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October 22, 2021

Q&A: Covid-19 and fraud in the medtech sector

Cooke, Young and Keidan partner Sam Roberts and senior associate Elizabeth Meade talk Covid-19 and fraud in medtech.

By Chloe Kent

The Covid-19 pandemic has led to unprecedented demand for medical devices and medtech products, opening the doors for innovation and investment the likes of which the sector has never seen before. Diagnostic firms in particular have experienced a drastic increase in interest, with many low-profile SMEs suddenly propelled into prominent roles in the world’s Covid-19 response.

This surge in sector activity has, perhaps unsurprisingly, opened the door for bad actors as well as good. The market has been flooded with businesses offering new, pandemic-related products, and while the majority have good intentions a significant minority have either produced devices which have fallen short of the mark or failed to fulfil their obligations to their customers.

Cooke, Young and Keidan partner Sam Roberts and senior associate Elizabeth Meade spoke with Medical Device Network about the increase of fraudulent activity in the sector, what this looks like and how legitimate companies can protect themselves.

 

Chloe Kent: What would you say has been the overall impact of Covid-19 on the medtech industry?

Sam Roberts: There’s obviously been a huge increase in demand, both for existing products and new devices. The pandemic has made hypochondriacs of all of us. Existing devices like wearables are only going to find a bigger market, but equally the quite narrow circumstances of Covid-19 means there are also opportunities for new devices to come on the market. For example, these devices that supposedly detect airborne particles, which probably wouldn’t have existed but for a pandemic. The other big issue I guess would be demand and what that has done in terms of supply chain and businesses’ ability to follow through on their obligations.

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CK: Why has the pandemic caused fraud to skyrocket in the medtech industry?

Elizabeth Meade: A lot of it is increased demand. People might not have the time or the choice to apply much scrutiny to what they purchase. If you truly need something then you will take what’s on offer, and fraudsters will fill that gap pretty quickly.

Something else we’ve looked at are public procurement guidelines that were relaxed at the beginning of the pandemic under the circumstances of urgency, which means that things might not be vetted quite to the same extent. There’s also more of a market for counterfeit products and imitation products and I think that people can make more outlandish claims about things that people might not have been concerned about in the past. Some of the products we’ve seen are portable breathing devices that are meant to help improve your lung capacity. They certainly look quite gimmicky, and I don’t know if that’s something that would have been on consumers’ minds hugely two years ago.

SR: There are two different types of fraud, in a way. There’s a career fraudster who will set out to deceive someone and then disappear, but then you might get businesses that have told a white lie and end up on a slippery slope. The say they can supply X amount of product by a certain time and then you find out that they actually couldn’t. Even that can count as fraud.

CK: Would products that could be dismissed as part of ‘hygiene theatre count as fraudulent?

SR: It depends how it’s advertised. If a business is selling infrared thermometers to the catering trade in February 2020, and then in March 2020 suddenly people want to start implementing infrared thermometers into their businesses then obviously it’s not the original supplier’s fault that they happen to sell a product for one purpose that then the customer wants to apply for another purpose. It’s all in the messaging and how it’s being pitched.

CK: How could this situation impact legitimate medtech businesses?

SR: In terms of what we’ve seen from a legal perspective, we’ve seen supply issues and also issues where – as a result of a sense of urgency – a customer will buy products which then don’t quite live up to expectations. They think they’ve got a whole container full of swabs on the way and it turns out they’re not medical grade when they arrive.

I think there’s the risk of bad actors in the sector giving the whole sector notoriety. If you had a viable business and were looking for outside investment in order to grow, or if you wanted to fulfil a valuable contract but you needed the capital, bad actors in the sector could put people off. If there were some bad actors in the sector and that put people off, for example if private equity didn’t like the sector anymore because it was looking too risky, you might end up with businesses that were losing out as a result of a few bad apples.

EM: M&A risks have been a real burden in the sector. Medtech companies acquiring other medtech companies are in about the best place they could be, because they already have much more knowledge than businesses from outside the sector looking to move into it.

CK: How can medtech businesses protect themselves from these kinds of circumstances?

SR: I think, regardless of the circumstance, ‘try before you buy’ is essentially the message. Do your homework on whoever it is that you’re entering into business with. If they don’t have a track record, if you go on Companies House and see that it was incorporated last week, that’s probably not a great sign. It’s always a case of prevention being better than cure, so if the business that you’re about to go into partnership or sign a supply contract with is a bad apple then it’s better to find it beforehand and never go into business with them in the first place.

If you have contractual remedies, for example if the product is not up to specification, then you might want to go and claim some damages from the company in question. If it’s one of these out-and-out frauds looking to make a quick but and then disappear then good luck finding them again, and you’re obviously also out of pocket. Of even if it’s the other type of fraudsters that don’t set out to deceive, it may well be that they’re not in a very good financial position either in which case you may also well be stuck.

Whether you’ve invested in the business and you have a breach of warranty claim, or it’s a supply contract sale of goods type thing where you have a right to reject the goods or put money into escrow so that payment is only made once contractual conditions are fulfilled, I’d say it’s far better just to have never got into it to begin with.

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