Life Science & Healthcare Private Equity Risk: Q2 2025 Update

Private capital firms focused on investment and operations within the Life Science and Healthcare industries face complex compliance, operational, and business risks. To help clients navigate this evolving environment, White & Case monitors key developments and trends impacting this industry quarterly. Read our 2025 Q1 Alert here.

Heightened Scrutiny on Healthcare Industry

Heightened government scrutiny is creating risk for private capital investors across the healthcare industry. In the last quarter, federal, and state authorities have taken steps that increase compliance burdens and challenge established business models, requiring diligence in both new transactions and portfolio company management.

• State Oversight of PE Deals: State-level scrutiny of healthcare deals is intensifying, with new laws and active legislation creating significant transactional hurdles. Different states are taking distinct approaches, targeting transaction approvals, the Management Services Organization (MSO) model, and investor liability.
  • Oregon (SB 951): Now has the most stringent law in the country, effective immediately. It significantly curtails the common MSO investment model by prohibiting MSOs from holding majority ownership in the medical practices they manage and barring them from controlling clinical operations like hiring, staffing, and billing.
  • Massachusetts (H.B. 5159): This new law, effective April 2025, expands notice requirements for deals involving “Significant Equity Investors” (defined to include private capital firms or any investor with 10%+ ownership). It also expands the state's False Claims Act liability to investors who are aware of portfolio company violations and fail to act.
  • California (AB 1415 & SB 351): After a 2024 veto, legislators have renewed their efforts with two bills. AB 1415 focuses on transactions, requiring a 90-day notice to a state health office for deals involving private capital firms and MSOs. SB 351 targets operations, aiming to codify restrictions on MSO control over clinical decisions and to void provider noncompete agreements.
• PBM Business Model: States are challenging vertical integration in pharmacy services. Following Arkansas’s new law (H.B. 1150) banning pharmacy benefit managers (PBM) ownership of pharmacies, similar legislation is being considered in Indiana, New York, and Vermont. This trend is amplified by the FTC and State Attorney General scrutiny of PBMs for anti-competitive practices, creating risk for investors in this model. Our Client Alert on the Arkansas law can be found here.
• Aggressive Federal Fraud Enforcement: DOJ announced a national healthcare fraud bust involving 324 defendants and over $14.6 billion in alleged fraud. This action signals a continued federal focus on fraud, waste, and abuse, requiring compliance programs at the portfolio company level.
• Emerging Risks: Investigations against healthcare providers are an emerging risk. DOJ recently subpoenaed clinics providing specific services to minors (transgender medical procedures). 

Evolving Regulatory Compliance Landscape

The FDA and HHS introduced several regulatory and policy changes in Q2 2025 that impact manufacturing oversight, M&A diligence, and market access for novel therapies. Investors should note these shifts when evaluating operational risks and growth opportunities within their life sciences portfolios.

• Oversight Model: The FDA is pairing its expansion of unannounced foreign facility inspections with a formalized remote regulatory assessment (RRA) program. More guidance on foreign facility inspections can be accessed here.
• New 510(k) Transfer Guidance: The FDA issued draft guidance to clarify rules for transferring 510(k) device clearances. The guidance confirms that while a new 510(k) is not needed for a transfer if the device has not been significantly changed or modified, there can only be one singular 510(k) holder at any given time. The guidance underscores that the specification developer is generally responsible for the 510(k) submission, placing the onus on buyers to conduct thorough diligence on a device's modification history and ownership.
• New Priority Vouchers: The FDA announced its new Commissioner’s National Priority Voucher (CNPV) program to accelerate drug review for companies aligned with US national health interests. Redeeming a voucher shortens the final drug application review time from approximately 10-12 months down to one to two months. A limited number of vouchers will be granted to companies addressing health crises, delivering innovative cures, or increasing domestic manufacturing. Vouchers may be granted as “undesignated,” allowing a company to use the voucher for a new drug at its discretion, creating a flexible and potentially valuable asset for portfolio companies.
• Access for CAR T Therapies: The FDA eliminated the Risk Evaluation and Mitigation Strategies (REMS) for six currently approved BCMA- and CD19-directed autologous CAR-T cell immunotherapies. A REMS is a safety program required for certain medications with serious safety concerns. The agency determined a REMS is no longer necessary for these products, and this change removes the requirement for dispensing hospitals to be specially certified
• Phasing Out Synthetic Dyes: Regulators announced plans to phase out certain petroleum-based synthetic dyes (such as Red Dye No. 3) in foods and drugs, which will create downstream manufacturing and labeling considerations for affected products

Artificial Intelligence & Digital Health

While no new major federal or state healthcare-specific AI statutes were enacted this quarter, the trend continues to center on agency-level integration of AI and key legislative developments impacting digital health. Investors should monitor these crosscurrents, as they are shaping the future compliance and reimbursement landscape.

