems have since been resolved, a Mylan spokeswoman said.

Companies sometimes decide that a very attractive acquisition’s flaws can be worth the cost, according to KPMG’s Qamar.

“It’s like if you find a house in a nice block at the right price, you may plunge in blind without inspecting the plumbing,” he said.