We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to stringent quality specifications and processes. Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced suppliers (the only recognized supply source available to us) or single-sourced suppliers (the only approved supply source for us among other sources). We purchase the majority of our components and major assemblies through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of finished goods relative to our anticipated demand.
We face competition in the forms of existing open surgery, conventional MIS, drug therapies, radiation treatment, and emerging interventional surgical approaches. Our success depends on continued clinical and technical innovation, quality and reliability, as well as educating hospitals, surgeons, and patients on the demonstrated results associated with robotic-assisted surgery using da Vinci Surgical Systems and its value relative to other techniques. We also face competition from several companies that have introduced or are developing new approaches and products for the MIS market. We believe that many companies are focused on adding capability to manualthe entrance or emergence of competition validates MIS systems. Because many of these developments are aimed at MIS, we believe that our da Vinci Surgical Systems may prove complementary to some of these new technologies.and robotic-assisted surgery.
Moreover, as we add new robotically controlled products (e.g., da Vinci Stapling and da Vinci Vessel Sealer Extend)Energy) that compete with product offerings traditionally within the domains of open surgery and/or conventional MIS, we face greater competition from larger and well establishedwell-established companies, such as Ethicon Endo-Surgery, Inc.Johnson & Johnson and Medtronic PLC.plc.
We place considerable importance on obtaining and maintaining patent, copyright, trademark, and trade secret protection for significant new technologies, products, and processes.
Patents are granted for finite terms. Upon expiration, the inventions claimed in a patent enter the public domain.
Our products and operations are subject to regulation by the FDA, the State of California, and countries or regions in which we market our products. In addition, our products must meet the requirements of a large and growing body of international standards, which govern the design, manufacture, materials content and sourcing, testing, certification, packaging, installation,
use, and disposal of our products. We must continually keep abreast of these standards and requirements and integrate our compliance into the development and regulatory documentation for our products. Failure to meet these standards could limit our ability to market our products in those regions whichthat require compliance to such standards. Examples of standards to which we are subject include electrical safety standards, such as those of the International Electrotechnical Commission (e.g., IEC 60601-ss series of standards), and composition standards, such as the Reduction of Hazardous Substances (“RoHS”) and the Waste Electrical and Electronic Equipment (“WEEE”) Directives.
If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant clearance to commercially market the device in the U.S. The FDA has a statutory 90-day period to respond to a 510(k) submission, or a guidance-based 30-day period for “special” 510(k) submissions which have a more restrictive scope and generally involve more specific or very limited changes to a legally marketed device. Assubmission; however, as a practical matter, clearance often takes longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not “substantially equivalent,” the FDAdevice may deny the request for clearance. Although unlikely for the types of products marketed by us, the FDA may classify the device, or the particular use of the device, intobe designated as a Class III and thedevice. The device sponsor must then fulfill more rigorous pre-market approval (“PMA”) requirements. APMA requirements or can request a risk-based classification determination for the device in accordance with the de novo classification pathway, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
Products manufactured outside the U.S. by or for us are subject to U.S. Customs and FDA inspection upon entry into the U.S. We must demonstrate compliance of such products towith U.S. regulations and carefully document the eventual distribution or re-exportation of such products. Failure to comply with all applicable regulations could prevent us from having access to products or components critical to the manufacture of finished products and lead to shortages and delays.
In order for us to market our products in countries outside the United States, we must obtain regulatory approvals or certifications and comply with extensive product and quality system regulations in other countries. These regulations, including the requirements for approvals, clearance, or clearancecertifications and the time required for regulatory review, vary from country to country. Some countries have regulatory review
In addition, local regulations may apply, which govern the use of our products and which could have an adverse effect on our product utilization if they are unfavorable. All such regulations are revised from time to time and, in general, are increasing in complexity and in the scope and degree of documentation and testing required. There can be no assurance that the outcomes from such documentation and testing will be acceptable to any particular regulatory agency or will continue to be acceptable over time. There are further regulations governing the importation,
marketing, sale, distribution, use, and service as well as the removal and disposal of medical devices in the regions in which we operate and market our products. Failure to comply with any of these regulations could result in sanctions or fines and could prevent us from marketing our products in these regions.
the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referralfederal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the government and such individuals may share in amounts paid by the entity to the government in fines or settlement;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making false statements relating to healthcare matters;
the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
the federal Physician Payment Sunshine Act, which requires (i) manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain other healthcare professionals, and teaching hospitals, and (ii) applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians described above and their immediate family members, and payments or other “transfers of value” to such physician owners. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year; and
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other “transfers of value” to physicians and other healthcare providers or marketing expenditures and pricing information; and laws governing the privacy and security of health information in certain circumstances, including the E.U. General Data Protection Regulation (“GDPR”), many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
If our operations are found to violate any of the laws described above or any other laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from our participation in federal and state healthcare programs, and imprisonment, any of which could adversely affect our ability to market our products and materially adversely affect our business, results of operations, and financial condition. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Third-Party Coverage and Reimbursement
Our customers, including physicians, hospitals, and outpatient facilities, typically bill third-party payors for the costs and fees associated with the procedures in which our products are used. In the U.S., in order to receive payment for the procedures performed using our products, our customers must report codes that describe the services or products furnished and determine the medical necessity of the service or whether the service is included in the payors’ policy). In the U.S. and most markets OUSglobally where we sell our products, reimbursement for medical services and surgical procedures to hospitals, outpatient facilities, and surgeons (collectively “providers”) is determined by the government, and health insurance companies together are responsible for hospital and surgeon reimbursement for virtually all covered surgical procedures. Governments and insurance companies generally reimburse hospitals and physicians for surgery when the procedure is considered medically necessary. commercial payors (insurers), or a combination of both.
In the
U.S., CMS administersthe Centers for Medicare and Medicaid Services (“CMS”) and its fiscal intermediaries (Medicare Administrative Contractors) and state Medicaid programs establish reimbursement policies for medical and surgical services at the state and federal level for the Medicare and Medicaid programs (the latter, along with applicable state governments). Many other third-partyprograms. Third-party payors modeloften rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement methodologies afterpolicies but also have their own methods and approval processes. Commercial payors in non-capitated contracts commonly establish payment to providers based on a percentage of the Medicare program. As the single largest payor, this program haspayment rate.
Physicians and outpatient facilities bill for medical and surgical services by reporting a significant impact on other payors’ payment systems.
Generally, reimbursement for professional services performed at a facility by physicians is reported undercombination of billing codes. Current Procedural Terminology (“CPT”) codes issuedare created by the American Medical Association (“AMA”), known as Current Procedural Terminology (“CPT”) codes. Physician reimbursement under Medicare generally is based on a fee schedule and determined by the relative values of the professional service rendered. In addition, with input from CMS and the National Center for Health Statistics (“NCHS”) are jointly responsible for overseeing changescommercial payors to describe medical and modifications to billing codes used by hospitals to report inpatient procedures, ICD-10-PCS codes. For Medicare, CMS generally reimburses hospitals for services provided during an inpatient stay based on a prospective payment system that is determined by a classification system known as Medicare-Severity Diagnostic Related Groupings (“MS-DRGs”). MS-DRGs are assigned using a number of factors including the principal diagnosis, major procedures, discharged status, patient age, and complicating secondary diagnoses among other things. Hospital outpatient services, reported bysurgical procedures. CPT codes are assigned to clinically relevant Ambulatory Payment Classifications (“APCs”)currently exist for minimally invasive surgical procedures, which may involve the da Vinci surgical system. In general, the majority of payors, including Medicare, consider robotic assistance as a tool used to determineperform the payment amountprocedure and do not pay providers more for services provided.
Since October 1, 2015, a new family of ICD-10-PCS codes can be used-in conjunction with other applicable procedure codes-to describe various robotic-assisted procedures. An inpatient surgical procedure completed with or withoutthat involves robotic assistance continues to be assigned tousing the clinically relevant MS-DRG.
Governments and insurance companies carefully review and increasingly challenge the prices charged for medical products andda Vinci or any other robotic surgical services. Reimbursement rates from private companies vary depending on the procedure performed, the third-party payor, contract terms, and other factors.system. Because both hospitals and physicians may receive the samethere is often no separate reimbursement for their respective services,the use of our products, the additional cost associated with or without robotics, regardlessthe use of actual costs incurred byour products can affect the profit margin of the hospital or physician in furnishingsurgery center where the care, including for the specific products used in that procedure hospitals and physicians may decide not to use our products if reimbursement amounts are insufficient to cover any additional costs incurred when purchasing our products.
Domestic institutions typically bill various third-party payors, such as Medicare, Medicaid, and other government programs and private insurance plans for the primary surgical procedure that includes our products. Because our da Vinci Surgical System has been cleared for commercial distribution in the U.S. by the FDA, coverage and reimbursement by payors are generally determined by the medical necessity of the primary surgical procedure. We believe that the additional procedures we intend to pursue are established surgical procedures that are generally already reimbursable by government agencies and insurance companies for appropriately selected patients.is performed. If hospitals do not obtain sufficient reimbursement from third-party payors for procedures performed with our products, or if governmental and private payors’ policies do not cover surgical procedures performed using our products, we may not be able to generate the revenuesrevenue necessary to support our business.
Hospitals bill for inpatient services by reporting ICD-10-PCS codes. CMS is primarily responsible for overseeing changes and modifications to ICD-10-PCS codes. Medicare payment to hospitals for services provided during an inpatient stay are based on the Inpatient Prospective Payment System (“IPPS”). Under the IPPS, each patient discharge is categorized into a Medicare Severity Adjusted Diagnosis-Related Group (“MS-DRG” or “DRG”). Each DRG has an assigned payment weight based on the average resources used for Medicare patients in that DRG, taking into account the patient’s principal diagnosis, surgical procedures, age, discharge status, and up to 24 additional or secondary diagnoses, among other things. The DRG is a single, bundled payment intended to cover all costs associated with the inpatient admission.
The use of robotic technology does not influence MS-DRG assignment or payment for an inpatient admission related to a surgical procedure. CMS annually updates hospital inpatient and outpatient payments based on hospitals’ charge data. Hospital inpatient and outpatient payments are also adjusted based on whether the hospital is a teaching hospital, its geographic location, and any failures to meet certain quality metrics, among other factors.
Commercial payors commonly establish inpatient facility payment for providers using published Medicare DRG rates as a benchmark. Commercial payment to providers varies depending on the procedure performed, geographic location, contractual allowances, and other factors.
Medicare and commercial payor payments to facilities for medical and surgical services may not always fully reimburse providers for all costs associated with furnishing these procedures. If payment is insufficient for procedures involving our technology, hospitals and physicians may decide not to use our products.
In countries outside the U.S., reimbursement for surgical services to physicians and facilities differs considerably and varies by country. In some markets, there is obtained from various sources, including governmental authorities, private health insurance plans, and labor unions.a single public payor who provides a global annual budget to hospitals to provide all care to the population served in a designated geographic area. In most foreign countries,other markets, private insurance systemscan be purchased or is provided by employers to supplement public health insurance. In some countries, patients may also offer paymentsbe permitted to pay directly for some therapies. In addition, health maintenancesurgical services; however, such “co-pay” practices are not common (or allowed) in many countries. Further, in many global markets, access to procedures and technology is governed or heavily influenced by Health Technology Assessment (“HTA”) organizations, are emerging in certain European countries.which conduct periodic and extensive evidence-based reviews of the clinical value and cost effectiveness of a new technology. To effectively conduct our business, we may need to seek OUS reimbursement approvals, and we do not know if these required approvals will be obtained in a timely manner or at all. In addition, in some countries, patientsmarkets, HTA organizations may be permittedpublish reports with mixed conclusions about the clinical and economic value of our products to pay directly for surgical services; however, such “co-pay” practices are not common in most countries.the population. Such reviews could negatively impact hospital adoption of our technology.
Healthcare Reform
In the U.S., there have been, and continue to be, a number of legislative initiatives to contain healthcare costs. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”“ACA”), was enacted. The PPACAACA made changes that have significantly impacted healthcare providers, insurers, and pharmaceutical and medical device manufacturers. The PPACAACA contained a number of provisions designed to generate the revenues necessary to fund health insurance coverage expansion including, but not limited to, fees or taxes on certain health-related industries, including medical device manufacturers. For sales between January 1, 2013 and December 31, 2015, medical device manufacturers were required to pay an excise tax (or sales tax) of 2.3% on certain U.S. medical device revenues. The Consolidated Appropriations Act, 2016 (the “Appropriations Act”), enacted in December 2015, included a two-year moratorium on Medical Device Excise Tax (“MDET”) such that medical device sales in 2016 and 2017 were exempt from the MDET. Subsequent legislation was passed in January 2018 such that MDET will be delayed until January 1, 2020.
The PPACA also appropriated funding to research the comparative effectiveness of health carehealthcare treatments and strategies. It remains unclear how this research will influence future Medicare coverage and reimbursement decisions as well as influence other third-party payor coverage and reimbursement policies. The PPACA, as well as other federal or state health care reform measures that may be adopted in
Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the future, could have a material adverse effect on our business. The taxes imposed by PPACA and the expansion in the government’s role inACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021, through August 15, 2021, for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, industry may result in decreased profits, lower reimbursement from payors for proceduresincluding among others, reexamining Medicaid demonstration projects and waiver programs that use our products, and/include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or reduced procedural volumes, all of which may adversely affect our business, financial condition, and results of operations.the ACA.
In addition, other legislative changes have been proposed and adopted since the PPACAACA was enacted. These changes included an aggregate reduction in Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013, and
will remain in effect through 20272030, unless additional Congressional action is taken.taken, with the exception of a temporary suspension from May 1, 2020, through March 31, 2022. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers, and cancer treatment centers. The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015 (“MACRA”), repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to beginthat began in 2019 thatand are based on various performance measures and physicians’ participation in alternative payment models, such as accountable care organizations. Individual states in the U.S. have also become increasingly aggressive in passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints and discounts, and require marketing cost disclosure and transparency measures.
There have also been judicial and congressional challenges to certain aspects of the PPACA, as well as efforts byIn the U.S. administrationand abroad, reimbursement is dynamic and subject to modify, repeal,change annually by public and private payors. National government agencies may also intervene and pass legislation that is intended to reduce healthcare spending, which could impact market access. Such legislative interventions can vacillate significantly based on government leadership. Other federal or otherwise invalidate all, or certain provisions of, the PPACA. Since January 2017, the U.S. President has signed two Executive Orders designed to delay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. The current U.S. administration has also announcedstate healthcare reform measures that it will discontinue the payment of cost-sharing reduction (“CSR”) payments to insurance companies until Congress approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the PPACA. A bipartisan bill to appropriate funds for CSR payments has been introducedmay be adopted in the Senate, but the future of that bill is uncertain. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which maycould have thea material adverse effect of relaxing the essential health benefits required under the PPACA for plans sold through such marketplaces. Because of the Tax Cuts and Jobs Act (“2017 Tax Act”) enacted on December 22, 2017, the PPACA’s individual mandate penalty for not having health insurance coverage will be eliminated starting in 2019. Further, each chamber of Congress has put forth multiple bills designed to repeal or repeal and replace portions of the PPACA. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the 2017 Tax Act, the remaining provisions of the ACA are invalid as well. While the current White House Administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the ACA will impact the ACA and our business. Although the majority of these measures have not been enacted by Congress to date, Congress will likely continue to consider other legislation to repeal or repeal and replace elements of the PPACA. Any regulatory or legislative developments in domestic or foreign markets that eliminate or reduce reimbursement rates for procedures performed with our products could harm our ability to sell our products or cause downward pressure on the prices of our products, either of which would adversely affect our business, financial condition, and results of operations.
EmployeesHuman Capital
The future success of our company depends on our ability to attract, retain, and further develop top talent. To facilitate talent attraction, retention, and development, we strive to make Intuitive an inclusive, diverse, and safe workplace with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, and health and wellness programs as well as by programs that build connections between our employees and the communities in which they live and work.
As of December 31, 2018,2021, we had 5,527approximately 9,793 full-time employees, 7711,294 of whom were engaged directly in research and development, 2,3413,682 in manufacturing operations, 3,354 in commercial and service operations, and 2,4151,463 in marketing, sales, and administrative activities. NoneDuring 2021, the number of employees increased by approximately 1,712. Our employees are based in 27 different countries around the world. Our global workforce consists of diverse, highly skilled talent at all levels. During 2021, our turnover rate was approximately 10.3%.
Inclusion and Diversity
Intuitive’s inclusion and diversity (I&D) vision is to empower our employees and customers from every background to fully contribute toward our mission to expand the potential of physicians to heal without constraints. We want to build an environment where every individual can belong and flourish – in our company and the communities we serve.
