The MedTech sector faces unprecedented regulatory overhaul, particularly
with Europe's transition from the Medical Device Directive (MDD) and In Vitro Diagnostic
Directive (IVDD) to the more stringent Medical Device Regulation (MDR) and In Vitro
Diagnostic Regulation (IVDR). These changes fundamentally alter how MedTech
businesses are valued in healthcare mergers and acquisitions. Companies and
private equity firms increasingly conduct thorough regulatory due diligence
before taking acquisition decisions. We will
tell you more about how regulatory changes increasingly affect MedTech business
valuations through increased operational costs, market access challenges, and
long-term value considerations.
1. Increased operational
costs
Regulatory compliance significantly increases operational expenses, financially
impacting companies not certified under MDR or IVDR. Moreover, expanded
technical documentation requirements and more rigorous clinical or performance evidence
demands require a lot of input. There
are more post-market surveillance obligations, more need for specialized
regulatory personnel, and higher notified body fees than before. These costs
can reduce margins by several percentage points, directly affecting valuation.
2. Market access challenges
Regulatory
transitions create market access uncertainties:
- Certification
issues due to limited notified body capacity. Notified body capacity constraints have
created significant backlogs, with review timelines extending from 6-9
months under MDD to 12-18 months under MDR for medical devices. The same
delays can be expected for IVDs. This directly impacts time-to-market and
revenue recognition, particularly for new products.
- Portfolio
decisions. Economic
analysis often reveals that certain legacy products cannot justify MDR or
IVDR investment. Analysts estimate that 20-30% of legacy devices will be
discontinued, creating market gaps and revenue impacts.
- Legacy
devices and IVDs facing new regulatory requirements. New regulatory requirements may
result in compliance gaps in the technical documentation of legacy products. Fixing
these gaps could lead to additional costs for re-design, verification testing
or validations.
- Geographic
market access limitations. As some non- European markets adopt MDR- or IVDR-equivalent
requirements, companies face complex decisions about geographic
prioritization. This often leads to market withdrawal from smaller non-European
markets.
- Competitive
disadvantages for non-compliant products. Regulatory transitions create windows of
opportunity for market share changes. Companies with early MDR or IVDR
certification gain temporary competitive advantages and can capture market
share from competitors experiencing certification delays.
The dual pressures of increased regulatory
costs and continued healthcare pricing pressures create margin compression.
This forces difficult decisions about either absorbing costs (reducing
profitability) or passing them to customers (risking volume).
Companies that achieve higher valuations treat
regulatory excellence as more than just a compliance task. They build it into
their business strategy, using it as a key advantage that supports long-term
growth and value.
3. Long-term value considerations
Beyond immediate
compliance costs, regulatory positioning affects long-term value. The
regulatory transition forces companies to evaluate their product portfolios.
This often leads to focused investment in higher-margin products while
divesting less profitable legacy products. Portfolio rationalization can
increase company value despite short-term revenue impacts.
Resilient
regulatory frameworks can be a competitive advantage. Companies with robust
regulatory frameworks have higher valuations, due to lower risks of
compliance issues and sustainable market access for the product portfolio.
·
Portfolio optimization. The regulatory transition forces companies to evaluate their
product portfolios. This often leads to focused investment in higher-margin
products while divesting less profitable legacy products. Portfolio optimization
can increase company value despite short-term revenue impacts.
MDR compliance creates higher
barriers to entry. Higher barriers due to
costly MDR compliance potentially protect the market share of companies that
manage to do so. From this perspective, the MDR can be a strategic
advantage.
·
Regulatory
talent value. Organizations that have successfully managed
regulatory transitions possess human capital with scarce expertise. This talent
pool becomes a significant component of acquisition value, particularly as
regulatory expertise shortages persist across the industry.
Strategic recommendations
For private equity
companies seeking to maximize the valuation of MedTech companies during M&A
healthcare activity:
- Prioritize regulatory compliance
as a strategic investment, not just a cost.
- Develop clear remediation roadmaps
with realistic timelines and budgets.
- Consider the portfolio to focus on
compliance resources.
- Build regulatory excellence into
company culture and operations.
The regulatory
landscape has permanently altered MedTech's valuation. Companies that view
regulatory excellence as a strategic advantage rather than a burden will
ultimately command premium valuations in healthcare mergers and acquisitions.