• State AI Laws: A proposed federal moratorium that would have limited states from creating their own AI laws was removed from the “One Big Beautiful Bill” before it was signed. This clears the way for states to continue developing their own AI regulations, which is likely to increase compliance complexity for digital health and AI-driven companies operating nationwide. More insights into complex regulatory environment surrounding artificial intelligence can be accessed here.
• Proposed Senate Bill Targets AI Reimbursement: The Health Tech Investment Act (S. 1399) aims to create a stable Medicare payment pathway for algorithm-based healthcare services. These are defined as services from an FDA-cleared or approved device using AI or machine learning to produce clinical conclusions. The bill would require that these services be assigned to a “new technology ambulatory payment classification” for at least five years. If passed, this could significantly de-risk investment in the AI driven digital health space by providing a clearer payment structure for market entry.
• FDA Deploys Internal AI Tools: Signaling a deeper integration of AI into its own operations, the FDA has launched an agency-wide internal AI tool. The stated goal is to optimize the agency's performance and regulatory processes, which could influence the speed and nature of future drug and device reviews.  Further insights into AI’s role in the regulatory review process can be found here.
• OBBB Expands Telehealth HSA Coverage: The One Big Beautiful Bill includes two provisions favorable to the telehealth sector. The law now permits high-deductible health plans (HDHPs) with Health Savings Accounts (HSAs) to cover telehealth services before a patient meets their deductible. It also allows patients to use HSA funds to pay for direct primary care. This expansion is expected to increase patient access to telehealth and direct-to-consumer healthcare models.
• The Centers for Medicare & Medicaid Services (CMS) Seeks Input on Beneficiary Tech: CMS is seeking public input on how to better use technology for Medicare beneficiaries. This indicates the agency is exploring new digital health pathways and creates an opportunity for stakeholders to shape future policy related to technology adoption and reimbursement in the Medicare population.
• UK Clarifies Rules for Digital Mental Health Apps: The UK's Medicines and Healthcare products Regulatory Agency (MHRA) issued new guidance for Digital Mental Health Technology (DMHT) to clarify when such products are regulated as medical devices. The guidance outlines a two-part test: a product is likely regulated as Software as a Medical Device (SaMD) if it has both a “medical purpose” and “high functionality.”
• EU Responsibility and Liability Landscape for Smart Medical Devices: With its legislative projects on AI and product liability, the European Union recently addressed the rapid advance of AI in numerous economic sectors. The interaction between these cross-sectional regulations and sector-specific medical device law poses intricate legal issues. Read our alert on this topic here.

Trade, Supply Chain, and Domestic Manufacturing

Significant developments in international procurement, sanctions enforcement, and domestic manufacturing policy present new risks and opportunities for investors.

• DOJ Highlights Path for Private Capital Firms to Avoid Prosecution: In the first application of its M&A Voluntary Self-Disclosure (VSD) policy, the Department of Justice declined to prosecute a US private equity firm, White Deer Management LLC after the firm voluntarily disclosed criminal sanctions and export control violations committed by a company it had acquired. DOJ cited the firm’s timely disclosure after discovering the misconduct, full cooperation, and remediation as the basis for the declination. More information on the DOJ’s decision to decline to prosecute White Deer Management LLC can be accessed here.
• EU Restricts Chinese Access to Medical Device Tenders: The European Commission adopted its first measure under the International Procurement Instrument (IPI). Effective June 30, 2025, the measure excludes Chinese suppliers from competing for public medical device contracts valued at €5 million or more. This action, set to last for five years, responds to China's “Buy China” policies that limit market access for EU companies. More information on the IPI actions against China can be accessed here.
• Executive Order Targeting Domestic Pharma Manufacturing: The EO directs federal agencies to eliminate regulatory barriers to boost domestic pharmaceutical production. The order instructs the FDA and EPA to streamline review processes for new and expanded manufacturing facilities by reviewing and eliminating duplicative or unnecessary requirements. Important directives for the FDA include improving its risk-based approach to inspections, expanding programs that offer early technical advice, and clarifying requirements for moving production from foreign to domestic sites. The HHS and FDA have an August 3, 2025 deadline to propose regulatory changes.