We believe that everyone should feel included and fairly treated, and we embrace the unique qualities that make people who they are. This includes all genders and gender identities, races, ethnicities, ages, national origins, native languages,
disabilities, sexual orientations, body sizes, military backgrounds, socioeconomic backgrounds, religions, and family structures. We believe in seeking the different to propel innovation and creativity forward.
We have a four-part strategy to guide our I&D progress: building a diverse workforce to fuel innovation and better mirror the patients we serve; ensuring an inclusive experience, where employees from all backgrounds feel welcome, supported, and valued; investing in fair practices by continuously improving our people practices and sharing progress; and strengthening our industry leadership by engaging with the healthcare community, diversity-focused organizations, and shareholders to drive positive change. Employee Resource Groups (ERGs) have been one key area of I&D focus and growth, providing support and community for traditionally marginalized groups, including women, people of color, members of the LGBTQ+ community, military veterans, and employees with disabilities.
From a governance perspective, maintaining a mix of backgrounds and experience in our board composition is essential to understanding and reflecting the needs of our diverse stakeholders. Currently, four of our 11 board members self-identify as women, and three of our 11 board members self-identify as individuals from underrepresented communities (defined as an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender).
Health, Safety, and Wellness
The health, safety, and wellness of our employees are covered byis a collective bargaining agreement,priority in which we continued to invest and we consider our relationship withexpand throughout 2021. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended to provide protection and security, including workplace health and safety best practices integrated into our everyday activities. Additionally, we provide programs that help employees have peace of mind concerning events that may require time away from work or that may impact their family, mental health, or financial well-being.
We continue to implement changes that we determine are in the best interest of our employees, as well as the communities in which we operate, in compliance with government regulations. This includes having employees continue to work from home, where possible, while providing support for strategic, on-site, in-person activities and gatherings with meeting and event protocols in place to help minimize the exposure to COVID-19 and other risks. Each Intuitive location manages overall safety with guidance based on regional, country, and local regulations and best practices.
In 2021, investments in building upgrades and facility safety improvements included improved-efficiency HVAC filters and restrooms equipped with touchless faucets, toilets, towel dispensers, and door kickplates, where possible. We increased cleaning frequency in common areas, while implementing additional safety measures for employees continuing critical on-site work. Employees critical to maintaining our essential engineering, manufacturing, repair, and logistics functions have continued to work from Intuitive locations globally. To protect and support our essential team members, health and safety measures that included maximizing personal workspaces, changing shift schedules, providing personal protective equipment (PPE), and screening and testing resources continue to be good.provided.
Our future ways of working team helped us explore changes that could strengthen our culture and could appeal to a diverse group of new employees. These included redefining job classifications to include fully remote and hybrid work arrangements, setting new expectations around how we work. An employee survey to inform new ways of working resulted in more outdoor working spaces, self-service information technology equipment procurement, on-demand mental health care and resilience resources, ergonomics review and new furniture choices for those working from home, new scheduling systems for reserving on-site workspaces, and more thoughtful approaches to building cleaning and access to common areas.
Keeping in mind employee health and safety, Intuitive has prepared for a post-pandemic future where employees can return to an Intuitive workspace with peace of mind.
Compensation and Benefits
We provide compensation and benefits programs to help meet the needs of our employees. In addition to base compensation, these programs, which vary by country and region, include annual bonuses, stock awards, an Employee Stock Purchase Plan, retirement savings plans, healthcare, income protection benefits, paid time off, family leave, family care resources, and flexible work schedules, among many others.
Ensuring fair and equitable pay is integral to our commitment to our employees. Our executive team and Board of Directors strongly support this commitment. We conduct pay equity reviews annually to help us understand whether our compensation structure is appropriate and to identify what improvements can be made. In addition, we utilize a robust inspection process with an independent consulting firm for gender and ethnicity hiring, promotion, and wage equity to determine whether any statistically significant pay differences exist between women and men and between minorities and non-minorities. If pay disparities are identified, we conduct further evaluation to determine whether remedial adjustments are
appropriate. In addition, employees can raise issues regarding pay equity with their manager, their human resources partner, or confidentially through our anonymous reporting helpline.
Talent Development
We value our employees and the passion, commitment, and professional depth they provide. To enhance employee retention and job satisfaction, we offer ongoing learning and leadership training opportunities that support growth.
With a commitment to achieving diverse representation within our leadership ranks that reflects the diversity that we see in our overall employee base, we increased our leadership development efforts by reinforcing development around our People Leader Success Model. Leadership development focuses on people-leader effectiveness, cultural continuity, and organizational effectiveness, so that leaders at all levels have the capabilities and knowledge that they and their teams need to succeed.
Our Global Talent Management team transitioned much of our leadership training from in-person sessions to remote learning with the emergence of COVID-19. Our scaled learning platform of on-demand and virtual classroom learning eliminates travel and allows employees worldwide to access development at their convenience.
We have robust annual global performance review processes for reviewing all employees’ performance and pay. To support our managers, we train them on conducting effective performance reviews and making compensation recommendations, which take into consideration market pay data and performance, as well as experience in an employee’s respective role.
Community Programs
We believe that building connections between our employees, their families, and our communities creates a more meaningful, fulfilling, and enjoyable workplace. Through our engagement programs, our employees can pursue their interests and hobbies, connect to volunteering and giving opportunities, and enjoy unique recreational experiences with family members.
The Intuitive Foundation is a nonprofit organization established in 2018 and funded by Intuitive. Since its founding, the Intuitive Foundation has been dedicated to promoting health, advancing education, and reducing human suffering. The Foundation supports outreach programs financially while we provide the volunteers and mentors from within our company. Since its inception, we have contributed $85 million to the Intuitive Foundation to fulfill its mission.
One of the Foundation’s major programs, the Global Surgical Training Challenge (“GSTC”) is inspiring innovation to help expand healthcare access around the world. Launched in 2020, GSTC came together when the Intuitive Foundation worked with MIT Solve and Nesta Challenges to recruit teams and offer a prize pool of up to $5 million for winning concepts that help enable better access to care. In addition, the Intuitive Foundation engages with professional societies and nonprofits to create internships and support leadership development for underrepresented student populations and also continues to support programs that empower young people of all backgrounds to participate in robotics-centered events to inspire their education in science, technology, engineering, and math. Moreover, Intuitive and the Intuitive Foundation, along with many employees, contributed financially to support community programs and other charitable campaigns.
We encourage you to review the “Talent and workplace experience” and “Creating stronger communities” section of our Sustainability Report 2021 (located on our website) for more detailed information regarding our Human Capital programs and initiatives. Nothing on our website, including our Sustainability Report 2021 or sections thereof, shall be deemed incorporated by reference into this Annual Report.
General
We make our periodic and current reports, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, available free of charge on our website as soon as practicable after such material is electronically filed or furnished with the Securities and Exchange Commission (the “SEC”). Our website address is www.intuitive.com, and the reports are filed under “SEC Filings,”Filings” on the Company—Company — Investor Relations portion of our website. Periodically, we webcast Company announcements, product launch events, and executive presentations, which can be viewed via our Investor Relations page on our website. In addition, we provide notifications of our material news, including SEC filings, investor events, and press releases as part of our Investor Relations page on our website. The contents of our website are not intended to be incorporated by reference into this report or in any other report or document we file, and any references to our website are intended to be inactive textual references only. The SEC maintains an Internetinternet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
We operate our business as one segment, as defined by U.S. generally accepted accounting principles. Our financial results for the years ended December 31, 2018, 2017,2021, 2020, and 20162019 are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Annual Report.
Intuitive Surgical, Inc. was founded in 1995. We are a Delaware corporation with our corporate headquartersprincipal executive offices located at 1020 Kifer Road, Sunnyvale, California 94086. Our telephone number is (408) 523-2100, and our website address is www.intuitive.com.
You should consider each of the following risk factors, which could materially affect our business, financial position, or future results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.
RISKS RELATING TO OUR BUSINESS
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLEPUBLIC HEALTH CRISES OR EPIDEMIC DISEASES, OR THE PERCEPTION OF THEIR EFFECTS, HAVE AND COULD CONTINUE TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
The da Vinci Surgical System and our other products represent a fundamentally new way of performing surgery. Achieving physician, patient, and third-party payor acceptance of robotic-assisted surgery as a preferred method of performing surgery is crucial to our success. If our products fail to achieve market acceptance, customers will not purchase our products and we will not be able to generate the revenue necessary to support our business. We believe that physicians’ and third-party payors’ acceptance of the benefits of procedures performed using our products will be essential for acceptance of our products by patients. Physicians will not recommend the use of our products unless we can demonstrate that they produce results comparable or superior to existing surgical techniques. Even if we can prove the effectiveness of our products through clinical trials, surgeons may elect not to use our products for any number of other reasons. For example, cardiologists may continue to recommend conventional heart surgery simply because such surgery is already widely accepted. In addition, surgeons may be slow to adopt our products because of the perceived liability risks arising from the use of new products and the uncertainty of reimbursement from third-party payors, particularly in light of ongoing health care reform initiatives and the evolving U.S. health care environment.
We expect that there will be a learning process involved for surgical teams to become proficient in the use of our products. Broad use of our products will require training of surgical teams. Market acceptance could be delayed by the time required to complete this training. We may not be able to rapidly train surgical teams in numbers sufficient to generate adequate demand for our products.
ECONOMIC CONDITIONS COULD MATERIALLY ADVERSELY AFFECT OUR COMPANY.BUSINESS AND RESULTS OF OPERATIONS.
Uncertainty aboutOur global economic conditions, including creditoperations expose us to risks associated with public health crises and sovereign debt concerns in certain European countries and concerns about slowed economic growth in China and other OUS markets, have causedoutbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of a novel strain of coronavirus (COVID-19). To date, COVID-19 has had, and may continue to cause disruptionshave, an adverse impact on our operations, our supply chains and distribution systems, and our expenses, including as a result of preventive and precautionary measures that we, other businesses, and governments are taking. In addition, hospitals are also experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the financial credit markets, volatile currency exchange ratesdemand for our products as healthcare customers divert medical resources and energy costs, concerns about inflation, slowerpriorities towards the treatment of that disease. In addition, our customers have delayed, cancelled, or redirected and, in the future, may delay, cancel, or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to economic activity, decreased consumer confidence, reduced corporate profitsdisruption related to COVID-19. For example, as a result of the global COVID-19 pandemic, in the first half of 2020, we experienced a significant decline in procedure volume in the U.S. and capital spending, adverseWestern Europe, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19. In addition, U.S. and global public health bodies have, at times, recommended delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies are evaluating the risks of minimally invasive surgeries in the presence of infectious diseases, which we expect will continue to negatively impact the usage of our products and the number of da Vinci procedures performed. Also, as we are conducting IDE studies to support 510(k) submission for da Vinci platforms and for seeking new indications, we may experience delays in obtaining new product approvals, certifications, or clearances from the FDA or foreign approvals or certifications from foreign authorities or notified bodies or delays in recruiting patients in our ongoing and planned clinical studies.
As a result of the COVID-19 outbreak, we have experienced significant business conditions,disruptions, including restrictions on our ability to travel as well as distribute and liquidity concerns. Customersservice our products, temporary closures of our facilities and distributors may choosethe facilities of our suppliers and their contract manufacturers, and a reduction in access to postpone or reduce spendingour customers due to diverted resources and priorities and the business hours of hospitals, as governments institute prolonged shelter-in-place and/or self-quarantine mandates. For example, our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are located in California, which previously instituted risk reduction orders applicable to our employees in that region, significantly impacting the ability of our employees to get to their places of work to produce products and hampering our products from moving through the supply chain. These unprecedented measures to slow the spread of the virus taken by local governments and healthcare authorities globally, including the deferral of elective medical procedures and social distancing measures, have had, and we expect will continue to have, a negative impact on our operations and financial difficultiesresults. Furthermore, our future ways of working changes, including fully remote and hybrid work environments, may present additional risks, uncertainties, and costs that could affect our performance, including increased operational risk, uncertainty regarding office space needs, heightened vulnerability to cyber attacks due to remote work, potential reduced productivity, changes to our company culture, and increased costs to ensure our offices are safe and functional as hybrid offices that enable effective collaboration of both remote and in-person colleagues.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or delay spending by hospitals and affect demand for our products as well as increased risk of customer defaults or delays in payments. Our customers may be unable to obtain credit to finance purchasesterminate or amend their agreements for the purchase, lease, or service of our products due to restraints on credit. Therebankruptcy, lack of liquidity, lack of funding, operational failures, or other reasons. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows.
Outbreaks of other epidemic, pandemic, or contagious diseases, such as, historically, the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could be additional effects from adverse conditions inalso divert medical resources and priorities towards the credit markets ontreatment of that disease. An outbreak of other contagious diseases could negatively affect hospital admission rates or disrupt our business including the insolvency of key suppliers or their inability to obtain credit to finance the development and/or manufacture of our products resulting in product delays.
In addition, our business is closely tiedsimilar to the overall U.S. healthcare system, relating to which there are concerns and uncertainties as a result of efforts made by the U.S. federal government to modify, repeal, or otherwise invalidate all, or certain provisionsimpact of the PPACA. In addition,COVID-19 pandemic highlighted above. Any of these
outbreaks could negatively impact the U.S. federal government has called for, or enacted, substantial changes to trade, fiscal,number of procedures performed and tax policies, which may include changes to existing trade agreements including, but not limited to, the North American Free Trade Agreement (“NAFTA”), and may have a significant impact on our operations. We cannot predict the impact, if any, that these changes could have on our business.
If economic conditions worsen or new legislation is passed related to the healthcare system, trade, fiscal or tax policies, customer demand may not materialize to the levels we require to achieve our anticipated financial results, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS AND OUR ABILITY TO PURCHASE AT ACCEPTABLE PRICES A SUFFICIENT SUPPLY OF MATERIALS, PARTS, AND COMPONENTS COULD HARM OUR ABILITY TO MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced suppliers or single-sourced suppliers. We generally purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory. While alternative suppliers exist and could be identified for single-sourced components, the disruption or termination of the supply of components, or inflationary pressure in our supply chain, could cause a significant increase in the costs of these components, which could affect our operating results. A disruption or termination in the supply of components could also result in our inability to meet demand for our products, which could harm our ability to generate revenues, lead to customer dissatisfaction, and damage our reputation and our brand. Furthermore, if we are required to change the manufacturer of a key component of our products, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The time and processes associated with the verification of a new manufacturer could delay our ability to manufacture our products on schedule or within budget, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
In addition, our ability to meet customers’ demands depends, in part, on our ability to timely obtain an adequate delivery of quality materials, parts, and components from our suppliers. An information technology systems interruption, including cybersecurity attacks, could adversely affect the ordering, distribution, and manufacturing processes of our suppliers. Difficulties in obtaining a sufficient supply of semiconductor and other component materials continue to increase, and we expect such difficulties to persist in the foreseeable future. Prices of such materials have also increased, and global supply has become significantly constrained due to the increased demand for materials, including semiconductors, to support expansion of server and cloud networks as a greater proportion of the global population worked remotely, the introduction of 5G, and the continued electrification of vehicles. We engage in activities to seek to mitigate such supply disruptions by, for example, increasing our communications with our suppliers and modifying our purchase order coverage and inventory levels. However, notwithstanding these activities, the global semiconductor and materials supply shortage is likely to remain a challenge for the foreseeable future. Such global shortages in important components have resulted in, and will continue to cause, inflationary pressure in our supply chain, which would impact our profits and profit margin. If shortages and price increases in important supply-chain materials in the semiconductor or other markets continue, we could also fail to meet product demand, which would adversely impact our business, financial condition, results of operations, or cash flows.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO PURCHASE OUR COMPETITORS’ PRODUCTS OR SERVICES OR MAY NOT ACCEPT DA VINCI ROBOTIC-ASSISTED SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
Robotic-assisted surgery with a da Vinci Surgical System is a technology that competes with established and emerging treatment options in both disease management and reconstructive medical procedures. These competitive treatment options include conventional MIS, open surgery, interventional approaches, and pharmacological regimens. Some of these procedures are widely accepted in the medical community and, in many cases, have a long history of use. Technological advances could make such treatments more effective or less expensive than using our products, which could render our products obsolete or unmarketable. Studies could be published that show that other treatment options are more beneficial and/or cost-effective than robotic-assisted surgery. We cannot be certain that physicians will use our products to replace or supplement established treatments or that our products will continue to be competitive with current or future technologies.
