Healthcare lenders consider these key factors when lending to medical device companies.

7 Min Read
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Medical devices and other medical technologies continue to play critical roles in our healthcare system as evidenced in the ongoing COVID-19 pandemic. Our reliance on these devices include, for example, everything from face masks to prevent the spread of the virus, to in vitro diagnostics tests that identify infected individuals, to ventilators that support critically ill patients. The pandemic further advanced the growth and underscored the importance of digital health technologies, including Software as a Medical Device, at-home diagnostics, and various wearables that allow for remote data collection and monitoring. This market is poised to grow as users and regulators have grown more accustomed to these technologies.  

Although the demand for medical devices utilized for elective procedures decreased during the COVID pandemic, the domestic medical device market is expected to rebound in 2021 with a 6.1% CAGR. The global medical device industry is anticipated to have an ultimate growth trajectory of $603.5 billion in 2023.1 With the amount of untapped money in direct lenders’ and private equity companies’ coffers, there is certain to be continued investments and lending opportunities in the medical device and medical technology sectors. Yet as evidenced by the disparate effect of the COVID-19 pandemic on medical devices and medical technology (non-elective vs elective), it is critical for lenders to understand the demand for a particular device or medical technology in evaluating a company’s projected performance. And, just as critical, lenders need to appreciate the governmental oversight of the medical device industry and the significant impact that oversight may have on a device manufacturer’s performance from the inception of the medical device and throughout its lifecycle.

In the United States, FDA has a broad statutory authority to regulate everything from face masks to ventilators to diagnostics. FDA’s regulatory approach to devices is risk based with more significant pre-market review and post-market requirements for devices that present greater risk in the event of failure, such as implantable devices that support or sustain life. The risk classification of the device (Class I, II, or III) influences the specific controls that FDA requires for a particular device and the type of information a manufacturer must provide to demonstrate the device’s safety and effectiveness. In other words, the greater the potential risk to patients, the greater regulatory oversight.

FDA plays an active role in monitoring the ongoing safety of devices. For example, the agency monitors adverse event reports (called Medical Device Reports [MDRs]) for signals that might indicate a potential issue with a device. FDA also reviews required reports from manufacturers about corrections or recalls by the manufacturer of distributed devices. Finally, the agency inspects manufacturing facilities or accepts certain third-party audits as part of its surveillance program. If FDA is unsatisfied with the results of such inspections, it typically issues an untitled letter or warning letter to senior company management alerting them that they must correct the underlying issues or the company may face further civil or criminal enforcement, including product seizures or injunctions.  

Lending to Medical Device Companies

Lenders performing due diligence on medical device manufacturers must carefully consider all these factors to better assess the risk of transaction financing. And for early-stage devices, there needs to be a clear understanding of how the medical technology is regulated and on what basis the product will be authorized, cleared, or approved by FDA. In many cases, this question may be straightforward, but with novel technologies or newly developing areas, such as digital health, it will be important to assess the company’s analysis of whether and to what extent the underlying technology is subject to FDA regulation.  

For late-development products or products already on the market, additional attention will be focused on post-market data: Is the product labeling and promotion compliant with the product clearance or approval? Does post-market surveillance indicate any problematic trends or safety signals? Has the company made any recalls or product corrections? What is the company’s inspection history, and has it received any FDA warning letters? The answers to these questions and others should guide additional focused review. 

Additionally, the answers to these questions may have a bearing on the company’s financial performance. For example, if a party performing due diligence identifies a recent warning letter, it is critical for lenders to understand the company’s progress in resolving the underlying issues. The first step is to assess the scope of the warning letter itself. Many device warning letters relate to a failure to meet current Good Manufacturing Practice (GMP) requirements in the Quality System Regulation. Some letters focus on a small number of relatively discrete GMP issues while other letters reflect systemic problems across multiple quality system elements. While a company is likely to be in a position to address discrete GMP without a significant impact on its financial performance, systemic quality issues may be more difficult and costly and may ultimately lead FDA to seek an injunction, which would have a significant impact on a company’s financial performance.  

Once the scope of the warning letter is understood, a lender must evaluate how the company intends to resolve the matter. To resolve a GMP warning letter, FDA typically conducts a re-inspection of the manufacturer’s facility. This re-inspection will include confirming that corrective actions have been implemented for the specific items cited in the warning letter, as well as conducting a broader inspection to identify any additional concerns. To clear the warning letter, FDA will need to classify the inspection as “No Action Indicated” or “Voluntary Action Indicated.” An inspection that reveals unsatisfactory corrective actions or additional concerns may result in a continuing classification of the facility as “Official Action Indicated” (OAI). FDA may classify a re-inspection as an OAI, resulting in the need for more corrective actions and another re-inspection before FDA will close the warning letter. This can add six months to a year or more to the timelines for closing a warning letter. This additional delay is on top of what is commonly a year or more to receive the initial re-inspection after a warning letter.  

Consequently, when a warning letter is identified in due diligence, lenders must understand where the manufacturer is in the process of closing the warning letter. Gaining an understanding of the manufacturer’s corrective action plan will provide some insight into how broadly the manufacturer has addressed the identified concerns and how the cost of the corrective actions may impact financial performance. Similarly, understanding whether the corrective actions have been implemented or the timelines for any remaining corrective actions will provide some insight into how much progress the manufacturer has made in resolving the issues and the timeframe for closure and whether there will be a continued drain on the company’s resources. If a lender is comfortable closing a financing transaction despite the existence of a warning letter, the lender should require reporting regarding the company’s progress and FDA responses. A lender may also want to include progress milestones as covenants in the credit agreement.

Because FDA often does not provide much feedback on the corrective actions until a re-inspection, it can be difficult to assess as part of the due diligence process whether completed corrective actions will be satisfactory to the agency. In some cases, the manufacturer may have worked with third-party consultants who may have confirmed the effectiveness of the corrective actions or who may have provided reports or feedback about the thoroughness of the manufacturer’s actions. These can provide a more-independent evaluation of the corrective action plan and its implementation. Counsel who practice regularly in this area can also help lenders assess the action plan and the manufacturer’s communications with FDA.  

Risk-Based Due Diligence

Opportunities abound in the medical device and medical technology sectors. However, these sectors make up a heavily regulated industry calling for a risk-based due diligence process for lenders. And, when warning letters are identified during due diligence, a lender should conduct an additional targeted review as noted above. The impact of a warning letter can be significant, and the timelines to close such a letter can frequently be extended, so it is important to take a methodical approach to such issues to evaluate the impact on a company’s financial performance and mitigate against any risk to a lender.  



1. Wolters Kluwer, “Medical device outlook for 2021 and beyond,” December 6, 2019.

About the Author(s)

Peter Lindsay

partner, Paul Hastings LLP

Peter Lindsay is a partner at Paul Hastings LLP with an FDA Regulatory and Enforcement practice focused on advising clients regarding a range of FDA regulatory, compliance, and enforcement issues, including those related to manufacturing (cGMPs/QSR) and other post-approval requirements. He has conducted significant internal reviews for life science companies addressing promotional activities, supplier management and supply chain risks, manufacturing activities, and safety reporting.

Stacy Hopkins

of counsel, Paul Hastings LLP

Stacy Hopkins is of counsel at Paul Hastings LLP. Her Finance and Restructuring practice focuses on commercial finance and creditors' rights, where she advises clients on structuring, negotiating, and documenting cash flow and asset-based transactions across all lifecycles of a loan. Prior to rejoining Paul Hastings, Hopkins served as Senior Vice President in the Healthcare Finance group at Wells Fargo Commercial Capital.


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