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Beyond the term sheet: De-risking life sciences and healthcare M&A
For buyers and sellers in the life sciences and health industry, a signed letter of intent signals the commencement of the diligence, regulatory, and deal mechanics that ultimately determine the value, timing, and certainty of closing. In a sector defined by product classification judgments, quality system rigor, data-driven business models, and participation in federal health care programs, the issues that matter most emerge after exclusivity begins. Today, the winning strategies are the ones that anticipate these sector-specific risks early, triage them efficiently, and establish pragmatic solutions that address structure, price, and post-closing protections.
What to confirm first: regulatory status, pathway, and commercial model
The fastest way to prevent late-stage surprises is to make sure that the buyer and seller are aligned on what, specifically, is being acquired. Early in exclusivity, the buyer should confirm the product portfolio, device classification and intended use, and the corresponding regulatory pathways that apply to the products at issue (e.g., exempt, De Novo, 510(k), or pre-market approval). The parties should also validate current-year certificates, FDA registrations and device listings. All labeling and promotional claims should be cross-checked against clinical support and prior agency correspondence. Technical gaps like device misclassification, a missing listing, or an unsubstantiated claim, can reallocate risk, extend timelines, or lead to purchase price adjustments. Bringing these questions forward and addressing them early helps both sides calibrate the structure of the deal and set appropriate closing conditions.
Quality system readiness and initial diligence
Quality system readiness continues to drive valuation and bespoke indemnity discussions in medtech acquisitions. Diligence should assess risk management, corrective and preventive actions, internal audits, change control, and production and labeling controls. Buyers will want to review inspection history and outcomes, remediation status, complaint handling, medical device reporting (MDR) processes and timeliness, and recall or field action patterns. Trends in MDR volumes or a history of “Dear Doctor” letters will likely invite targeted underwriting and often result in tailored protections in the definitive agreement, including special indemnities or structured escrows to mitigate risk.
Clinical evidence and enforcement history
Clinical evidence relating to medical devices underpins their commercial viability, especially for earlier-stage or digital health assets. The diligence process should validate data integrity, the protections in place for clinical test subjects, and publication controls, distinguishing proactive studies from those brought by investigations. Similarly, the buyer should confirm any past or current FDA enforcement actions. Weakness in the evidence package can lead to special indemnity/ set-off protections benefiting the buyer and contingent economics, such as earn-outs, holdbacks or escrows tied to clearance, reimbursement, or commercialization milestones, so that price is paid when risk recedes.
Federal program participation and fraud and abuse exposure
Targets that bill Medicare, Medicaid, or Department of Veterans Affairs (VA) programs have a heightened regulatory risk profile. To address this risk, parties should confirm enrollment and certification status, billing accuracy, claims integrity, internal controls, and audit histories. A common way of doing this is by conducting a targeted sample claims review. Review physician and distributor relationships, consulting agreements, incentives, and Sunshine Act reporting disclosures. Anti-kickback and Stark Law issues, or even the appearance of referral-based financial arrangements, can derail an otherwise compelling deal unless addressed through remediation, exclusions, or bespoke risk allocation.
Data privacy, cybersecurity, and AI diligence
Data rights and privacy compliance are now foundational to valuation for AI-enabled and data-intensive products or services. As a result, it is increasingly important to confirm HIPAA applicability and compliance, state law coverage, data flows, security controls, incident logs, and breach notification infrastructure. For AI models, buyers should verify that all training data, applicable datasets, and data pipelines were obtained legally. Documentation should further detail transferability of rights, bias testing and human oversight protocols and procedures, and applicable regulatory controls. In case of problematic data practices, discontinuing the same does not erase historical exposure; where legacy use creates risk, expect to see enhanced representations and warranties insurance (RWI) underwriting, specific indemnities, or targeted price protections.
Structuring protections: indemnities, RWI, and earn-outs
Definitive agreements in this sector commonly feature line-item indemnities for known exposures such as pre-closing taxes, historical regulatory non-compliance, missing licenses, and employment misclassification. Survival periods for non-fundamental representations typically run 12–24 months, with longer periods for fundamental and tax representations. Representations and warranties insurance remains widely used, with typical premium levels in the 2.4% to 3% range of the insured amount, retentions that often start at 0.5% to 1% of the transaction’s purchase price, and policy periods that generally extend beyond customary contractual survival periods. Insurers increasingly require deep dives on quality systems, MDR histories, data practices, and clinical evidence, and may exclude certain regulatory matters or price them separately. Earn-outs and contingent value rights remain a practical bridge where value turns on regulatory or commercial milestones, including FDA clearances, payer reimbursement, revenue thresholds, or time-to-market, often paired with offset rights to align incentives.
Cross-border and state-level timing
Cross-border transactions raise additional considerations. Such transactions may require merger control filings, employee transfer consents, foreign direct investment screening, national security/ CFIUS reviews, and anticorruption diligence. Device certifications, manufacturer notifications, and data transfer restrictions can affect sequencing. Even within the United States, state licensing and change-of-ownership rules for device manufacturers, distributors, telehealth providers, and facilities can drive closing mechanics and interim covenants. Planning for site-specific approvals and enrollments avoids timing traps that can otherwise force re-trading.
A practical path to deal certainty
In a market where diligence findings can reshape economics, the most effective acquirers and sellers integrate regulatory foresight into the process before and during exclusivity. That means prioritizing portfolio and regulatory pathway confirmation, quality system and post-market reviews, clinical and enforcement checks, federal program participation and fraud and abuse risk, and the provenance and governance of data and AI. It also means using the findings from the diligence review to inform the architecture of the deal so that any anticipated risk is borne by the party best positioned to manage it.
If you are contemplating an acquisition or sale in the medical device or digital health space, Reed Smith can help you triage the regulatory and legal issues that drive value, anticipate insurer and regulator expectations, and structure a path to closing that protects the business you are buying or selling. Please contact the Reed Smith team to discuss your objectives and pressure-test your due diligence and transaction strategy.