Additionally, we face or expect to face competition from companies that develop or have developed wristed, robotic,robotic-assisted, or computer-assisted surgical systems and products. Companies have introduced products in the field of robotic surgery or have made explicit statements about their efforts to enter the field including, but not limited to: Auris Health,to, the following companies: Asensus Surgical, Inc.; Avatera Medicalavateramedical GmbH; CMR Surgical Limited;Ltd.; Johnson & Johnson and Google Inc. and their joint venture, Verb Surgical Inc.;Johnson; Medicaroid, Inc.; MedRobotics Corp.;Medrobotics Corporation; Medtronic PLC;plc; meerecompany Inc.; MicroPort Scientific Corporation; Olympus Corp.Corporation; Samsung Group; Shandong Weigao Group Medical Polymer Company Ltd.; Samsung Corporation; Smart Robot Technology Group
Co. Ltd.;and Titan Medical Inc.; TransEnterix Inc.; and Wego Holding Co., Ltd. Other companies with substantial experience in industrial robotics could potentially expand into the field of surgical robotics and become competitors. Our revenues may be reduced due to pricing pressure or eliminated if our competitors develop and market products that are more effective or less expensive than our products. If we are unable to compete successfully, our revenues will suffer, which could have a material adverse effect on our business, financial condition, result of operations, or cash flows. We may not be able to maintain or improve our competitive position against current or potential competitors, especially those with greater resources.
In addition, third-party service providers that provide services toda Vinci Surgical System operators may emerge and compete with us on price or offerings. To date, substantially all of our customers have sourced services on their da Vinci Surgical Systems from us through service contract commitments or time and materials contracts. Furthermore, there are third-party service providers offering consulting services targeted at analyzing the cost-effectiveness of hospitals’ roboticrobotic-assisted surgery programs, including procedures performed, placement of systems, and consumption of instruments and accessories. We currently provide similar services and analysis to our customers, but it is difficult to assess the impact that this may have on our business. If we are unable to compete successfully with any third-party service providers, our revenues may suffer.
THE INFLATIONARY ENVIRONMENT COULD MATERIALLY ADVERSELY IMPACT OUR CUSTOMERS MAY USE UNAUTHORIZED OR UNAPPROVED INSTRUMENTSBUSINESS AND ACCESSORIES, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSSRESULTS OF MARKET SHARE.OPERATIONS.
A large portionChanges in economic conditions and supply chain constraints and steps taken by governments and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, could lead to higher inflation than previously experienced or expected, which could, in turn, lead to an increase in costs. In an inflationary environment, we may be unable to raise the prices of our revenue is generated through our sales of instruments and accessories. Third parties have attemptedproducts sufficiently to and may discover ways to manufacture and sell counterfeit reprocessed instruments and/or alter instruments that are compatible and functionkeep up with the rate of inflation. Impacts from inflationary pressures could be more pronounced and materially adversely impact aspects of our business with revenue streams and cost commitments linked to contractual agreements that extend further into the future, as we may not be able to quickly or easily adjust pricing, reduce costs, or implement counter measures.
IF OUR PRODUCTS DO NOT ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
The da Vinci Surgical System and such activities may reduce our other products represent a fundamentally new way of performing medical procedures. Achieving and maintaining physician, patient, and third-party payor acceptance of robotic-assisted medical procedures as a preferred method of performing these procedures is crucial to our success. If our products fail to achieve or maintain market share. Whileacceptance, customers will not purchase our sales arrangements with customers generally prohibitproducts, and we will not be able to generate the revenue necessary to support our business. We believe that physicians’ and third-party payors’ acceptance of the benefits of procedures performed using our products will be essential for acceptance of our products by patients. Physicians will not recommend the use of unauthorizedour products unless we can demonstrate that they produce results comparable or unapproved instruments and accessories with da Vinci Surgical Systems, warranties will be voidsuperior to existing techniques. Even if such instruments and accessories are used, and a programmed memory chip inside each instrument is designedwe can prove the effectiveness of our products through clinical studies, physicians may elect not to prevent the instrument from being useduse our products for more than the prescribedany number of proceduresother reasons. For example, cardiologists may continue to help ensure that its performance meets specifications during each procedure, these measuresrecommend conventional heart surgery simply because such surgery is already widely accepted. In addition, physicians may not preventbe slow to adopt our products because of the perceived liability risks arising from the use of unauthorized or unapproved instruments and accessories by our customers. In addition to potential reductions to our revenues and market share, sales of unauthorized instruments and accessories by third parties may create safety and health risks to da Vinci patients and could cause negative publicity for us if these products cause injuries and/or do not function as intended when used with the da Vinci Surgical Systems, any of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
NEW PRODUCT DEVELOPMENTS AND INTRODUCTIONS MAY ADVERSELY IMPACT OUR FINANCIAL RESULTS.
We develop and introduce new products with enhanced features and extended capabilities from time to time. We may introduce new products that target different markets than what our existing products target. The success of new product introductions depends on a number of factors including, but not limited to, timely and successful research and development, regulatory clearances or approvals, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
We invest substantially in various research and development projects to expand our product offerings. Our research and development efforts are critical to our success, and our research and development projects may not be successful. We may be unable to develop and market new products successfully, and the products we invest in and develop may not be well-received by customers or meet our expectations. Our research and development investments may not generate significant operating income or contribute to our future operating results for several years, and such contributions may not meet our expectations or even cover the costs of such investments. In addition, the introduction or announcement of new products or product enhancements may shorten the life cycle of our existing products or reduce demand for our current products, thereby offsetting any benefits of successful product introductions and potentially leading to challenges in managing inventory of existing products.
Our products are subject to various regulatory processes, and we must obtain and maintain regulatory approvals in order to sell our new products. If a potential purchaser believes that we plan to introduce a new product in the near future or if a potential purchaser is located in a country where a new product that we have introduced has not yet received regulatory clearance, planned purchases may be deferred or delayed. We have in the past experienced a slowdown in demand for existing products in advance of new product introductions and may experience a slowdown in demand in the future as well. It is also possible that a new product introduction could cause downward pressure on the prices of our existing products or require us to change how we sell our products, either of which could have material adverse effect on our revenues.
If we fail to effectively develop new products and manage new product introductionsthe uncertainty of reimbursement from third-party payors, particularly in light of ongoing healthcare reform initiatives and the future, our business, financial condition, results of operations, or cash flows could be materially adversely impacted.evolving U.S. healthcare environment.
WE EXPECT GROSS PROFIT MARGINS TO VARY OVER TIME, AND CHANGES IN OUR GROSS PROFIT MARGINS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Our gross profit margins have fluctuated from period to period, and weWe expect that they will continue to fluctuate in the future. Our gross profit margins may be adversely affected by numerous factors, including:
changes in customer, geographic, or product mix, including mix of da VinciSurgical System models sold or leased;
changes in the portion of sales involving a trade-in of another system and the amount of trade-in credits given;
introduction of new products, which may have lower margins than our existing products;
our ability to maintain or reduce production costs;
changes to our pricing strategy;
changes in competition;
changes in production volume driven by demand for our products;
changes in material, labor, or other manufacturing-related costs, including the impact of foreign exchange rate fluctuations for foreign-currency denominated costs;
changes to U.S. and foreign trade policies, such as the enactment of tariffs on goods imported into the U.S. including, but not limited to, goods imported from Mexico where we manufacture a majority of our instruments that we sell;
inventory obsolescence and product recall charges; and
market conditions.
If we are unable to offset the unfavorable impact of the factors noted above by increasing the volume of products shipped, reducing product manufacturing costs, or otherwise, our business, financial condition, results of operations, or cash flows may be materially adversely affected.
WE EXPERIENCE LONG AND VARIABLE CAPITAL SALES CYCLES AND SEASONALITY IN OUR BUSINESS, WHICH MAY CAUSE FLUCTUATIONS IN OUR FINANCIAL RESULTS.
The sales and purchase order cycle of our da Vinci Surgical System is lengthy because it is a major capital item and its purchase generally requires the approval of senior management of hospitals, their parent organizations, purchasing groups, and government bodies, as applicable. In addition, sales to some of our customers are subject to competitive bidding or public tender processes. These approval and bidding processes can be lengthy. As a result, hospitals may delay or accelerate system purchases in conjunction with timing of their capital budget timelines. Further, IDN groups are creating larger networks of da Vinci system users with increasing purchasing power and are increasingly evaluating their robotic-assisted surgery programs to optimize the efficiency of surgeries using the da Vincisystem. Further, the introduction of new products could adversely impact our sales cycle as customers take additional time to assess the benefits and costs of such products. As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales. Historically, our sales of da Vinci Surgical Systems have tended to be heaviest during the third month of each fiscal quarter, lighter in the first fiscal quarter and heavier in the fourth fiscal quarter.
We have experienced procedure growth for a number of benign conditions, including hysterectomies for benign conditions, sacrocolpopexies, hernia repairs, cholecystectomies, and certain other surgeries. Many of these types of surgeries may be postponed in the short term by patients to avoid vacation periods and for other personal scheduling reasons. Patients may also accelerate procedures to take advantage of insurance funding cut-off dates. Historically, we have experienced lower procedure volume in the first and third fiscal quarters and higher procedure volume in the second and fourth fiscal quarters. Timing of procedures and changes in procedure growth directly affect the timing of instrument and accessory purchases and capital purchases by customers.
The above factors may contribute to substantial fluctuations in our quarterly operating results. Because of these fluctuations, it is possible that in future periods our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance.
WE ARE SUBJECT TO A VARIETY OF RISKS DUE TO OUR OPERATIONS OUTSIDE OF THE U.S.
We manufacture, perform research and development activities, and distribute our products in OUS markets. Revenue from OUS markets accounted for approximately 29%, 27%, and 28% of our revenue for the years ended December 31, 2018, 2017, and 2016, respectively. Our OUS operations are, andthere will continue to be subjecta learning process involved for patient care teams to become proficient in the use of our products. Broad use of our products requires training of patient care teams. Market acceptance could be delayed by the time required to complete this training. We may not be able to rapidly train patient care teams in numbers sufficient to generate adequate demand for our products.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN COVERAGE AND REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
In the U.S., hospitals generally bill for the services performed with our products to various third-party payors, such as Medicare, Medicaid, other government programs, and private insurance plans. If hospitals do not obtain sufficient reimbursement from third-party payors for procedures performed with our products, or if government and private payors’ policies do not cover surgical procedures performed using our products, we may not be able to generate the revenues necessary to support our business. In addition, to the extent that there is a shift from an inpatient setting to outpatient settings, we may experience pricing pressure and a reduction in the number of risks including:
failure to obtain or maintainprocedures performed. Our success in OUS markets also depends upon the same degree of protection against infringementeligibility of our intellectual property rights as weproducts for coverage and reimbursement through government-sponsored healthcare payment systems and third-party payors. Reimbursement practices vary significantly by country. Many OUS markets have government-managed healthcare systems that control reimbursement for new products and procedures. Other foreign markets have both private insurance systems and government-managed systems that control reimbursement for new products and procedures. Market acceptance of our products may depend on the availability and level of coverage and reimbursement in any country within a particular time. In addition, healthcare cost containment efforts similar to those in the U.S.;
multiple OUS regulatory requirements that are subject to change and that could impact our ability to manufacture and sell our products;
changesprevalent in tariffs, trade barriers, and regulatory requirements;
protectionist laws and business practices that favor local competitors, which could slow our growth in OUS markets;
local or national regulations that make it difficult or impractical to market or use our products;
U.S. relations with the governmentsmany of the foreignother countries in which we operate;
inability or regulatory limitations on our abilitysell, and intend to move goods across borders;
the risks associated with foreign currency exchange rate fluctuations;
difficulty in establishing, staffing, and managing OUS operations;
the expense of establishing facilities and operations in new foreign markets;
building and maintaining an organization capable of supporting geographically dispersed operations;
anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials;
antitrust and anti-competition laws;
economic weakness, including inflation, or political instability in particular foreign economies and markets; and
business interruptions due to natural disasters, outbreak of disease, and other events beyond our control.
On June 23, 2016, the United Kingdom (the “UK”) held a referendum in which voters approved an exit from the European Union (the “EU”), commonly referred to as “Brexit.” On March 29, 2017, the UK formally notified the EU of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The commencement of the official withdrawal process by the UK has created uncertainties affecting business operations in the UK and the EU. Until the terms of the UK’s exit from the EU on March 29, 2019 are determined, including any transition period, it is difficult to predict its impact. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our business is subject, impose greater restrictions on imports and exports between the UK and the EU and other parties, and create economic and political uncertainty in the region.
In addition, the U.S. federal government has made changes to U.S. trade policy, including signing an executive order to withdraw from the negotiating process of the Trans-Pacific Partnership, renegotiate the terms of NAFTA, and imposing border taxes on imports into the U.S. On November 30, 2018, the leaders of the U.S., Mexico and Canada signed a replacement to NAFTA, which remains subject to the ratification by the legislatures of each country. We manufacture a majority of the instruments we sell, in Mexico and any legislation enacted that impacts the relationship between the U.S. and Mexico and/or the continuity of NAFTA could adversely affect our operations and financial results. In addition, the U.S. federal government has implemented, or is considering the imposition of, tariffs on certain foreign goods. Such tariffs, and, if enacted, any further legislation or actions taken by the U.S. federal government that restrict trade, such as additional tariffs, trade barriers, and other protectionist or retaliatory measures taken by governments in Europe, Asia, and other countries, could adversely impact our ability to sell products and services in our OUS markets. Tariffs could increase the cost of our products, and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that we earn on our products. Tariffs could make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our abilitythese efforts are expected to offer our products and services.
Furthermore, a large portion of our OUS sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive and/or less affordable in OUS markets.
If we are unable to meet and manage these risks, our OUS operations may not be successful, which would limit the growth of our business and could have a material adverse effect on our business, financial condition, result of operations, or cash flows.
WE UTILIZE DISTRIBUTORS FOR A PORTION OF OUR SALES, WHICH SUBJECTS US TO A NUMBER OF RISKS THAT COULD HARM OUR BUSINESS.
We have strategic relationships with a number of key distributors for sales and service of our products in certain foreign countries. If these strategic relationships are terminated and not replaced, our revenues and/or ability to sell or service our products in the markets serviced by these distributors could be adversely affected. In addition, we may be named as a defendant in lawsuits against our distributors related to sales or service of our products performed by them.continue. Please see our risk factor below titled “We Are Subject to Product Liability“Changes in Healthcare Legislation and Negligence Claims Relating to the Use of Our Products and Other Legal Proceedings That Could Materially Adversely AffectPolicy May Have a Material Adverse Effect on Our Financial Condition Divert Management’s Attention, and Harm Our Business.” The actionsResults of our distributors may affect our ability to effectively market our products in certain foreign countries or regulatory jurisdictions if a distributor holds the regulatory authorization in such countries or within such regions and causes, by action or inaction, the suspension of such marketing authorization or sanctionsOperations” for non-compliance. It may be difficult, expensive, and time consuming for us to re-establish market access or regulatory compliance in such case.
WE OFFER ALTERNATIVE CAPITAL ACQUISITION APPROACHES. AS A RESULT, WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND THE RISK OF LOSSES OF REVENUE, WHICH COULD RESULT IN MATERIAL LOSSES.
We believe customer financing through leasing is an important consideration for some of our customers and have experienced an increase in demand for customer financing. We may experience loss from a customer’s failure to make payments accordingadditional risks related to the contractual lease terms. Our exposureability of institutions or surgeons to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors.obtain reimbursements.
Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements. If the level
Certain of our leasing arrangements allow customers to cancel, return, or upgrade the systems leased prior to the end of the lease term without incurring a financial penalty. We also lease our systems to certain qualified customers where the lease payments are based on their usage of the systems. While leases and usage-based arrangements enable our customers to upgrade and get access to new technologies faster, it may also enable competitors to more easily induce customers to switch to a competitor system. If customers do not perform a sufficient number procedures on systems leased under usage-based arrangements, or return or terminate leases prematurely, it could have a material adverse effect on our business, financial condition, result of operations, or cash flows.
IF OUR PRODUCTS CONTAIN DEFECTS OR ENCOUNTER PERFORMANCE PROBLEMS, WE MAY INCUR LOSSES ASSOCIATED WITH CURRENCY FLUCTUATIONS AND MAY NOT BE ABLEHAVE TO EFFECTIVELY HEDGERECALL OUR EXPOSURE.
Our operating results are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign currency exchange rates relates to revenue and operating expenses denominated in currencies other than the U.S. dollar. The weakening of foreign currencies relative to the U.S. dollar adversely affects our foreign currency-denominated revenue. Margins on OUS revenue could also be materially adversely affected by foreign currency exchange rate fluctuations as we may not be able to raise local prices to fully offset the strengthening of the U.S. dollar. Conversely, the strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated revenue and earnings, may cause us to reduce pricing on our products in our OUS markets and may cause us to incur losses on our foreign currency hedging instruments, thereby limiting the benefit that strengthened foreign currencies could have on our results of operations.
We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity, and expense. Although we have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations, primarily related to transactions denominated in the Euro, Japanese Yen, Korean Won, British Pound, and the Swiss Franc, and we regularly review our hedging program and make adjustments as necessary, our hedging activities may not offset more than a portion of the adverse financial impact caused by unfavorable movement in foreign currency exchange rates, which could materially adversely affect our financial condition or results of operations. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional discussion on the impact of foreign exchange risk.
