The impact of regulatory changes on the value of MedTech businesses

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.