How To Conduct Due Diligence On SaMD And AIaMD Acquisitions
2024 looks to be a year of consolidation in the health tech market. As private equity analysts sharpen their pencils, it's a good time to refresh some key clinical and regulatory due diligence points when targeting software and AI medical device (SaMD and AIaMD) companies for mergers and acquisitions. In our experience, here are the most common blindspots to look out for.
Clinical Due Diligence
1 Vet the Clinical Team
Companies building complex SaMD should have strong in-house clinical expertise.
Clinicians understand products holistically in a way that general product managers and engineers don't. Big clinical or academic names on advisory boards are not enough - these types of part time clinical advisors are probably not involved in the day-to-day decision making that helps drive clinical development and give the consistent input that's needed to build good SaMD. A strong clinical team is needed to support a successful regulatory submission, through literature review and clinical evaluation reporting. Check for clinicians’ level of experience, academic publications relevant to the product and industry experience. You’ll find for instance that many start-ups only have a junior grade doctor on their early team.
Time and again, we see that a strong clinical team is the cohesive force in SaMD and AIaMD companies.
2 Dive deep into the quality of evidence
SaMD and AIaMD companies should be prioritising objective evidence to prove their technology works.
It's not just about the number of published studies - quality counts for more. When looking at clinical data that companies share, it's important to also ask what's missing. What analysis has been omitted or relegated to the footnotes and supplementaries? This will give you an understanding of the true quality and limitations of any clinical evidence that the company has collected. A full systematic review of their literature, and their direct competitors, is required for the regulatory submissions - ask to see this, and check it is up-to-date.
Finally, high-quality evidence outputs are also a tangible sign of a skilled clinical and scientific team.
3 Check that the evidence is aligned with the product
Many early-stage companies suffer from an evidence alignment problem. This is when the studies they conduct don't support the actual product they want to sell. It's less of an issue in pharmaceuticals and physical devices, because these products can't change quickly - but it's a big problem for SaMD, where frequent updates are easier to roll out.
When reading any clinical data for SaMD and AIaMD companies, keep an eye out for which version of software the study was conducted on, or whether it was a commercial product that was being tested at all. We often see papers published on prototype models, and that's not good enough for regulatory or commercial success. Studies should be done on the final product, and it’s also worth putting extra weight on any post-market evidence to see that the device is performing as claimed in the real world.
4 Understand the clinical context of the product
The regulatory and evidence generation processes don't consider the system-level impacts that a technology could have, so well-aligned clinical evidence is not enough for commercial success.
When it comes to SaMD and AIaMD, implementation hurdles are the biggest blockers. Some SaMD tools might be too disruptive to current clinical care pathways, rather than enhancing and improving them.
We highly recommend investors speak to independent clinicians to understand the nuances of the care pathway where the SaMD will work. All other value (health economic value, reimbursement, patient outcomes) flows downstream of the product fitting into a clear clinical context.
5 Look ahead for disruptive scientific developments on the horizon
Medicine is not static. Guidelines get updated, new tests get released, and basic research pushes our capabilities.
When looking at any SaMD product, it's important to ask the question: what external developments might make this technology obsolete? Can the product pivot to work with these new clinical breakthroughs? For example, software tools predicting genetic abnormalities may have limited runway, as the cost of genome analysis continues to plummet and convenience continues to rise.
If clinical context is the foundation for short-term success, scientific context is the bedrock for long-term resilience.
Regulatory Due Diligence
1 Check that the basic requirements are met
Medical devices need to have the appropriate regulatory approvals to sell and operate in each jurisdiction. This could be CE marking for the EU, UKCA marking for the UK, or FDA clearance or approval in the US.
Other regulatory compliance should also be verified, including HIPAA and GDPR, cybersecurity, ISO 42001 for AI devices, and up-to-date certification of an ISO 13485 Quality Management System (QMS). Depending on the type of company, even more regulatory requirements might also apply, so a static checklist might leave you with some gaps.
2 Vet the regulatory team
In very early stages of SaMD companies, sometimes the role of Quality Assurance and Regulatory Affairs is covered by a member of general operational staff. As the company grows and builds towards a first regulatory submission, the company should have an appropriately trained Quality Manager in charge of this part of the business.
It's important to make sure there is a specialist team that is responsible for quality and regulatory, because it's the core business risk for these companies. Also, look for evidence that the executive team takes regulations seriously. Is the company regularly conducting management reviews? Are regulatory KPIs in the C-suite’s plans? If regulatory auditors care about this, investors should too. Without regulatory compliance, and its maintenance, there is no business.
3 Check that the evidence is aligned with the regulation
We've already discussed evidence alignment with a clinical lens, but it's even more important from a regulatory perspective.
Different jurisdictions will have different evidence requirements, so if companies are planning to enter new markets with little new evidence, question what assumptions they might be making. This is particularly vital when submitting to the FDA - a validation study in the UK may not support the product's use in the US.
4 Look out for over-optimistic costs and timelines
The regulatory process is long and expensive. It's important to check that companies have provided adequate budgets and timelines for:
Product development
Setting up a Quality Management System
Verification and validation testing
Clinical study recruitment and conduct
Waiting list delays for regulatory audit
Rounds of feedback from auditors and regulators
Companies often present overly ambitious timelines that don't account for all of the above. They may also underestimate the costs of running large studies to prove their claims, or fees and ongoing maintenance costs they need to pay to regulatory bodies.
5 Look ahead at the changing regulatory landscape
As software and AI become more capable, they are bound to have a greater impact on healthcare. This means they are also bound to be more closely scrutinised, to make sure they are safe and effective. Regulators tend to be on the back foot, but they're always in flux. In October 2023 the FDA issued their plan to start regulating Lab Developed Tests, in June 2025 the MHRA will publish the new UK Medical Device Regulations, and of course, the EU AI Act is planned to come into force in 2026.
When analysing companies for long-term success, it should be clear that they appreciate the changes on the horizon, and are ready to meet their requirements so that they can continue to be commercially viable.
6 Make your post-acquisition plans to harmonise regulatory infrastructure
The regulatory diligence doesn’t stop after M&A. Following a merger or acquisition, the hard work starts in harmonising disparate business processes such as quality management systems, technical documentation structure and supplier contracts. Allocate time and resources to working through these processes, alongside the usual M&A administration.
Final Thoughts
This Insight piece only focused on the key blindspots for clinical and regulatory aspects of due diligence. Of course, there's a lot more detail to each of these categories. There are also other aspects which are obviously worth considering, including market and commercialisation strategy, IP protection and economic modelling.
If you're looking to invest in or acquire software or AI medical device companies, need support in strategic planning, or mock audits, reach out to Hardian for support in your due diligence process.