WE ARE EXPOSED TO CREDIT RISK AND FLUCTUATIONS IN THE MARKET VALUE OF OUR INVESTMENTS.
Our investment portfolio includes both domestic and international investments. The credit ratings and pricing of our investments can be negatively affected by liquidity concerns, credit deterioration, financial results, economic risk, political risk, or other factors. As a result, the value and liquidity of our cash equivalents and marketable securities could fluctuate substantially. Our other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of investments, impairment charges resulting from revaluations of debt and equity securities and other investments, changes in interest rates, increases or decreases in cash balances, volatility in foreign exchange rates, and changes in fair value of derivative instruments. Increased volatility in the financial markets and overall economic uncertainty could increase the risk that actual amounts realized on our investments may differ significantly from the fair values currently assigned to them.
While we have not realized any significant losses on our cash equivalents or marketable securities, future fluctuations in their value could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS, AND OUR REPUTATION MAY SUFFER.
Our success depends on the quality and reliability of our products. While we subject components sourced and products manufactured to stringent quality specifications and processes, our products incorporate mechanical parts, electrical components, optical components, and computer software, any of which may contain errors or exhibit failures, especially when products are first introduced. Component failures, manufacturing flaws, design defects or inadequate disclosure of product related risks with respect to our products could result in an unsafe condition or injury to, or death of, the patient. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Because our products are designed to be used to perform complex surgical procedures, due to the serious and costly consequences of product failure, we and our customers have an increased sensitivity to such defects. In the past, we have voluntarily recalled certain products. Although our products are subject to stringent quality
processes and controls, we cannot provide assurance that our products will not experience component aging, errors, or performance problems. If we experience product flaws or performance problems, any or all of the following could occur:
•delays in product shipments;
•loss of revenue;
•delay in market acceptance;
•diversion of our resources;
•damage to our reputation;
•product recalls;recalls, which can include, but not be limited to, product withdrawals from the market, labeling changes, design changes, customer notifications, and notifications to global regulatory bodies;
•regulatory actions;
•increased service or warranty costs; or
•product liability claims.
Costs associated with product flawsdefects or performance problems of our products could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
WE ARE SUBJECT TO PRODUCT LIABILITY AND NEGLIGENCE CLAIMS RELATING TO THE USE OF OUR PRODUCTS AND OTHER LEGAL PROCEEDINGS THAT COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION, DIVERT MANAGEMENT’S ATTENTION, AND HARM OUR BUSINESS.
We are, and may become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. Certain current lawsuits and pending proceedings to which we are party, including purported class actions, product liability litigation, and patent litigation, are described in Note 78 to the Consolidated Financial Statements included in Part II, Item 8.
In particular, our business exposes us to significant risks of product liability claims, which are inherent to the medical device industry. Product liability claims have been brought against us by, or on behalf of, individuals alleging that they have sustained personal injuries and/or death as a result of purported product defects, the alleged failure to warn, and/or the alleged inadequate training by us of physicians regarding the use of the da Vinci Surgical System. The individuals who have brought the product liability claims seek recovery for their alleged personal injuries and, in many cases, punitive damages. Current product liability claims have resulted in negative publicity regarding our Company, and these and any other product liability or negligence claims or product recalls also could harm our reputation. Please see our risk factor below titled “Negative Publicity, Whether Accurate or Inaccurate, Concerning Our Products or Our Company Could Reduce Market Acceptance of Our Products and Could Result in Decreased Product Demand and a Decline in Revenues” for additional risks related to the potential effects of negative publicity on our business.
The outcome of these product liability claims and other legal proceedings cannot be predicted with certainty. We currently self-insure our product liability risk and maintain third-party insurance coverage for certain other liabilities. However, we cannot determine whether our insurance coverage from third-party carriers, or our self-insurance of product liability risk, would be sufficient to cover the costs or potential losses related to these lawsuits and proceedings or otherwise be excluded under the terms of any third-party policy. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant legal costs (including settlements, judgments, legal fees, and other related defense costs) and diversion of management attention. If we do not prevail in the purported class actions, and derivative lawsuits, product liability litigation, or other legal proceedings, we may be faced with significant monetary damages or injunctive relief against us that could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
WE ARE SUBJECT TO SIGNIFICANT, UNINSURED LIABILITIES.
For certain risks, we do not maintain insurance coverage because of cost and/or availability. For example, we self-insure our product liability risks, and we indemnify our directors and officers for third-party claims and do not carry insurance to cover that indemnity or the related underlying potential losses. We also do not carry, among other types of coverage, earthquake insurance. In addition, in the future, we may not continue to maintain certain existing insurance coverage or adequate levels of coverage. Premiums for many types of insurance have increased significantly in recent years and, depending on market conditions and our circumstances, in the future, certain types of insurance, such as directors’ and officers’ insurance, may not be available on acceptable terms or at all. Because we retain some portion of our insurable risks and, in some cases, we are entirely self-insured, unforeseen or catastrophic losses in excess of insurance coverage could require us to pay substantial amounts, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
NEGATIVE PUBLICITY, WHETHER ACCURATE OR INACCURATE, CONCERNING OUR PRODUCTS OR OUR COMPANY COULD REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS AND COULD RESULT IN DECREASED PRODUCT DEMAND AND A DECLINE IN REVENUES.
There have been articles published and reports questioning patient safety and efficacy associated with robotic-assisted surgery with the da Vinci Surgical System and its cost relative to other disease management methods and the adequacy of surgeon training. Negative publicity, including statements made by public officials, whether accurate or inaccurate, concerning our products or our Company could reduce market acceptance of our products and could result in decreased product demand and a decline in revenues. In addition, significant negative publicity could result in an increased number of product liability claims, regardless of whether these claims are meritorious. The number of claims could be further increased by plaintiffs’ law firms that use a wide variety of media to advertise their services and solicit clients for product liability cases against us.
WE ARE SUBJECT TO SIGNIFICANT, UNINSURED LIABILITIES.
For certain risks, we do not maintain insurance coverage because of cost and/or availability. For example, we self-insure our product liability risks and we indemnify our directors and officers for third-party claims and do not carry insurance to cover that indemnity or the related underlying losses. We also do not carry, among other types of coverage, earthquake, and cyber insurance.
In addition, in the future, we may not continue to maintain certain existing insurance coverage or adequate levels of coverage. Premiums for many types of insurance have increased significantly in recent years, and depending on market conditions and our circumstances, in the future, certain types of insurance such as directors’ and officers’ insurance may not be available on acceptable terms, or at all. Because we retain some portion of our insurable risks, and in some cases we are self-insured completely, unforeseen or catastrophic losses in excess of insurance coverage could require us to pay substantial amounts, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
WE MAY ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
Manufacturing our products is a complex process. We (or our critical suppliers) may encounter difficulties in scaling up or maintaining production of our products, including:
problems involving production yields;
quality control and assurance;
component supply shortages;
import or export restrictions on components, materials or technology;
shortages of qualified personnel; and
compliance with state, federal, and foreign regulations.
If demand for our products exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we are unable to maintain larger-scale manufacturing capabilities, our ability to generate revenues will be limited and our reputation in the marketplace could be damaged, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced suppliers or single-sourced suppliers. We generally purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory. While alternative suppliers exist and could be identified for sole-sourced components, the disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our operating results. A disruption or termination in the supply of components could also result in our inability to meet demand for our products, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. Furthermore, if we are required to change the manufacturer of a key component of our products, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could delay our ability to manufacture our products in a timely manner or within budget, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN COVERAGE AND REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
In the U.S., hospitals generally bill for the services performed with our products to various third-party payors, such as Medicare, Medicaid, and other government programs and private insurance plans. If hospitals do not obtain sufficient reimbursement from third-party payors for procedures performed with our products, or if government and private payors’ policies do not cover surgical procedures performed using our products, we may not be able to generate the revenues necessary to support our business. Our success in OUS markets also depends upon the eligibility of our products for coverage and reimbursement through government-sponsored health care payment systems and third-party payors. Reimbursement practices vary significantly by country. Many OUS markets have government-managed healthcare systems that control reimbursement for new products and procedures. Other foreign markets have both private insurance systems and government-managed systems that control reimbursement for new products and procedures. Market acceptance of our products may depend on the availability and level of coverage and reimbursement in any country within a particular time. In addition, health care cost containment efforts similar to those in the U.S. are prevalent in many of the other countries in which we intend to sell our products and these efforts are expected to continue. Please see our risk factor below titled “Changes in Healthcare Legislation and Policy May Have a Material Adverse Effect on Our Financial Condition and Results of Operations” for additional risks related to the ability of institutions or surgeons to obtain reimbursements.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.HARMED AND INCREASES IN LABOR COSTS COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
We are highly dependent on the principal members of our management and scientific staff. For example, our product development plans depend, in part, on our ability to attract and retain engineers with experience in mechanics, electronics, software, and optics. Attracting and retaining qualified personnel will be critical to our success, and competition for qualified personnel is intense. We may not be able to attract and retain personnel on acceptable terms given the constrained labor market and competition for such personnel among technology and healthcare companiescompanies. Moreover, we may encounter higher recruiting expenses, wage rates, and universities.retention benefits. The extent and duration of the impact of labor market challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic, availability of qualified and highly skilled persons in the markets where we operate and unemployment levels within these markets, behavioral changes, such as fully engaging employees and earning loyalty, prevailing wage rates, health and other insurance and benefit costs, inflation, adoption of new or revised employment and labor laws and regulations or government programs, safety levels of our operations, and our reputation within the labor market. The loss of any of these personsour qualified personnel or our inability to attract and retain qualified personnel could harm our business and our ability to compete.compete and related expenses could materially adversely affect our results of operations and financial condition.
NATURAL DISASTERS OR OTHER EVENTS BEYOND OUR CONTROL COULD DISRUPTWE EXPERIENCE LONG AND VARIABLE CAPITAL SALES CYCLES AND SEASONALITY IN OUR BUSINESS, WHICH MAY CAUSE FLUCTUATIONS IN OUR FINANCIAL RESULTS.
The sales and purchase order cycle of our systems is lengthy, because the systems are major capital items and their purchase generally requires the approval of senior management of hospitals, their parent organizations, purchasing groups, and government bodies, as applicable. In addition, sales to some of our customers are subject to competitive bidding or public tender processes. These approval and bidding processes can be lengthy. As a result, hospitals may delay or accelerate system purchases in conjunction with the timing of their capital budget timelines. Further, IDN groups are creating larger networks of system users with increasing purchasing power and are increasingly evaluating their robotic-assisted surgery programs to optimize the efficiency of surgeries using da VinciSurgical Systems. Further, the introduction of new products could adversely impact our sales cycle as customers take additional time to assess the benefits and costs of such products. As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales. Historically, our sales of da Vinci Surgical Systems have tended to be heavier in the fourth quarter and lighter in the first quarter, as hospital budgets are reset.
We have experienced procedure growth for a number of benign conditions, including hysterectomies, sacrocolpopexies, hernia repairs, cholecystectomies, and certain other surgeries. Many of these types of surgeries may be postponed in the short term by patients to avoid vacation periods and for other personal scheduling reasons. Patients may also accelerate procedures to take advantage of insurance funding cut-off dates. Historically, we have experienced lower procedure volume in the first and third quarters of the year and higher procedure volume in the second and fourth quarters of the year. The timing of procedures
and changes in procedure growth directly affect the timing of instrument and accessory purchases and capital purchases by customers.
The above factors may contribute to substantial fluctuations in our quarterly operating results. Because of these fluctuations, it is possible that, in future periods, our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance.
NEW PRODUCT DEVELOPMENTS AND RESULT IN LOSS OF REVENUE OR IN HIGHER EXPENSES.INTRODUCTIONS MAY ADVERSELY IMPACT OUR FINANCIAL RESULTS.
Natural disasters, terrorist activities,We develop and other business disruptionsintroduce new products with enhanced features and extended capabilities from time to time. We may introduce new products that target different markets than what our existing products target. The success of new product introductions depends on a number of factors including, but not limited to, internet security threats,timely and successful research and development, regulatory clearances, approvals, or certifications, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
We invest substantially in various research and development projects to expand our product offerings. Our research and development efforts are critical to our success, and our research and development projects may not be successful. We may be unable to develop and market new products successfully, and the products we invest in and develop may not be well-received by customers or meet our expectations. Our research and development investments may not generate significant operating income or contribute to our future operating results for several years, and such contributions may not meet our expectations or even cover the costs of such investments. In addition, the introduction or announcement of new products or product enhancements may shorten the life cycle of our existing products or reduce demand for our current products, thereby offsetting any benefits of successful product introductions and potentially leading to challenges in managing inventory of existing products.
Our products are subject to various regulatory processes, and we must obtain and maintain regulatory approvals and certifications in order to sell our new products. If a potential purchaser believes that we plan to introduce a new product in the near future or if a potential purchaser is located in a country where a new product that we have introduced has not yet received regulatory clearance or certification, planned purchases may be deferred or delayed. In the past, we have experienced a slowdown in demand for existing products in advance of new product introductions and may experience a slowdown in demand in the future as well. It is also possible that a new product introduction could seriously harmcause downward pressure on the prices of our existing products or require us to change how we sell our products, either of which could have material adverse effect on our revenues.
If we fail to effectively develop new products and manage new product introductions in the future, our business, financial condition, results of operations, or cash flows could be materially adversely impacted.
WE ARE SUBJECT TO A VARIETY OF RISKS DUE TO OUR OPERATIONS OUTSIDE OF THE U.S.
We manufacture, perform research and development activities, and distribute our products in OUS markets. Revenue from OUS markets accounted for approximately 33%, 32%, and 30% of our revenue for the years ended December 31, 2021, 2020, and financial condition2019, respectively. Our OUS operations are, and increase our costs and expenses. For example,will continue to be, subject to a number of risks including:
•failure to obtain or maintain the March 2011 earthquake and tsunami in Japan and their aftermath created economic uncertainty and disrupted economic activities in Japan, including a reduction in hospital spending. Furthermore, our corporate headquarters and manysame degree of protection against infringement of our intellectual property rights as we have in the U.S.;
•multiple OUS regulatory requirements that are subject to change and that could impact our ability to manufacture and sell our products;
•changes in tariffs, trade barriers, and regulatory requirements;
•protectionist laws, policies, and business practices that favor local competitors or lead to non-U.S. customers favoring domestic technology solutions, which could slow our growth in OUS markets;
•local or national regulations that make it difficult or impractical to market or use our products;
•U.S. relations with the governments of the other countries in which we operate;
•inability or regulatory limitations on our ability to move goods across borders;
•the risks associated with foreign currency exchange rate fluctuations;
•difficulty in establishing, staffing, and managing OUS operations, including certaindiffering labor relations;
•the expense of our manufacturingestablishing facilities are locatedand operations in California, which innew foreign markets;
•building and maintaining an organization capable of supporting geographically dispersed operations, including appropriate business procedures and controls;
•anti-corruption laws, such as the past has experienced both severe earthquakesU.S. Foreign Corrupt Practices Act (“FCPA”), and other local laws prohibiting corrupt payments to governmental officials;
•antitrust and anti-competition laws;
•economic weakness, including inflation, or political instability in particular foreign economies and markets; and
•business interruptions due to natural disasters. disasters, outbreak of disease, climate change, and other events beyond our control.
We do not have multiple-site capacity for all ofincreased, and will continue to increase, our operations in China. There is inherent risk, based on the eventcomplex relationships between China and the U.S., that political, diplomatic, military, or other events could result in business disruptions, including increased regulatory enforcement against companies, tariffs, trade embargoes, and export restrictions. Tariffs increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs adversely impact the gross margin that the Company earns on its products. Tariffs can also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand. Countries may also adopt other measures, such as controls on imports or exports of goods, technology, or data, that could adversely impact the Company’s operations and supply chain and limit the Company’s ability to offer its products and services as designed. These measures can require the Company to take various actions, including changing suppliers and restructuring business relationships. Changing the Company’s operations in accordance with new or changed trade restrictions can be expensive, time-consuming, disruptive to the Company’s operations and distracting to management. Such restrictions can be announced with little or no advance notice and the Company may not be able to effectively mitigate all adverse impacts from such measures. Political uncertainty surrounding trade and other international disputes could also have a negative effect on consumer confidence and spending. Any of these events could reduce customer demand, increase the cost of our products and services, or otherwise have a materially adverse impact on our customers’ and suppliers’ businesses and results of operations.