Drug Pricing

• Legislation Introduced to Ban Direct-to-Consumer Drug Ads: On June 12, 2025, several senators introduced the “End Prescription Drug Ads Now Act,” which would prohibit all direct-to-consumer (DTC) advertising for prescription drugs and biologics. The bill targets the holders of approved drug applications and would align the US with most other countries that already ban such ads. While its passage is uncertain, the proposal reflects growing political will to alter the current pharmaceutical marketing model.
• Executive Order on “Most Favored Nation” Pricing: The EO aims to give Americans access to the “most-favored-nation” (MFN) price for prescription drugs and biologics to end “global freeloading.” The order's initial phase directs the Secretary of HHS to communicate MFN price targets to manufacturers within 30 days. If significant progress toward this goal is not achieved, the order authorizes several more actions, including a proposed rulemaking to impose MFN pricing, modification or revocation of existing drug approvals, potential legalization of drug importation from lower-cost countries, and increased antitrust enforcement by the DOJ and FTC.
• DOJ and FTC Signal Broad Scrutiny of Pharma Practices: The DOJ and FTC held joint public listening sessions on June 30 and July 1, 2025, to investigate anticompetitive practices in the pharmaceutical industry. The sessions, mandated by executive order, brought together experts to discuss a wide range of conduct, including “pay-for-delay” patent settlements, product hopping, exclusive supply agreements, and the effect of PBMs. This joint initiative signals a coordinated, high-level enforcement focus on industry practices that the agencies believe delay competition and keep drug prices high.

Enforcement & Business Risk

• DOJ-HHS False Claims Act Working Group Relaunched: On July 2, 2025, the U.S. Department of Justice (DOJ) and the Department of Health and Human Services (HHS) jointly announced the reestablishment of the DOJ-HHS False Claims Act (FCA) Working Group. While the two agencies have long collaborated on healthcare fraud enforcement, the formal relaunch of the Working Group signals a renewed and intensified focus on False Claims Act investigations, particularly in sectors where federal healthcare dollars and compliance risk intersect. Read our alert here.
• OIG Guidance: The Office of Inspector General (OIG) has been very active in Q2, issuing a series of advisory opinions that signal heightened scrutiny of financial arrangements between manufacturers and their customers. While several recent opinions were favorable—blessing certain patient assistance and cost-sharing programs—two recent unfavorable opinions highlight key areas of compliance risk for investors.
  • OIG Warns Against Covering Customer Operating Costs: In two recent unfavorable opinions, the OIG rejected proposals for device companies to pay for their hospital customers' third-party vendor services (for compliance screening and billing, respectively). The OIG reasoned that covering a customer's operating costs is prohibited remuneration that creates a risk of “inappropriate steering” and could be used to gain an unfair competitive advantage over competitors unwilling to pay such fees.
  • OIG Provides Roadmaps for Patient Support and MSO Models: On the other hand, OIG provided favorable roadmaps for common business models, approving a program covering travel and lodging costs for patients receiving a high-cost gene therapy, a manufacturer-sponsored companion diagnostic testing program, and a telehealth provider leasing arrangement that met the Personal Services safe harbor. The OIG also issued a favorable opinion on a device product warranty to cover costs from device failure, confirming it is a low-risk tool when structured to meet the warranties safe harbor.
• DOJ's Data Security Program Enforcement Now Active: The DOJ's 90-day grace period for its new Data Security Program (DSP) expired on July 8, 2025, and the agency now expects full compliance. The DSP restricts or prohibits transactions involving access to "bulk sensitive personal data” or “U.S. government-related data” by persons or entities associated with “countries of concern,” including China, Russia, Iran, North Korea, Cuba, and Venezuela. Penalties for non-compliance are severe, with potential civil penalties up to $377,700 (or twice the transaction value) and criminal penalties up to $1 million and 20 years in prison. Investors should ensure portfolio companies have assessed their potential exposure and taken appropriate steps to manage and mitigate attendant risks. More information on the DSP rule can be access here. 

Conclusion

The second quarter of 2025 delivered a regulatory environment defined by intensifying scrutiny and strategic opportunity for life sciences and healthcare investors. States are accelerating legislative efforts targeting private equity ownership, MSO structures, and pharmacy vertical integration. At the federal level, enforcement priorities are expanding—from aggressive False Claims Act actions and data security compliance to heightened oversight of financial arrangements and anti-competitive practices. Yet, this same environment is producing valuable levers for growth: new FDA voucher programs, streamlined pathways for domestic manufacturing, and emerging reimbursement models for AI and digital health. For investors, the message is clear—regulatory acumen is not only essential for risk mitigation but increasingly central to value creation. Those who embed regulatory strategy into their diligence and operational oversight will be best positioned to navigate uncertainty, unlock opportunity, and sustain competitive advantage in a rapidly evolving market.

Joshua Jones (Summer Associate, White & Case) contributed to the development of this publication.

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