As we previously reported, this year has seen a surge in healthcare-related M&A. Many of these transactions are in the medical technology industry, or MedTech. While the industry’s healthy profit margins and opportunities for growth have driven a flurry of activity, the potential for large rewards from MedTech acquisitions also comes with unique obstacles:
- Regulatory compliance: The healthcare industry is heavily regulated, with recent privacy legislation requiring stricter due diligence practices. Medtech companies often collect sensitive user data and in addition to conducting cybersecurity due diligence, buyers must ensure that the target’s data collection policies and practices comply with health privacy legislation such as Ontario’s Personal Health Information Protection Act (PHIPA) or its applicable counterparts. Compliance with legislation such as the Food and Drugs Act in Ontario may also become essential when valuing and allocating risk in a transaction.
- Clinical trials: Many MedTech transactions involve products that are still under development. In order to determine a proper valuation, it may be essential to thoroughly review the clinical trial’s design, the reliability of the preliminary studies on which the trials are based, and the trial records to ensure regulatory compliance.
- Product liability: Even if a target complies with all applicable laws, MedTech companies may be vulnerable to potential lawsuits related to patient injuries and casualties. Statutes of limitations and standards of care vary by jurisdiction and must be thoroughly vetted to ensure the target is adequately covered.
- Intellectual property: Intellectual property (IP) is often a MedTech company’s most valuable asset. However, it may also be a source of potential liability, resulting from infringement of another company’s IP. As a result, to help mitigate such risks, buyers should ensure extensive freedom-to-operate due diligence is conducted or was conducted at some point by the target
- Anti-corruption laws: Sales and advertising of medical devices are strictly regulated. In many countries, customers such as hospitals and healthcare practitioners are affiliated with the government and therefore, improper payments formerly made by a target may be at odds with the US Foreign Corrupt Practices Act (FCPA) or other anti-corruption legislation.
Structuring a deal in a manner that isolates as well as mitigates product and regulatory liabilities is essential to ensuring success in MedTech transactions. Indemnities may be modified to cover not just product liability but voluntary recalls and other regulatory issues. Other solutions include acquiring representations and warranties insurance or setting up of escrow funds so certain payments only when corresponding milestones are reached. MedTech companies and medical data are increasingly international.
The author would like to thank Jamie Parker, articling student, for his assistance in preparing this legal update.
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