For example, in 2020, the U.S. government amended the Entity List rules to expand the requirement to obtain a license prior to the export of certain technologies. In addition, in 2020, a new U.S. regulation seeks to prohibit the U.S. government from contracting with companies who use the products or services of certain Chinese companies. We believe that these regulations do not materially impact our business disruption. at this time but cannot predict the impact that additional regulatory changes may have on our business in the future. These actions or similar actions may result in policies and regulations in response that could adversely affect our business operations in China, or may otherwise limit our ability to offer our products and services in China and other parts of the world.
Following a national referendum and enactment of legislation by the government of the United Kingdom (the “UK”), the UK formally withdrew from the European Union (the “EU”) and ratified a trade and cooperation agreement governing its relationship with the EU. The EU–UK Trade and Cooperation Agreement (the “TCA”) was applied provisionally as of January 1, 2021, and entered into force on May 1, 2021. The TCA does not specifically refer to medical devices. However, as a result of Brexit, the Medical Devices Regulation (EU) No 2017/745 (the “EU Medical Devices Regulation”) will not be implemented in the UK, and previous legislation that sought to mirror the EU Medical Devices Regulation in the UK law has been revoked. The regulatory regime for medical devices in Great Britain (England, Scotland, and Wales) continues to be based on the requirements derived from previous EU legislation, and the UK may choose to retain regulatory flexibility or align with the EU Medical Devices Regulation going forward. CE markings will continue to be recognized in the UK, and certificates issued by EU-recognized notified bodies will be valid in the UK until June 30, 2023. For medical devices placed on the market in Great Britain after this period, the UK Conformity Assessed (“UKCA”) marking will be mandatory. In contrast, UKCA marking and certificates issued by UK notified bodies will not be recognized on the EU market. The TCA does provide for cooperation and exchange of information in the area of product safety and compliance, including market surveillance, enforcement activities and measures, standardization-related activities, exchanges of officials, and coordinated product recalls (or other similar actions). For medical devices that are locally manufactured but use components from other countries, the “rules of origin” criteria will need to be reviewed. Depending on which countries products will ultimately be sold in, manufacturers may start seeking alternative sources for components if this would allow them to benefit from no tariffs. The rules for placing medical devices on the Northern Ireland market will differ from those in Great Britain. These developments, or the perception that any related developments could occur, have had and may continue to have a material adverse effect on global economic conditions and financial markets, and our business would likely be impacted and the demand for our products could be depressed.
In addition, the U.S. federal government has made changes to U.S. trade policy, including entering into a successor to the North American Free Trade Agreement (“NAFTA”), known as the United States-Mexico-Canada Agreement (“USMCA”), effective as of July 1, 2020. In addition, the U.S. federal government has implemented, or is considering the imposition of, tariffs on certain foreign goods. Such tariffs and, if enacted, any further legislation or actions taken by the U.S. federal government that restrict trade, such as additional tariffs, trade barriers, and other protectionist or retaliatory measures taken by governments in Europe, Asia, and other countries, could adversely impact our ability to sell products and services in our OUS markets. Tariffs could increase the cost of our products and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that we earn on our products, which could make our products less
competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our ability to offer our products and services.
Furthermore, partiesa large portion of our OUS sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive and/or less affordable in OUS markets.
If we are unable to meet and manage these risks, our OUS operations may not be successful, which would limit the growth of our business and could have a material adverse effect on our business, financial condition, result of operations, or cash flows.
DISRUPTION OF CRITICAL INFORMATION SYSTEMS OR MATERIAL BREACHES IN THE SECURITY OF OUR SYSTEMS COULD HARM OUR BUSINESS, CUSTOMER RELATIONS, AND FINANCIAL CONDITION.
Information technology is critical to the success of our digital products, helps us operate efficiently, interface with customers, maintain our supply chain and manufacturing operations, operate effectively and efficiently, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, are similarly vulnerablebusiness disruptions, security breaches of our digital products, or the unauthorized access to, natural disastersloss of, or damage to intellectual property, confidential information, or personally identifiable information (“PII”). If our data management systems do not effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, security incidents, or human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations would be impaired, and could be materially impaired. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our internal and external operating results.
Our business requires us to use and store customer, employee, and business partner personal information. This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of security breaches by unauthorized persons, employee error, malfeasance, faulty password management, or other sudden, unforeseen,irregularity and severe adverse events. A natural disasterresult in anypersons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords, or other sensitive information, which may in turn be used to access our information technology systems.
In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to patients or employees, our confidential or proprietary information, or confidential information we hold on behalf of third parties. If the unauthorized persons successfully hack into or interfere with our connected products or services, they may create issues with product functionality that could pose a risk of loss of data, a risk to patient safety, and a risk of product recall or field activity, which could adversely impact our business and reputation. We have programs in place to detect, contain, and respond to data security incidents, and we make ongoing improvements to our information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards. However, because the techniques used to obtain unauthorized access to or steal personal information or intellectual property, or sabotage systems containing personal information or intellectual property, change frequently and may be difficult to detect, we may not be able to anticipate and prevent these intrusions or mitigate them when and if they occur.
We also rely on external vendors to supply and/or support certain aspects of our major markets,information technology systems. The systems of these external vendors may contain defects in design or manufacture or other problems that could unexpectedly compromise information security of our own systems, and we are dependent on these third parties to deploy appropriate security programs to protect their systems. In addition to potential exposure to data breaches, security incidents, or other actions that may compromise the security of or interfere with the function of our systems, defects or vulnerabilities in the software or systems of our external vendors may expose failures in our internal controls and risk management processes, which may adversely impact our business, financial condition, results of operations, or cash flows and may also harm our reputation, brand, and customer relationships.
While we devote significant resources to network security, data encryption, and other security measures to protect our systems and data, these security measures cannot provide absolute security. We may experience attacks on or a breach of our systems and may be unable to protect personal information, confidential data, or sensitive data. It is possible for such vulnerabilities to remain undetected for an unanticipatedextended period, including several years or longer. These attacks seek to compromise the confidentiality, integrity, or availability of confidential information or disrupt normal business disruption caused,operations and could, among other things, impair the Company’s ability to attract and retain customers for example, by internetits products, impact the price of the Company’s stock, materially damage commercial relationships, and expose the Company to litigation or government investigations, which could result in penalties, fines, or judgments against the Company. The costs to us to eliminate or alleviate network security threats, damageproblems, bugs, viruses, worms, ransomware and other malicious software programs, and security
vulnerabilities could be significant. Our efforts to global communication networks,address these problems may not be successful and could result in unexpected interruptions, delays, cessation of service, and harm to our business operations. Moreover, if a computer security breach affects our systems or similar eventsresults in the unauthorized release of personal information, our reputation and brand could be materially damaged, and use of our products and services could decrease. We would also be exposed to a risk of loss, litigation and potential liability, and regulatory scrutiny, which could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
EPIDEMIC DISEASES OR THE PERCEPTION OF THEIR EFFECTS COULD HAVE A MATERIAL ADVERSE EFFECT ON Globally, attacks are expected to continue accelerating in both frequency and sophistication with increasing use of tools and techniques that are designed to circumvent controls, avoid detection, and remove or obfuscate forensic evidence, all of which hinders the Company’s ability to identify, investigate, and recover from incidents.
While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise
OUR BUSINESS FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH FLOWS.IS SUBJECT TO COMPLEX AND EVOLVING LAWS AND REGULATIONS REGARDING PRIVACY, DATA PROTECTION, AND OTHER MATTERS RELATING TO INFORMATION COLLECTION.
OutbreaksThere are numerous state, federal, and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure, and protection of pandemicdifferent types of personal data and personal information and other customer or contagious diseases,other data, the scope of which is continually evolving and subject to differing interpretations. We may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations, and directives.
For example, the General Data Protection Regulation (the “GDPR”), which is in effect across the European Economic Area (the “EEA”), imposes several stringent requirements for controllers and processors of personal data including, for example, imposing strict standards when obtaining consent from individuals to process their personal data, requiring robust disclosures to individuals, providing individual data rights, imposing short timelines for data breach notifications, limiting retention periods and secondary use of information, imposing certain requirements pertaining to health data as well as pseudonymised (i.e., key-coded) data, as well as additional obligations when we contract third-party processors in connection with the processing of personal data. The GDPR provides that EEA member states may make their own further laws and regulations limiting the processing of genetic, biometric, or health data, which could limit our ability to use and share personal data or could cause our costs to increase and harm our business and financial condition. Failure to comply with the requirements of the GDPR and the applicable national data protection laws of the EEA member states may result in fines of up to 4% of the total worldwide annual turnover of the preceding financial year and other administrative penalties. Compliance with the new data protection rules imposed by GDPR may be onerous and adversely affect our business, financial condition, and results of operations.
Further, beginning in January 1, 2021, companies have been subject to the GDPR and also the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, e.g., fines up to 4% of worldwide annual turnover of the preceding financial year. The European Commission has adopted an adequacy decision in favor of the UK, enabling data transfers from EU member states to the UK without additional safeguards. However, the UK adequacy decision will automatically expire in June 2025 unless the European Commission re-assesses and renews/extends that decision and remains under review by the Commission during this period. The relationship between the UK and the EU in relation to certain aspects of data protection law remains unclear, and it is unclear how UK data protection laws and regulations will develop in the medium to longer term and how data transfers to and from the UK will be regulated in the long term. These changes may lead to additional costs and increase our overall risk exposure.
In the United States, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and regulations implemented thereunder, imposes privacy, security, and breach notification obligations on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates that perform certain services that involve creating, receiving, maintaining, or transmitting individually identifiable health information for or on behalf of such covered entities and their covered subcontractors. Entities that are found to be in violation of HIPAA, as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could divert medical resources and priorities towards the treatment of that disease. An outbreakresult of a contagious diseasebreach of unsecured personal information, a complaint about privacy practices, or an audit by the U.S. Department of Health and Human Services (“HHS”), may be subject to significant civil, criminal, and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.
Even when HIPAA does not apply, according to the Federal Trade Commission (the “FTC”), violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair and/or deceptive acts or practices in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.
Further, the California Consumer Privacy Act (the “CCPA”) went into effect on January 1, 2020, and gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information and how their personal information is used. The CCPA imposes compliance burdens on many organizations doing business in California who collect personal information about California residents. The CCPA’s definition of personal information is very broad and specifically includes biometric information. The CCPA allows for significant fines by the state attorney general, as well as a private right of action from individuals in relation to certain security breaches. The enactment of the CCPA is prompting a wave of similar legislative developments in other US states and creating the potential for a patchwork of overlapping but different state laws. These developments are increasing our compliance burden and our risk, including risks of regulatory fines, litigation and associated reputational harm. Additionally, a new California ballot initiative, the California Privacy Rights Act (the “CPRA”) recently passed in California. The CPRA will substantially expand the requirements of the CCPA and will impose additional data protection obligations on companies doing business in California. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required.
In addition, recent legal developments in Europe have created complexity and compliance uncertainty regarding certain transfers of personal data from the EEA to the United States. For example, on July 16, 2020, the Court of Justice of the European Union (the “CJEU”) invalidated the EU-US Privacy Shield Framework (“Privacy Shield”) under which personal data could also negativelybe transferred from the EU to US entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of EU-specified standard contractual clauses (a form of contract approved by the EU commission as an adequate personal information transfer mechanism), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances and that their use must be assessed on a case-by-case basis taking into account the surveillance laws and right of individuals in the destination country. The CJEU went on to state that, if the competent supervisory authority believes that the standard contractual clauses cannot be complied with in the recipient country and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer unless the data exporter has already done so itself. The European Commission has published revised standard contractual clauses for data transfers from the EEA. The revised clauses must be used for relevant new data transfers from September 27, 2021. Existing standard contractual clauses arrangements must be migrated to the revised clauses by December 27, 2022. We will be required to implement the revised standard contractual clauses in relation to relevant existing contracts and certain additional contracts and vendor arrangements within the relevant time frames. There is some uncertainty around whether the revised clauses can be used for all types of data transfers, particularly whether they can be relied on for data transfers to non-EEA entities subject to the GDPR.
We rely on a mixture of mechanisms to transfer personal data from our EU business to the U.S. (including having previously relied on Privacy Shield) and are evaluating whether additional mechanisms will be required to establish adequate safeguards for personal data. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used and/or start taking enforcement action, we could suffer additional costs, complaints, and/or regulatory investigations or fines. Moreover, if we are unable to transfer Personal Information between and among countries and regions in which we operate, it could affect hospital admission rates. Thisthe manner in which we provide our services and could negatively impactadversely affect our financial results.
In Israel, The Protection of Privacy Law, 5741-1981 (the “Israeli Privacy Law”) regulates the numberprotection of da Vinci procedures performedprivacy and personal data, along with several other specific regulations enacted thereunder and, in particular, the Privacy Protection Regulations (Data Security), 5777-2017 (together with Israeli Privacy Law, the “Israeli Privacy Law and Regulations”). Under the Israeli Privacy Law and Regulations, organizations are subject to various privacy and data protection requirements, including mandatory registration of databases with the Israeli Registrar of Databases (if certain conditions are met), executing data processing agreements with data recipients, safeguarding the collection and processing of personal data, safeguarding the transfer of personal data (which is specifically subject to the requirements of the Privacy Protection Regulations), personal data breach notification obligations, and other requirements. The Privacy Protection Authority (the “PPA”) is responsible for enforcement of the Israeli Privacy Law and Regulations and periodically publishes opinions and guidelines on privacy matters. In terms of enforcement, failure to comply with the Israeli Privacy Law and Regulations can result in PPA investigations, administrative fines or sanctions, and civil or criminal actions (civil proceedings may include statutory damages without the need to prove actual damages).
Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies or to comply with any federal, state, or international privacy, data-retention, or data-protection-related laws, regulations, orders, or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of customer confidence, damage to our brand and reputation, and a loss of customers, any of which could have a materialan adverse effect on our business. In addition, various federal, state, and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention, and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business financial condition, results of operations, or cash flows.
IF WE DO NOT SUCCESSFULLY MANAGE OUR COLLABORATION ARRANGEMENTS, LICENSING ARRANGEMENTS, JOINT VENTURES, STRATEGIC ALLIANCES, OR PARTNERSHIPS WITH THIRD PARTIES, WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM SUCH ALLIANCES AND IT MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH FLOWS.
From time to time, we enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships to complement or augment our research and development, product development, training, procedure development, and marketing efforts.reputation with customers. For example, some countries have adopted laws mandating that some personal information regarding
customers in 2016, we entered into an agreementtheir country be maintained solely in their country. Having to form the Joint Venture. In January 2019, the Joint Venture acquired certain assets relatedmaintain local data centers and redesign product, service, and business operations to the da Vinci distribution business of Chindex, a subsidiary of Fosun Pharma, which has been our distribution partner for da Vinci Surgical Systems in China since 2011, following which the Joint Venture began direct distribution operations for da Vinci products and services in China. There can be no assurance that we and the Joint Venture can successfully complete the development of the robotic-assisted catheter-based medical devices; or that we and the Joint Venture will successfully commercialize such products. There can also be no assurance that the Joint Venture will not require additional contributionslimit personal information processing to fund its business; that the Joint Venture will become profitable; or that the acquired Chindex assets will be successfully integrated and the expected benefits realized. Proposing, negotiating, and implementing collaborations, in-licensing agreements, joint ventures, strategic alliances, or partnerships may be a lengthy and complex process. In addition, other companies, including those with substantially greater financial, marketing, sales, technology, or other business resources, may compete with us for these opportunities or arrangements. As a result, we may not identify, secure, or complete any such arrangements in a timely manner, on a cost-effective basis or on otherwise favorable terms, if it all.
There can be no assurance we will realize the expected benefits from these alliances. In addition, we may not be in a position to exercise sole decision-making authority regarding any collaboration or other arrangement, whichwithin individual countries could create the potential risk of creating impasses on decisions, and our alliances may have economic or business interests that are, or that may become, inconsistent with our interests. It is possible that conflicts may arise in these relationships, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations, termination rights or the ownership or control of intellectual property developed during the collaboration. These alliances can be difficult to manage, given the potentially different interests of the parties involved, and we could suffer delays in product development or other operational difficulties.
The alliances may involve significant expense and divert the focus or attention of our management and other key personnel. Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, or disrupt our ordinary business activities. Such arrangements may also expose us to numerous known and unknown risks, including unique risks with respect to the economic, political, and regulatory environment of any foreign entities with whom we partner, including Fosun Pharma. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations, or cash flows.operating costs significantly.
IF WE FAIL TO SUCCESSFULLY ACQUIRE OR INTEGRATE NEW BUSINESSES, PRODUCTS, AND TECHNOLOGY, WE MAY NOT REALIZE EXPECTED BENEFITS OR OUR BUSINESS MAY BE HARMED.
We need to grow our businesses in response to changing technologies, customer demands, and competitive pressures. In some circumstances, we may decide to grow our business through the acquisition of complementary businesses, products, or technologies rather than through internal development.
