Expected amendments of the Medical Device Regulation will most likely increase the attractiveness of investments in the sector

Investments in the health care sector are very popular since the start of the COVID-19 pandemic. In Germany, there has been a particular interest in the strong German medical technology sector during the last years, not only from strategic but also from private equity investors.

It is well known that the structural problems in the context of the implementation of the Medical Device Regulation (EU) 2017/745 (MDR) caused turmoil in the sector, which also impacts the market of mergers and acquisitions. Now, as a result of the meeting of the Employment, Social Policy, Health and Consumer Affairs Council (EPSCO) on 9  December, the European Commission proposed to amend the MDR, and in particular to extend the recertification deadline in order to ensure the availability of medical devices. The new timeframe will most likely increase the attractiveness of investments in the sector.

MDR requirements in M&A transactions

In the course of the legal due diligence of a target company in the medical technology sector special attention needs to be paid to the legal framework of the manufactured and distributed products. For a potential buyer it is essential that the products are certified as medical devices, bear the CE marking, have passed the applicable conformity assessment procedures, and that the certificate will be valid also upon completion of the contemplated M&A transaction.

With respect to the certification procedure the MDR, which entered into force at the end of May 2021, resulted in substantial intensifications. In order to increase the safety and quality of medical devices the risk classification system has been modified by the up-classification of almost every product to a higher risk class. Certificates issued before the MDR came into force will, according to the transition period provided therein, only be valid until 26 May 2024. Naturally, for a potential buyer it is essential that the products of the target company meet the increased regulatory requirements after that date and that the recertification either has been obtained, or timely can be obtained.

Problems of the sector with the MDR

For quite some time structural problems with the implementaion of the MDR are known, inter alia a jam of recertification procedures. According to the German medical technology association (Bundesverband der Medizintechnik - BVMed) currently only 2,000 out of the approximately 25,000 medical devices used in Europe were recertified. There are many reasons for this. On the one hand the new procedure is considered as to complex and cost-intensive. A joint survey of the German Chamber of Commerce and Industry (Deutscher Industrie- und Handelskammertag – DIHK) and the sector association Spectaris give legitimate cause for concern that in many fields of application manufacturers might take at least half of the products from the market. On the other hand the recertification procedures take a very long time: according to the BVMed in 82 percent of the cases between 13 and 18 months, in 18 percent of the cases even between 19 and 24 months. No single recertification procedure has been completed in less than a year.

Consequences

Since months representatives of the German medical technology industry and German politicians, not least the federal states of Baden-Württemberg und Bayern, pointed out with initiatives, surveys, an urgent letter to the European Commission and a resolution of the Federal Council (Bundesrat) that the missing recertifications will result in a substantial shortage of medical devices from May 2024 onwards. The sell-off date of 25 May 2025 for medical devices that are already on the market would even aggravate the supply situation. The existence of many companies and the competitiveness of the entire European medical device industry are at stake. In this context, the request of the Swiss parliament which asked the country’s Federal Council to allow medical devices that have been vetted by non-European regulators, such as the US Food and Drug Administration (FDA) to be marketed in Switzerland, demonstrates the gravity of the situation.

Proposed amendments of the MDR

The need to readjust the MDR has meanwhile acknowledged, as most recently shown at the meeting of the Employment, Social Policy, Health and Consumer Affairs Council (EPSCO) on 9  December 2022, where the majority of the ministries of health of the European member states supported the proposal of the European Commission to extend the transition period under the MDR. A staggered deadline for the recertification depending on the risk class of the respective device, i.e. by 2027 for devices of the classes IIb and III, and by 2028 for devices of the classes I and IIa. In addition, the sell-off date shall be removed in order to prevent a shortage of medical devices and avoid that safe medical devices need to be taken from the market.

The European Commissioner for Health and Food Safety, Stella Kyriakides, plans to present a respective proposal to amend the MDR at the beginning of 2023. The proposed extensions provide at least a short term solution and will likely increase the attractiveness of investments in European and particular the strong German med tech sector and mitigate transaction risks related to regulatory requirements. It remains to be seen whether the European Commission will also address further expectations of the sector such as exceptions for niche products or the lack of notified bodies.

M&A plans become more attractive

So far as it has been assumed that many companies of the sector will dispose of those business units which became unattractive due to the MDR requirements, the proposed amendments will probably not change that expectation, except that there would be less pressure to sell on short notice. As regards investments in certified medical devices, the announcement of the European Commission to extend the transition period will probably lead to an increasing interest of investors in such regulated targets, in particular if such companies initiated the recertification and due to the modified timeline no longer have to fear whether they can obtain the recertification in time. But also companies which did not yet initiate the recertification may be targeted now given the changed deadlines.

In any event, the legal due diligence should pay particularly close attention to existing certificates and possible recertification procedures. In addition, it should be assessed to what extent established processes of development, production, quality assurance, monitoring and marketing can be maintained or need to be adjusted to the increased requirements of the MDR. When structuring an M&A transaction further implications, as for example the need for a new certification, must to be considered.

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