The M&A Playbook for Medical Devices

28th July 2016 (Last Updated July 18th, 2018 09:21)

Monir El Azzouzi, Johnson & Johnson, provides a step by step guide for med device companies looking to consolidate their businesses

The M&A Playbook for Medical Devices

Over the last few years, numerous medical device companies have been involved in huge mergers and acquisitions (M&A) – Zimmer and Biomet, Depuy and Synthes, or Medtronic and Covidien, just to name a few. What’s evident is that the major players want to be bigger to earn greater market share. But when it comes to consolidation, should market share be the only aspect that’s considered? Is this strategy increasing product quality and at the same time customer satisfaction? In this article, I will highlight three steps that will help guide your merger and acquisition. But first, let me pose to you a hypothetical situation:

Potential M&A?

Company A, which is a 20-year-old company, has a good but aging portfolio. They want to improve their commercial impact and have decided to target a new product. After some investigation they discovered that Company B is producing the right product. Company B is a Medical Device Company certified ISO 13485 and received a CE mark for their products. Some 85 percent of their production goes to export, it has a turnover of 10 to 12M€ per year, and the product is really cheap.

Do you think that Company A should acquire Company B? With those characteristics, Company B sounds like the perfect company to acquire. Now if we reveal that the name of Company B is PIP (Poly Implant Prothèse), the infamous French breast implants company, would you still consider this acquisition?

This company was using cheap raw material to manufacture their products, which were not compatible for medical usage. If Company A acquired Company B, chances are they would have discovered that from the beginning and initiated a recall. However, as many patients were implanted with the product, this would have had a big impact on their company name even if they had nothing to do with it in the first place.

To prevent this situation, we propose you follow a specific pathway during your journey to an M&A. And I want to insist that the journey doesn’t stop at the final signature. The signature is only a step. The methodology is called D2ICT which stands for:

  • Due Diligence (D2)
  • Integration (I)
  • Crash Test (CT)

This methodology will help you identify potential issues. Furthermore, it may even help you define a good strategy to execute, which will encourage harmonization between your businesses.

Due Diligence

The Due Diligence is a process where you are reviewing, auditing, and performing a diagnostic of what you potentially want to acquire.

When you are buying a house, you start by visiting the property. You verify if the kitchen or the bathroom is big enough. You check to see if the electrical network is safe for you and your family, whether there are modifications that need to be performed, and so forth. Even if there are things that are not fine for you, we can imagine that you would try to reduce the price to be able to pay for some constructions.

When buying a company you should do the same. For that, you involve Subject Matter Experts (SME) as lawyers, financial analysts and business analysts who most commonly perform due diligence. On the financial review we also analyze the cost of production which will help us decide if this company is a suitable fit. For a Medical Device company, the other aspects that are important to consider are:

  • Quality
  • Regulatory Affairs
  • Information Technology (IT)

We need then to involve SMEs on these fields. Certification of medical device companies is instrumental to conduct business. If a company loses their certificate because of a huge recall or a Warning letter they can be in danger. To avoid that there are certain points you need to take into account. A due diligence can be performed by an external partner, or it can be done inside the company with face to face meetings.

Actions that should be done are as follows:

  • Challenge the certificates: You should verify by yourself that the organization providing the certificates is competent. For example, The NANDO database will be the best resource to review Notified Bodies competencies.
  • Review the packaging material: By looking at the CE logo you can understand the classification of the product and know if this product was approved by a notified body or if this was self-certified by the company.
  • Read a plant fast: This methodology described in an article from Eugene Goodson on the Harvard Business Review from 2002 can be a good help to collect information from companies.
  • Everything is now done on IT platforms. A review of the possibility to transfer data and the maintenance of these platforms can be essential to succeed.
  • Quality Tools: How this company is using Corrective Actions and Preventive Actions (CAPA), Non-Conformities (NC) or complaints investigation can tell you a lot on their commitment to Quality.
  • Clinical Trials: Review of the studies done and if they are compatible to the countries you are targeting will avoid you to start unplanned investment.

Integration

You are driving a Formula One car. After a certain point, you need to refuel and change the tires. You go to the Pit Stop and when you arrive to park there is no-one waiting for you. You turn your head in the direction of the garage and you see your engineers walking in no hurry in your direction with the new tires, the tube to refill the gas and start to execute. Do you think this team will win the race? It’s similar for a company. Your Integration starts during the Due Diligence. You need to collect enough data to strategically prepare your integration. For that you need to have a team that is ready with a Project Leader who knows everything about the targeted company.

You also need to have a clear budget for this integration. Data transfer, product re-registration or label updates are some examples of what can happen. Furthermore, you also have to budget some money in case of unforeseen circumstances, such as a recall, a field action, or major issues not identified during the Due Diligence.

Your Due Diligence team should be connected to your project team for integration before the signature of the transaction. Opportunities, challenges, discussions, history, all of this should be shared and analyzed to give an opportunity to the integration team.

Before initiating your integration strategy, you need to establish a Quality System. Do you want to have one Quality System for both entities with the same certificate? Or do you prefer to keep them separated, which means twice more work to maintain?

A lot depends on your Due Diligence. If there is low confidence in the Quality System then perhaps first you need to keep both systems separated and initiate a remediation plan to increase the level of this entity. This likely means you’ll have to maintain two different quality systems. Nevertheless, after a certain time, you can harmonize all the standards and be able to merge them.

You’ll also need to collaborate with the Notified Bodies to have a transition plan for one or the other company.

Merging Quality Systems helps simplify processes. It enables people from each entity to talk the same language and support each other. It is also helpful when you have only one Notified Body to manage. Because even if the regulation is similar to everyone, sometimes an opposing decision can be made by each notified body, which puts you in trouble because you don’t know which one to listen to.

Crash Test

Within medical device companies there are many controls and audits that exist. A lot depends on which market you are selling your products. If you fail an audit, this can have huge consequences on your business. For instance, selling restrictions within a certain country, or a list of actions to put in place to be more compliant, could both impact your company’s finances.

To avoid this you need to be prepared and the best way to do that is to perform a crash test. You should simulate a real audit and verify that you are OK. The ideal is when the auditor is coming from outside the company and doesn’t know anything about it.

To prepare for this crash test you need also to train your team on how to behave. You need to verify that they have all the required knowledge to talk to an auditor. They should understand that quality topics are not only for the Quality department, but should be considered by all departments.

To conclude, I want to quote Warren Buffet. He once said that “it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

 

*Monir El Azzouzi is the Quality Plant Manager at Johnson & Johnson