Identifying suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to identify suitable candidates or successfully complete identified acquisitions. In addition, completing an acquisition can divert our management and key personnel from our business operations, which could harm our business and affect our financial results. Even if we complete an acquisition, we may not be able to successfully integrate newly acquired organizations, products, technologies, or employees into our operations or may not fully realize some of the expected synergies. An acquired company may have deficiencies in product quality, regulatory marketing authorizations or certifications, or intellectual property protections, which are not detected during due diligence activities or which are unasserted at the time of acquisition. It may be difficult, expensive, and time consumingtime-consuming for us to re-establish market access, regulatory compliance, or cure such deficiencies in product quality or intellectual property protection in such cases, which may have a material adverse impact on our financial condition, and results of operations, or cash flows.
Integrating an acquisition can also be expensive and time-consuming and may strain our resources. In many instances, integrating a new business will also involve implementing or improving internal controls appropriate for a public company at a business that lacks them. In addition, we may be unable to retain the employees of acquired companies or the acquired company’s customers, suppliers, distributors, or other partners for a variety of reasons, including that these entities may be our competitors or may have close relationships with our competitors. In 2019, we acquired certain assets and operations from Schölly Fiberoptic GmbH, a supplier of endoscopes and other visualization equipment and, in 2020, we acquired Orpheus Medical Ltd. and its wholly-owned subsidiaries (“Orpheus Medical”) to deepen and expand our integrated informatics platform. The integration of these acquisitions involves complex operations across different geographic locations and new products, distribution networks, and legal jurisdictions. Therefore, we cannot assure you that we can successfully integrate either or both of these acquisitions or realize the expected benefits from these acquisitions. Failure to successfully integrate our acquisitions may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
IF WE DO NOT SUCCESSFULLY MANAGE OUR COLLABORATION ARRANGEMENTS, LICENSING ARRANGEMENTS, JOINT VENTURES, STRATEGIC ALLIANCES, OR PARTNERSHIPS WITH THIRD PARTIES, WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM SUCH ALLIANCES, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH FLOWS.
From time to time, we enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships to complement or augment our research and development, product development, training, procedure development, and marketing efforts. For example, in 2016, we entered into an agreement to form the Joint Venture. In January 2019, the Joint Venture acquired certain assets related to the da Vinci distribution business of Chindex, a subsidiary of Fosun Pharma, which has been our distribution partner for da Vinci Surgical Systems in China since 2011, following which the Joint Venture began direct distribution operations for da Vinci products and services in China. There can be no assurance that we and the Joint Venture can successfully complete the development of robotic-assisted, catheter-based medical devices, or that we and the Joint Venture will successfully commercialize such products. There can also be no assurance that the Joint Venture will not require additional contributions to fund its business, that the Joint Venture will become profitable, or that the acquired Chindex assets will be successfully integrated and that the expected benefits will be realized. Proposing, negotiating, and implementing collaborations, in-licensing agreements, joint ventures, strategic alliances, or partnerships may be a lengthy and complex process. In addition, other companies, including those with substantially greater financial, marketing, sales, technology, or other business resources, may compete with us for these opportunities or arrangements. As a result, we may not identify, secure, or complete any such arrangements in a timely manner, on a cost-effective basis, or on otherwise favorable terms, if it all.
There can be no assurance that we will realize the expected benefits from these alliances. In addition, we may not be in a position to exercise sole decision-making authority regarding any collaboration or other arrangement, which could create the potential risk of creating impasses on decisions, and our alliances may have economic or business interests that are, or that may become, inconsistent with our interests. It is possible that conflicts may arise in these relationships, such as conflicts concerning the achievement of performance milestones or the interpretation of significant terms under any agreement, such as those related to financial obligations, termination rights, or the ownership or control of intellectual property developed during the
collaboration. These alliances can be difficult to manage, given the potentially different interests of the parties involved, and we could suffer delays in product development or other operational difficulties.
There can be no assurance that we will realize a return on our strategic investments. Further, if we acquire privately held companies, valuations of such companies are inherently complex due to the lack of readily available market data. If we determine that our investments in privately held companies have experienced a decline in value, we may be required to record impairments, which could be material and have an adverse effect on our results of operations.
These alliances may also involve significant expense and divert the focus and attention of our management and other key personnel. Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, or disrupt our ordinary business activities. Such arrangements may also expose us to numerous known and unknown risks, including unique risks with respect to the economic, political, and regulatory environment of any foreign entities with whom we partner, including Fosun Pharma. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations, or cash flows.
OUR CUSTOMERS MAY USE UNAUTHORIZED, UNAPPROVED, OR UNCERTIFIED INSTRUMENTS AND ACCESSORIES, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
A large portion of our revenue is generated through our sales of instruments and accessories. Third parties have attempted to and may discover ways to manufacture and sell counterfeit reprocessed instruments and/or alter instruments that are compatible and function with the da Vinci Surgical System, and such activities may reduce our market share. While our sales arrangements with customers generally prohibit the use of unauthorized, unapproved, or uncertified instruments and accessories with da Vinci Surgical Systems, warranties will be void if such instruments and accessories are used, and a programmed memory chip inside each instrument is designed to prevent the instrument from being used for more than the prescribed number of procedures to help ensure that its performance meets specifications during each procedure, these measures may not prevent the use of unauthorized, unapproved, or uncertified instruments and accessories by our customers. In addition to potential reductions to our revenues and market share, sales of unauthorized instruments and accessories by third parties may create safety and health risks to da Vinci patients and could cause negative publicity for us if these products cause injuries and/or do not function as intended when used with da Vinci Surgical Systems, any of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
WE EXPECT GROSS PROFIT MARGINS TO VARY OVER TIME, AND CHANGES IN OUR GROSS PROFIT MARGINS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Our gross profit margins have fluctuated from period to period, and we expect that they will continue to fluctuate in the future. Our gross profit margins may be adversely affected by numerous factors, including:
•changes in customer, geographic, or product mix, including the mix of system models sold or leased;
•changes in the portion of sales involving a trade-in of another system and the amount of trade-in credits given;
•introduction of new products, which may have lower margins than our existing products;
•our ability to maintain or reduce production costs;
•changes to our pricing strategy;
•changes in competition;
•changes in production volume driven by demand for our products;
•changes in material, labor, or other manufacturing-related costs, including the impact of foreign exchange rate fluctuations for foreign currency-denominated costs;
•changes to U.S. and foreign trade policies, such as the enactment of tariffs on goods imported into the U.S. including, but not limited to, goods imported from Mexico where we manufacture a majority of our instruments that we sell;
•inventory obsolescence and product recall charges; and
•market conditions.
If we are unable to offset the unfavorable impact of the factors noted above by increasing the volume of products shipped, reducing product manufacturing costs, or otherwise, our business, financial condition, results of operations, or cash flows may be materially adversely affected.
WE UTILIZE DISTRIBUTORS FOR A PORTION OF OUR SALES AND SERVICE OF OUR PRODUCTS IN CERTAIN COUNTRIES, WHICH SUBJECTS US TO A NUMBER OF RISKS THAT COULD HARM OUR BUSINESS.
We have strategic relationships with a number of key distributors for sales and service of our products in certain countries. If these strategic relationships are terminated and not replaced, our revenues and/or ability to sell or service our products in the markets serviced by these distributors could be adversely affected. In addition, we may be named as a defendant in lawsuits against our distributors related to sales or service of our products performed by them. Please see our risk factor below titled “We Are Subject to Product Liability and Negligence Claims Relating to the Use of Our Products and Other Legal Proceedings That Could Materially Adversely Affect Our Financial Condition, Divert Management’s Attention, and Harm Our Business.” Our distributors may affect our ability to effectively market our products in certain countries or regulatory jurisdictions if a distributor holds the regulatory authorization or certification in such countries or within such regions and causes, by action or inaction, the suspension of such marketing authorization or certification or sanctions for non-compliance. It may be difficult, expensive, and time-consuming for us to re-establish market access or regulatory compliance in such cases.
WE OFFER ALTERNATIVE CAPITAL ACQUISITION APPROACHES. AS A RESULT, WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND THE RISK OF LOSSES OF REVENUE, WHICH COULD RESULT IN MATERIAL LOSSES.
We believe customer financing through leasing is an important consideration for some of our customers and have experienced an increase in demand for customer financing. We may experience loss from a customer’s failure to make payments according to the contractual lease terms. Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors.
Although we have programs in place that are designed to monitor and mitigate the associated risks, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements. If the level of credit losses we experience in the future exceed our expectations, such losses could have a material adverse effect on our financial condition or results of operations.
Certain of our leasing arrangements allow customers to cancel, return, or upgrade the systems leased prior to the end of the lease term without incurring a financial penalty. We also lease our systems to certain qualified customers where the lease payments are based on their usage of the systems. While leases and usage-based arrangements enable our customers to upgrade and get access to new technologies faster, it may also enable competitors to more easily induce customers to switch to a competitor system. If customers do not perform a sufficient number of procedures on systems leased under usage-based arrangements, or return or terminate leases prematurely, it could have a material adverse effect on our business, financial condition, result of operations, or cash flows.
WE ARE EXPOSED TO CREDIT RISK AND FLUCTUATIONS IN THE MARKET VALUE OF OUR INVESTMENTS.
Our investment portfolio includes both domestic and international investments. The credit ratings and pricing of our investments can be negatively affected by liquidity concerns, credit deterioration, financial results, economic risk, political risk, or other factors. As a result, the value and liquidity of our cash equivalents and marketable securities could fluctuate substantially. Our other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of investments, impairment charges resulting from revaluations of debt and equity securities and other investments, changes in interest rates, increases or decreases in cash balances, volatility in foreign exchange rates, and changes in fair value of derivative instruments. Increased volatility in the financial markets and overall economic uncertainty could increase the risk that actual amounts realized on our investments may differ significantly from the fair values currently assigned to them.
Our Intuitive Ventures fund plans to invest in early-stage companies, which involve substantial risks and uncertainties. These risks and uncertainties include, among other things, uncertainties inherent in research and development; uncertainties regarding the ability of Intuitive Ventures to identify investment candidates; uncertainties regarding the success of Intuitive Ventures’ investments; uncertainties and variables inherent in the operating and financial performance in investments made, including, among other things, competitive developments and general economic, political, business, industry, regulatory and market conditions; future exchange and interest rates; and changes in tax and other laws, regulations, rates and policies.
While we have not realized any significant losses on our cash equivalents, marketable securities, or other investments, future fluctuations in their value could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
WE MAY INCUR LOSSES ASSOCIATED WITH CURRENCY FLUCTUATIONS AND MAY NOT BE ABLE TO EFFECTIVELY HEDGE OUR EXPOSURE.
Our operating results are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign currency exchange rates relates to revenue and operating expenses denominated in currencies other than the U.S. dollar. The weakening of foreign currencies relative to the U.S. dollar adversely affects our foreign currency-denominated revenue. Margins on OUS revenue could also be materially adversely affected by foreign currency exchange rate fluctuations, as we may not be able to raise local prices to fully offset the strengthening of the U.S. dollar. Conversely, the strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated revenue and earnings, may cause us to reduce pricing on our products in our OUS markets and may cause us to incur losses on our foreign currency hedging instruments, thereby limiting the benefit that strengthened foreign currencies could have on our results of operations.
We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity, and expense. Although we have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations, primarily related to transactions denominated in the Euro, Japanese Yen, Korean Won, British Pound, and Swiss Franc, and we regularly review our hedging program and make adjustments as necessary, our hedging activities may not offset more than a portion of the adverse financial impact caused by unfavorable movement in foreign currency exchange rates, which could materially adversely affect our financial condition or results of operations. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional discussion on the impact of foreign exchange risk.
WE MAY ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
Manufacturing our products is a complex process. We (or our critical suppliers) may encounter difficulties in scaling up or maintaining production of our products, including:
•problems involving production yields;
•quality control and assurance;
•component supply shortages;
•import or export restrictions on components, materials, or technology;
•shortages of qualified personnel; and
•compliance with state, federal, and foreign regulations.
If demand for our products exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we are unable to develop or maintain larger-scale manufacturing capabilities or build new manufacturing capabilities or facilities on schedule or within budget, our ability to generate revenue and maintain profit margins as expected will be limited and our reputation in the marketplace could be damaged, all of which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
CHANGESDISRUPTIONS AT THE FDA AND OTHER GOVERNMENT AGENCIES OR NOTIFIED BODIES CAUSED BY FUNDING SHORTAGES OR GLOBAL HEALTH CONCERNS COULD HINDER THEIR ABILITY TO FINANCIAL ACCOUNTING STANDARDSHIRE, RETAIN, OR DEPLOY KEY LEADERSHIP AND OTHER PERSONNEL, OR OTHERWISE PREVENT PRODUCTS FROM BEING DEVELOPED, CLEARED, CERTIFIED, APPROVED, OR COMMERCIALIZED IN A TIMELY MANNER OR AT ALL, WHICH MAY ADVERSELY AFFECT OUR REPORTEDBUSINESS.
Hospital, health systems, and physicians depend on a number of government agencies and services to effectively deliver healthcare to their patients. A prolonged government shutdown could impact inspections, regulatory review and certifications, grants, or approvals or could cause other situations that could impede their ability to effectively deliver healthcare, including attempts to reduce payments and other reimbursements to hospitals by federal healthcare programs. These situations could adversely affect our customers’ ability to perform procedures with our devices and/or their decisions to purchase additional products from us.
In addition, the ability of the FDA, foreign authorities, and notified bodies to review and clear, approve, or certify new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies or notified bodies, including a prolonged government shutdown, may cause significant regulatory delays and, therefore, delay our efforts to seek clearances, approvals, or certifications from the FDA, foreign authorities, and notified bodies and adversely affect business travel and import and export of products, all of which could have a material adverse effect on our business, financial condition, results of operations,
or cash flows. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the global COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most foreign inspections of manufacturing facilities and products through April 2020 and, subsequently, on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA resumed certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA utilized this risk-based assessment system to assist in determining when and where it was safest to conduct prioritized domestic inspections. In May 2021, the FDA outlined a detailed plan to move toward a more consistent state of inspectional operations and, in July 2021, the FDA resumed standard inspectional operations of domestic facilities and was continuing to maintain this level of operation as of September 2021. Subsequently, in November 2021, the FDA announced its intention to resume certain prioritized inspections of foreign manufacturing facilities, including surveillance and application-related inspections, starting in February 2022. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA, other regulatory authorities, or notified bodies from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA, other regulatory authorities, or notified bodies to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
For instance, in the EU, notified bodies must be officially designated to certify products and services in accordance with the EU Medical Devices Regulation. While several notified bodies have been designated, the COVID-19 pandemic has significantly slowed down their designation process, and the current designated notified bodies are facing a large number of requests with the new regulation, as a consequence of which review times have lengthened. This situation could impact our ability to grow our business in the EU and EEA.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH REAL ESTATE CONSTRUCTION AND DEVELOPMENT.
The development of our facilities is subject to risks relating to our ability to complete our projects on schedule or within budget. Factors that may result in a development project being prevented or delayed from completion or exceeding budget include, but are not limited to (i) construction delays, defects, or cost overruns, which may increase project development costs; (ii) cost escalations associated with materials, including changes in availability, proximity, and cost of materials, such as steel, cement, concrete, aggregates, oil, fuel, and other construction materials, including changes in U.S. trade policies and retaliatory responses from other countries, as well as cost escalations associated with subcontractors and labor; (iii) the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues; (iv) an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy, and other required governmental permits and authorizations; (v) difficulty in complying with local, city, county, and state rules and regulations regarding permitting, zoning, subdivision, utilities, and water quality, as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats; (vi) insufficient infrastructure capacity or availability (e.g., water, sewer, and roads) to serve the needs of our projects; (vii) failure to achieve or sustain anticipated occupancy levels; and (viii) condemnation of all or parts of development or operating properties, which could adversely affect the value or viability of such projects.
CONTINUED CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR SALES AND RESULTS OF OPERATIONS.
The healthcare industry has been consolidating, and organizations continue to consolidate purchasing decisions for many of our healthcare provider customers. Numerous initiatives and reforms by legislators, regulators, and third-party payers to curb the rising cost of healthcare have catalyzed a consolidation of aggregate purchasing power within the markets in which we sell our products. As the healthcare industry consolidates, competition to provide products and services is expected to continue to intensify, resulting in pricing pressures and decreased average selling prices. We expect that market demand, government regulation, third-party payor coverage and reimbursement policies, government contracting requirements, and societal pressures will continue to change the worldwide healthcare industry, resulting in further consolidation, which may exert further downward pressure on prices of our products and services and may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
ECONOMIC CONDITIONS COULD HAVE A changeMATERIAL ADVERSE EFFECT ON OUR COMPANY.
Uncertainty about global economic conditions, including credit and sovereign debt concerns in accounting standards cancertain European countries and concerns about slowed economic growth in China and other OUS markets, has caused and may continue to cause disruptions in the financial credit markets, volatile currency exchange rates, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, and liquidity concerns. Customers and distributors may choose to postpone or reduce spending due to financial difficulties or may be unable to obtain credit to finance purchases of our products due to restraints on credit. There could be additional effects from adverse conditions in the credit
markets on our business, including the insolvency of key suppliers or their inability to obtain credit to finance the development and/or manufacturing of our products resulting in product delays.
In addition, our business is closely tied to the overall U.S. healthcare system, relating to which there are concerns and uncertainties as a result of efforts made by the U.S. federal government to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. In addition, the U.S. federal government has called for, or enacted, substantial changes to trade, fiscal, and tax policies, which may include changes to existing trade agreements including, but not limited to, the replacement of NAFTA by the USMCA (effective July 1, 2020), that may have a significant impact on our operations. We cannot predict the impact, if any, that these changes could have on our business.
If economic conditions worsen or new legislation is passed related to the healthcare system or trade, fiscal, or tax policies, customer demand may not materialize to the levels we require to achieve our anticipated financial results, which could have a material adverse effect on our reportedbusiness, financial condition, results of operations, or cash flows.
NATURAL DISASTERS OR OTHER EVENTS BEYOND OUR CONTROL COULD DISRUPT OUR BUSINESS AND RESULT IN LOSS OF REVENUE OR HIGHER EXPENSES.
Natural disasters, terrorist activities, and other business disruptions including, but not limited to, internet security threats and violence motivated by political or social causes, could adversely affect our revenue and financial condition and increase our costs and expenses. For example, the March 2011 earthquake and tsunami in Japan and their aftermath created economic uncertainty and disrupted economic activities in Japan, including a reduction in hospital spending. Moreover, global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are located in California, which has experienced both severe earthquakes and other natural disasters in the past and is vulnerable to climate change effects. For example, increasing intensity of drought throughout the state and annual periods of wildfire danger increase the probability of planned power outages in the communities where we work and live. This danger has the potential to impact our employees’ abilities to commute to work or to work from home and stay connected effectively during the COVID-19 pandemic. We do not have multiple-site capacity for all of our operations in the event of a business disruption. In addition, global climate change resulting from increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere could present risks to our future operations resulting in the aforementioned natural disasters as well as other extreme weather conditions, including, but not limited to, hurricanes, tornadoes, earthquakes, wildfires or flooding. Such extreme weather conditions could pose physical risks to our facilities and disrupt operations of our supply chain and may retroactively affect previously reported results. New accounting pronouncementsimpact operational costs. The impacts of global climate change on water resources may result in water scarcity, which could impact our ability to access sufficient quantities of water in certain locations and varying interpretationsresult in increased costs.
Concern over global climate change could result in new legal or regulatory requirements designed to mitigate the effects of accounting pronouncements have occurredclimate change on the environment. If such laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and may occur incosts to meet the future. Changes to existing standards or the reevaluation of current practicesregulatory obligations and may adversely affect raw material sourcing, manufacturing operations, and the distribution of our reportedproducts. Such events can make it difficult or impossible for us to manufacture and deliver products to our customers, create delays and inefficiencies in our supply and manufacturing chain, and result in slowdowns and outages to our service offerings. Furthermore, parties in our supply chain and our customers are similarly vulnerable to natural disasters or other sudden, unforeseen, and severe adverse events. A natural disaster or a triggered global climate change event in any of our major markets, or an unanticipated business disruption caused, for example, by internet security threats, damage to global communication networks, or similar events, could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
CHANGES IN OUR EFFECTIVE TAX RATE MAY IMPACT OUR RESULTS OF OPERATIONS.
We are subject to taxes in the U.S. and other jurisdictions around the world. Tax rates in these jurisdictions may be subject to significant change due to economic and/or political conditions. A number of other factors may also impact our future effective tax rate, including:
•the jurisdictions in which profits are determined to be earned and taxed;
•the resolution of issues arising from tax audits with various tax authorities;
•changes in valuation of our deferred tax assets and liabilities;
•increases in expenses not deductible for tax purposes, including write-offs of acquired intangibles and impairment of goodwill in connection with acquisitions;
•changes in availability of tax credits, tax holidays, and tax deductions;
•changes in share-based compensation; and
•changes in tax laws or the way we conductinterpretation of such tax laws and changes in generally accepted accounting principles.
We are unable to predict what changes to the tax laws of the U.S. and other jurisdictions may be proposed or enacted in the future or what effect such changes would have on our business. Any significant increase in our future effective tax rate could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
WE USE ESTIMATES, MAKE JUDGMENTS, AND APPLY CERTAIN METHODS IN MEASURING THE PROGRESS OF OUR BUSINESS IN DETERMINING OUR FINANCIAL RESULTS AND IN APPLYINGMEASURING THE PROGRESS OF OUR ACCOUNTING POLICIES.BUSINESS. AS THESE ESTIMATES, JUDGMENTS, AND METHODS CHANGE, OUR RESULTS OF OPERATIONS AND OUR ASSESSMENT OF THE PROGRESS OF OUR BUSINESS AND OUR RESULTS OF OPERATIONS COULD VARY.
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that may lead us to change our methods, estimates, and judgments. Changes in any of our assumptions may adversely affect our reported financial results.
We utilize methods for determining surgical market sizes as well as the number and type (cancerous or benign) of certain da Vinci procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial risks, uncertainties, and assumptions. Our estimates of surgical market sizes or the number and type of da Vinci procedures performed do not have an impact on our results of operations but are used to estimate the progress of our business. Estimates and judgments for determining surgical market sizes and the number and type of da Vinci procedures and the accuracy of these estimates may be impacted over time with changes in treatment modalities, hospital reporting behavior, system internet connectivity, distributor reporting behavior, increases in procedures per field employee, and other factors. In addition, from time to time, we may change the method for determining market sizes and the number and type of da Vinci procedures, causing variation in our reporting.
CHANGES IN OUR EFFECTIVE TAX RATE MAY IMPACT OUR RESULTS OF OPERATIONS.
We are subject to taxes in the U.S. and other jurisdictions. Tax rates in these jurisdictions may be subject to significant change due to economic and/or political conditions. A number of other factors may also impact our future effective tax rate including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes, including write-offs of acquired intangibles and impairment of goodwill in connection with acquisitions;
changes in availability of tax credits, tax holidays, and tax deductions;
changes in share-based compensation; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
We are unable to predict what changes to the tax laws of the U.S. and other jurisdictions may be proposed or enacted in the future or what effect such changes would have on our business. Any significant increase in our future effective tax rate could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
DISRUPTION OF CRITICAL INFORMATION SYSTEMS OR MATERIAL BREACHES IN THE SECURITY OF OUR SYSTEMS COULD HARM OUR BUSINESS, CUSTOMER RELATIONS, AND FINANCIAL CONDITION.
Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do not effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our internal and external operating results.
Our business requires us to use and store customer, employee, and business partner personally identifiable information (“PII”). This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of security breaches by unauthorized persons, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords, or other sensitive information, which may in turn be used to access our information technology systems. For example, our employees have received “phishing” emails and phone calls attempting to induce them to divulge passwords and other sensitive information.
In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to patients or employees, our confidential or proprietary information or confidential information we hold on behalf of third parties. If the unauthorized persons successfully hack into or interfere with our connected products or services, they may create issues with product functionality that could pose a risk of loss of data, a risk to patient safety, and a risk of product recall or field activity. We have programs in place to detect, contain, and respond to data security incidents, and we make ongoing improvements to our information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards. However, because the techniques used to obtain unauthorized access to or sabotage systems change frequently and may be difficult to detect, we may not be able to anticipate and prevent these intrusions or mitigate them when and if they occur.
We also rely on external vendors to supply and/or support certain aspects of our information technology systems. The systems of these external vendors may contain defects in design or manufacture or other problems that could unexpectedly compromise information security of our own systems, and we are dependent on these third parties to deploy appropriate security programs to protect their systems.
While we devote significant resources to network security, data encryption, and other security measures to protect our systems and data, these security measures cannot provide absolute security. We may experience a breach of our systems and may be unable to protect sensitive data. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, malicious software programs, and security vulnerabilities could be significant. Our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, cessation of service, and harm to our business operations. Moreover, if a computer security breach affects our systems or results in the unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease. We would also be exposed to a risk of loss or litigation and potential liability, which could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
OUR BUSINESS IS SUBJECT TO COMPLEX AND EVOLVING LAWS AND REGULATIONS REGARDING PRIVACY, DATA PROTECTION AND OTHER MATTERS RELATING TO INFORMATION COLLECTION.
There are numerous state, federal and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure and protection of personally identifiable information (“PII”) and other personal, customer, or other data, the scope of which is continually evolving and subject to differing interpretations. We may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations and directives.
For example, as of May 25, 2018, a new privacy framework, the General Data Protection Regulation, or the GDPR, took effect across the European Economic Area, or the EEA. The GDPR imposes several stringent requirements for controllers and processors of personal data and will increase our obligations, including, for example, by imposing higher standards when obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals, strengthening individual data rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of information, increasing requirements pertaining to health data as well as pseudonymised (i.e., key-coded) data and imposing additional obligations when we contract third-party processors in connection with the processing of personal data. The GDPR provides that EU member states may make their own further laws and regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share personal data or could cause our costs could increase, and harm our business and financial condition. Failure to comply with the requirements of GDPR and the applicable national data protection laws of the EU member states may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. Compliance with the new data protection rules imposed by GDPR may be onerous and adversely affect our business, financial condition, results of operations and prospects.
In addition, recent legal developments in Switzerland and Europe have created complexity and compliance uncertainty regarding certain transfers of information from Switzerland and the EU to the United States. For example, the EU-US Privacy Shield Framework is regularly reviewed and there is currently litigation challenging the adequacy of EU-specified standard contractual clauses (another data transfer mechanism). It is uncertain whether the Privacy Shield Framework and/or the standard contractual clauses will be invalidated by the European courts or legislature. We rely on a mixture of mechanisms to transfer personal data from our EU business to the United States, and could be impacted by changes in law as a result of a future review of these transfer mechanisms by European regulators under the GDPR, as well as current challenges to these mechanisms in the European courts. If one or more of the legal bases for transferring PII from Europe to the United States is invalidated, or if we are unable to transfer PII between and among countries and regions in which we operate, it could affect the manner in which we provide our services or could adversely affect our financial results.
Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state or international privacy, data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of customer confidence, damage to our brand and reputation and a loss of customers, any of which could have an adverse effect on our business. In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business or our reputation with customers. For example, some countries have adopted laws mandating that some PII regarding customers in their country be maintained solely in their country. Having to maintain local data centers and redesign product, service and business operations to limit PII processing to within individual countries could increase our operating costs significantly.
A PROLONGED GOVERNMENT SHUTDOWN MAY ADVERSELY AFFECT OUR BUSINESS.
Hospital, health systems, and physicians depend on a number of government agencies and services to effectively deliver healthcare to their patients. A prolonged government shutdown could impact inspections, regulatory review and certifications, grants, approvals, or cause other situations that could impede their ability to effectively deliver healthcare, including attempts to reduce payments and other reimbursements to hospitals by federal healthcare programs. These situations could adversely affect our customers’ ability to perform procedures with our devices and/or their decisions to purchase additional products from us. In addition, a prolonged government shutdown may cause significant regulatory delays, and therefore, delay our efforts to seek clearances from the FDA, and adversely affect business travel and import and export of products, all of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
RISKS RELATING TO OUR REGULATORY ENVIRONMENT
CHANGES IN HEALTHCARE LEGISLATION AND POLICY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010, the PPACA was enacted, which made changes that have impacted and are expected to significantly impact the pharmaceutical and medical device industries.
The PPACA contained a number of provisions designed to generate the revenues necessary to fund health insurance coverage expansions among other things. This includes fees or taxes on certain health-related industries, including medical device manufacturers. For sales between January 1, 2013, and December 31, 2015, medical device manufacturers were required to pay an excise tax (or sales tax) of 2.3% of certain U.S. medical device revenues. Though there were some exceptions to the excise tax, this excise tax did apply to all or most of our products sold within the U.S. In December 2015, the former U.S. President signed into law the Appropriations Act. The Appropriations Act included a two-year moratorium on the medical device excise tax such that medical device revenues in 2016 and 2017 were exempt from the excise tax. Subsequent legislation was passed in January 2018 such that MDET will be delayed until January 1, 2020.
The PPACA also implemented a number of Medicare payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through bundled payment models, and appropriated funding for comparative effectiveness research.
The taxes imposed by the PPACA and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA, as well as efforts by the current U.S. administration to modify, repeal or otherwise invalidate all, or certain provisions of, the PPACA. Since January 2017, the U.S. President has signed two Executive Orders designed to delay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. The current U.S. administration has also announced that it will discontinue the payment of cost-sharing reduction (“CSR”) payments to insurance companies until Congress approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the PPACA. A bipartisan bill to appropriate funds for CSR payments has been introduced in the Senate, but the future of that bill is uncertain. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the PPACA for plans sold through such marketplaces. Because of the 2017 Tax Act, the PPACA’s individual mandate penalty for not having health insurance coverage will be eliminated starting in 2019. It is unclear what impact the elimination of the individual mandate penalty will have on our business, financial condition, results of operations, or cash flows. Further, each chamber of Congress has put forth multiple bills designed to repeal or repeal and replace portions of the PPACA. Although the majority of these measures have not been enacted by Congress to date, Congress will likely continue to consider other legislation to repeal or repeal and replace elements of the PPACA.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. MACRA repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations. It is unclear what impact new quality and payment programs, such as MACRA, may have on our business, financial condition, results of operations, or cash flows. Individual states in the U.S. have also become increasingly aggressive in passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints, and discounts, and require marketing cost disclosure and transparency measures.
We expect additional state and federal health care reform measures to be adopted in the future that could have a material adverse effect on our industry generally and on our customers. Any changes of, or uncertainty with respect to future reimbursement rates, or changes in hospital admission rates could impact our customers’ demand for our products and services, which in turn could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Further, the federal, state and local governments, Medicare, Medicaid, managed care organizations, and foreign governments have in the past considered, are currently considering, and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. Future significant changes in the healthcare systems in the U.S. or other countries, including retroactive and prospective rate and coverage criteria changes, competitive bidding or tender processes for certain products and services, and other changes intended to reduce expenditures along with uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business may be proposed or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.
WE ARE SUBJECT TO FEDERAL, STATE AND FOREIGN LAWS GOVERNING OUR BUSINESS PRACTICES WHICH, IF VIOLATED, COULD RESULT IN SUBSTANTIAL PENALTIES. ADDITIONALLY, CHALLENGES TO OR INVESTIGATION INTO OUR PRACTICES COULD CAUSE ADVERSE PUBLICITY AND BE COSTLY TO RESPOND TO AND THUS COULD HARM OUR BUSINESS.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of any tantalum, tin, gold, and tungsten used in manufacturing which may originate in the Democratic Republic of the Congo or adjoining regions (so called “conflict minerals”). These metals are central to the technology industry and are present in some of our products as component parts. In most cases no acceptable alternative material exists which has the necessary properties. Because it is not possible to determine the source of the metals by analysis, we must obtain a good faith description of the source of the intermediate components and raw materials from parties in our supply chain. The components that incorporate those metals may originate from many sources and we purchase fabricated products from manufacturers who may have a long and difficult-to-trace supply chain. As the spot price of these materials varies, producers of the metal intermediates can be expected to change the mix of sources used. Accordingly, components and assemblies we buy may have a mix of sources as their origin. We are required to carry out a diligent effort to determine and disclose the source of these materials. There can be no assurance we can obtain this information accurately or reliably, or at all, from intermediate producers who may be unwilling or unable to provide this information or further identify their sources of supply or to notify us if these sources change. In addition, these metals are subject to price fluctuations and shortages which can affect our ability to obtain the manufactured materials we rely on at favorable terms or from consistent sources. These changes could have an adverse impact on our ability to manufacture and market our devices and products.
The Medicare and Medicaid anti-kickback laws, and several similar state laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, prohibit payments, or other remuneration that could be considered to induce hospitals, physicians, or other potential purchasers of our products either to refer patients or to purchase, lease or order, or arrange for or recommend the purchase, lease or order, of healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid and any other third-party payor programs. Further, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it. The government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. The federal civil and criminal false claims laws and civil monetary penalties laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. Although we would not submit claims directly to government payors, manufacturers can be held liable under the federal false claim act if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.
These laws may affect our sales, marketing, and other promotional activities by limiting the kinds of financial arrangements we may have with hospitals, physicians, or other potential purchasers of our products. They particularly impact how we structure our sales offerings, including discount practices, customer support, education and training programs, physician consulting, and other service arrangements. These laws are broadly written, and it is often difficult to determine precisely how these laws will be applied to specific circumstances. Violating anti-kickback laws can result in civil and criminal fines and penalties, which can be substantial and include monetary damages and penalties, imprisonment, and exclusion from government healthcare programs for non-compliance. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to defend, and thus could harm our business and results of operations.
The federal Physicians Payments Sunshine Act imposes reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to physicians (including family members), certain other healthcare providers and teaching hospitals. Such information must be made publicly available in a searchable format. In addition, device manufacturers are required to report and disclose any ownership or investment interests held by physicians and their immediate family members, as well as any transfers of value made to such physician owners and investors, during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $165,786 per year (and up to an aggregate of $1.105 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. Device manufacturers are required to submit reports to CMS by the 90th day of each calendar year.
In addition, there has been increased federal and state regulation of payments made to physicians, including the tracking and reporting of gifts, compensation, and other remuneration to physicians. Certain states mandate implementation of commercial compliance programs to ensure compliance with these laws, impose restrictions on device manufacturer marketing practices, and/or require the tracking and reporting of gifts, compensation, and other remuneration to physicians or marketing expenditures and pricing information. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may be found out of compliance of one or more of the requirements, subjecting us to significant civil monetary penalties.
Compliance with complex foreign and U.S. laws and regulations that apply to our OUS operations increases our cost of doing business in foreign jurisdictions and could expose us or our employees to fines and penalties in the U.S. and/or abroad. These numerous and sometimes conflicting laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act, and similar laws in foreign countries, such as the U.K. Bribery Act of 2010, which became effective on July 1, 2011. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Our operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our business, in particular the U.S. and the EU. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements or practices are found to violate or infringe such laws, we may be subject to civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe these antitrust and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and enforceable. If we are unable to enforce our commercial agreements, whether at all or in material part, our results of operations, financial position, and cash flows could be adversely affected.
We are also subject to claims, suits, and government investigations involving labor and employment. Such claims, suits, and government investigations are inherently uncertain. Regardless of the outcome, any of these types of legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY REVIEW PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY AUTHORIZATIONS, WE WILL NOT BE ABLE TO PROVIDE OUR PRODUCTS IN THE U.S.
Our products and operations are subject to extensive regulation in the U.S. by the FDA. The FDA regulates the development and clinical testing, manufacturing, labeling, storage, record keeping, promotion, sales, distribution, and post-market support and medical device reporting in the U.S. to ensure that medical products distributed domestically are safe and effective for their intended uses. In order for us to market products for use in the U.S., we generally must first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food Drug and Cosmetic Act (“FFDCA”). Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfathered (“pre-amendment”) status. If we significantly modify our products after they receive FDA clearance, the FDA may require us to submit a separate 510(k) or premarket approval application (“PMA”) for the modified product before we are permitted to market the products in the U.S. In addition, if we develop products in the future that are not considered to be substantially equivalent to a device with 510(k) clearance or grandfathered status, we will be required to obtain FDA approval by submitting a PMA. A PMA is typically a much more complex, lengthy and burdensome application than a 510(k). To support a PMA, the FDA would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective. In some cases such studies may be requested for a 510(k) as well. The FDA may not act favorably or quickly in its review of our 510(k) or PMA submissions, or we may encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval, all of which could delay or preclude the sale of new products in the U.S. Moreover, we may not be able to meet the requirements to obtain 510(k) clearance or PMA approval, in which case the FDA may not grant any necessary clearances or approvals. In addition, the FDA may place significant limitations upon the intended use of our products as a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to obtain FDA clearance or approvals of new products we develop, any limitations
imposed by the FDA on new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
In addition, the FDA or other regulatory agencies may change their policies, adopt additional regulations, or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. We may be found non-compliant as a result of future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. We also cannot predict the likelihood, nature, or extent of government regulation that may arise from future legislation, administrative, or executive action. For example, certain policies of the current U.S. administration may impact our business and industry. Namely, the current U.S. administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board (“IRB”) approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an Investigational Device Exemption (“IDE”) application. Many of our products to date have been or would be considered significant risk devices requiring IDE approval prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices we intend to market in the U.S. in the future. If we obtain such approvals, we may not be able to conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition and results of operations. Certainty that clinical trials will meet desired endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA will accept the validity of foreign clinical study data cannot be assured, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant financial costs and reduced revenue.
In addition, some products may be regulated by the FDA as drugs, biologics, or combination devices which carry still greater requirements for clinical trials, regulatory submissions, and approvals.
COMPLYING WITH FDA REGULATIONS IS A COMPLEX PROCESS, AND OUR FAILURE TO FULLY COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT ENFORCEMENT ACTIONS.
Because our products, including the da Vinci Surgical System, are commercially distributed, numerous quality and post-market regulatory requirements apply, including the following:
•continued compliance to the QSR,FDA’s Quality System Regulation (“QSR”), which requires manufacturers to follow design, testing, control, documentation, and other quality assurance procedures during the development and manufacturing process;
•labeling regulations;
•the FDA’s general prohibition against false or misleading statements in the labeling or promotion of products for unapproved or “off-label” uses;
•stringent complaint reporting and Medical Device Reporting (“MDR”) regulations, which requiresrequire that manufacturers keep detailed records of investigations or complaints against their devices and to report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur;
•adequate use of the Correctivecorrective and Preventive Actionspreventive actions process to identify and correct or prevent significant, systemic failures of products or processes or in trends which suggest the same; and
•the reporting of Correctionscorrections and Removals,removals, which requires that manufacturers report to the FDA recalls and field corrective actions taken to reduce a risk to health or to remedy a violation of the FFDCAFederal Food Drug and Cosmetic Act (“FFDCA”) that may pose a risk to health.
We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from inspectional observations (Form(as set forth on FDA Form 483) to a public Warning Letter to more severe civil and criminal sanctions, including the seizure of our products and equipment or ban on the import or export of our products. The FDA has, in the past, issued and could, in the future, issue Warning Letters or other adverse communications to us. If we fail to satisfy or remediate the matters discussed in any such Warning Letters or communications, the FDA could take further enforcement action, including prohibiting the sale or marketing of the affected product. Our failure to comply with applicable requirements could lead to an enforcement action that may have an adverse
effect on our financial condition and results of operations. The receipt of a Warning Letter placescould place certain limits on the ability to obtain FDA issuedFDA-issued Certificates to Foreign Government (“CFGs”) used for new and re-registration of products in certain foreignother countries.
The FDA also strictly regulates labeling, advertising, promotion, and other activities relating to the marketing of our products. Medical devices may be promoted only for their cleared or approved indications and in accordance with the provisions of the cleared or approved label. It is possible that federal or state enforcement authorities might take action if they
consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under a variety of statutory authorities, including under the FFDCA as well as laws prohibiting false claims for reimbursement.
In addition, any modification or change of medical devices cleared for market requires the manufacturer to make a determination whether the change is significant enough to require new 510(k) clearance. We have created labeling, advertising, and user training for the da Vinci Surgical System to describe specific surgical procedures that we believe are fully within the scope of our existing 510(k) indications for use stated in our 510(k) clearances. Although we have relied on expert in-house and external staff, consultants, and advisors, some of whom were formerly employed by the FDA and are familiar with the FDA perspective, we cannot provide assurance that the FDA would agree that all such specific procedures are within the scope of the existing general clearance or that we have compiled adequate information to support the safety and efficacy of using the da Vinci Surgical System for all such specific procedures. From time to time, we modify our products, including the hardware and software in the da Vinci Surgical System, after we obtain 510(k) clearance from the FDA for the devices in ways that we do not believe require new 510(k) clearance. We cannot provide assurance that the FDA would agree in all cases with our determinations not to seek new 510(k) clearance for any of these changes. If the FDA disagrees with our assessments that a new 510(k) clearance was not required prior to commercializing the devices with these changes or modifications, then the FDA could impose enforcement sanctions and/or require us to obtain 510(k) clearance or other FDA marketing authorization for any modification to our products. We may be prohibited from marketing the modified device until such 510(k) clearancemarketing authorization is granted.
We have a wholly owned manufacturing facility located in Mexicali, Mexico, which manufactures reusable and disposable surgical instruments. This facility is registered with the FDA as well as with Mexican authorities. The facility is operated under U.S. and international quality system regulations, including those applicable to Canada, the European Union,EU, and Japan among others. Our wholly owned manufacturing facility in Mexicali, Mexico has an FDA Establishment Registration but has not been inspected by the FDA to date. If the FDA were to identify non-conformances in our product documentation or quality system compliance, it could hold indefinitely the importation of instruments at the border, which would deprive us of the ability to sell and supply the majority of our customers until the FDA requirements have been satisfied. Similar supply disruptions could occur if key suppliers outside of the U.S. were to encounter non-conformances with their documentation or quality system compliance.
OUR PRODUCTS ARE SUBJECT TO VARIOUSA LENGTHY AND UNCERTAIN DOMESTIC REGULATORY REVIEW PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY AUTHORIZATIONS, WE WILL NOT BE ABLE TO SELL OUR PRODUCTS IN THE U.S.
Our products and operations are subject to extensive regulation in the U.S. by the FDA. The FDA regulates the development and clinical testing, manufacturing, labeling, storage, record keeping, promotion, sales, distribution, and post-market support and medical device reporting in the U.S. to ensure that medical products distributed domestically are safe and effective for their intended uses. In order for us to market products for use in the U.S., we generally must first obtain clearance from the FDA pursuant to Section 510(k) of the FFDCA or approval of the product through the premarket approval (“PMA”) pathway. Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfathered (“pre-amendment”) status and for which a PMA is not required. If we develop products in the future that are not considered to be substantially equivalent to a device with 510(k) clearance or grandfathered status, we may be required to obtain marketing authorization through the more burdensome PMA process or alternatively through the de novo classification process, which is a path to market for novel devices that are low to moderate risk and for which a predicate device is not available. A PMA is typically a much more complex, lengthy, and burdensome application than a 510(k) or a de novo classification request. To support a PMA, the FDA would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective for its intended uses. In some cases, such studies may also be required to support a 510(k) application or a de novo classification request. The FDA may not act favorably or quickly in its review of any marketing application submissions, or we may encounter significant difficulties and costs in our efforts to obtain marketing authorization from the FDA, either of which could delay or preclude the sale of new products in the U.S. In addition, the FDA may place significant limitations upon the intended use of our products as a condition of granting marketing authorization. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following marketing authorization. Any delays or failure to obtain FDA marketing authorization for new or modified products that we develop, any limitations imposed by the FDA on new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
In addition, the FDA or other regulatory agencies may change their policies, adopt additional regulations, revise existing regulations, or take other actions that may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. We may be found non-compliant as a result of future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical
data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FFDCA. Among other things, the FDA announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these proposals. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.
More recently, in September 2019, the FDA issued revised guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list device types appropriate for the “safety and performance based” pathway and continues to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the recommended testing methods, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.
In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board (“IRB”) approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an IDE application. Many of our products to date have been or would be considered significant risk devices requiring IDE approval prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices that we intend to market in the U.S. in the future.
If we do obtain such approvals, we may not be able to conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Clinical testing is difficult to design and implement, can take many years, can be expensive, and carries uncertain outcomes and, if we fail to complete our planned or ongoing clinical trials or if such clinical trials produce negative or inconclusive results, we may be delayed or prevented from obtaining regulatory clearances or approvals to commercialize our products for new or expanded indications. Additionally, we may experience delays in our ongoing clinical trials for any number of reasons, which could adversely affect the costs, timing, or successful completion of our clinical trials. Moreover, the disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting, or completing our planned and ongoing clinical trials. If we fail to complete our planned and ongoing clinical trials or if such clinical trials produce negative or inconclusive results, we may be delayed or prevented from obtaining regulatory clearances or approvals to commercialize our products for new or expanded indications, which may limit the market for our products.
Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition, and results of operations. Certainty that clinical trials will meet desired endpoints, produce meaningful or useful data, and be free of unexpected adverse effects or that the FDA will accept the validity of foreign clinical study data cannot be assured, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant financial costs and reduced revenue.
OUR PRODUCTS MAY CAUSE OR CONTRIBUTE TO ADVERSE MEDICAL EVENTS OR BE SUBJECT TO FAILURES OR MALFUNCTIONS THAT WE ARE REQUIRED TO REPORT TO THE FDA AND FOREIGN REGULATORY AUTHORITIES AND, IF WE FAIL TO DO SO, WE WOULD BE SUBJECT TO SANCTIONS THAT COULD HARM OUR REPUTATION, BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS.
We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA and foreign regulatory authorities when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware
of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA or foreign regulatory authorities could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, approval, or certification, seizure of our products or delay in clearance, approval, or certification of future products.
The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in the design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government‑mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects, or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or foreign regulatory authorities may require, or we may decide, that we will need to obtain new clearances, approvals, or certifications for the device before we may market or distribute the corrected device. Seeking such clearances, approvals, or certifications may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA or foreign regulatory authorities warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA or foreign regulatory authorities. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA or foreign regulatory authorities. If the FDA or foreign regulatory authorities disagree with our determinations, it could require us to report those actions as recalls, and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us, and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, would require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE, OR OTHER MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, IMPORT/EXPORT OF OUR PRODUCTS, AND/OR RECALL SOME PRODUCTS, WHICH WOULD RESULT IN SIGNIFICANT PRODUCT DELIVERY DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities and notified bodies, and our operations will continue to be regulated and inspected by the FDA and other regulatory agencies and notified bodies for compliance with Good Manufacturing Practice requirements contained in the QSR and other regulatory requirements. We are also required to comply with International Organization for Standardization (“ISO”) quality system standards as well as EU legislation and norms in order to produce products for sale in the EU. In addition, many countries, such as Canada and Japan, have very specific additional regulatory requirements for quality assurance and manufacturing. If we fail to continue to comply with Good Manufacturing Practice requirements, as well as ISO or other regulatory standards, we may be required to cease all or part of our operations until we comply with these regulations.
We continue to be subject to FDA and certain other inspections by other regulatory authorities and notified bodies at any time. Maintaining such compliance is difficult and costly. We cannot be certain that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO standards and other regulatory requirements in future inspections and audits by regulatory authorities and notified bodies.
We are currently participating in the Medical Device Single Audit Program (“MDSAP”), which allows an MDSAP-recognized auditing organization to conduct a single regulatory audit of a medical device manufacturer that evaluates the Company’s quality system to assess compliance with the requirements of multiple regulatory jurisdictions, including the U.S., Japan, Brazil, Australia, and Canada. The information collected in an MDSAP audit is shared and reviewed amongst all the regulatory authorities participating in the MDSAP, who may or may not determine that additional information or auditing is required.
Our Sunnyvale, California facility is licensed by the State of California to manufacture medical devices. We have been subject to periodic inspections by the California Department of Health Services Food and Drug Branch and, if we are unable to maintain this license following any future inspections, we will be unable to manufacture or ship some products, which would have a material adverse effect on our results of operations. In addition, both our Sunnyvale, California and Mexicali, Mexico facilities are subject to periodic inspections by other regulatory bodies, including third-party auditors on behalf of national regulatory authorities. Compliance with multiple regulatory standards is complex, difficult, and costly to maintain, and material
deficiencies could result in significant limitations on our ability to manufacture, transport, and sell our products in one or more countries.
OUR PRODUCTS ARE SUBJECT TO INTERNATIONAL REGULATORY PROCESSES AND APPROVAL OR CERTIFICATION REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS OR CERTIFICATIONS, WE WILL NOT BE ABLE TO PROVIDESELL OUR PRODUCTS IN FOREIGNOTHER COUNTRIES.
To be able to providesell our products in other countries, we must obtain regulatory approvals or certifications and comply with the regulations of those countries, which may differ substantially from those of the U.S. These regulations, including the requirements for approvals or certifications and the time required for regulatory review, and vary from country to country. Obtaining and maintaining foreign regulatory approvals or certifications is complex, and timing to obtain clearances or certifications in those countries varies; therefore, we cannot be certain that we will receive regulatory approvals or certifications in any foreignother country in which we plan to market our products or to obtain such approvals or certifications on a favorable schedule. If we fail to obtain or maintain regulatory approval or certification in any foreignother country in which we plan to market our products, our ability to generate revenue will be harmed. In particular, if the FDA refuses to provide CFGs, our ability to register products or renew such registrations may be delayed or denied.
TheFor instance, one of the most significant moving targets related to the regulatory landscape is in the EU; more specifically, the medical devices regulation has recently evolved. On May 25, 2017, the EU requires that manufacturersMedical Devices Regulation entered into force, which repeals and replaces the Council Directive 93/42/EEC (the “EU Medical Devices Directive”). Unlike directives, which must be implemented into the national laws of the EU member states, regulations are directly applicable (i.e., without the need for adoption of EU member state laws implementing them) in all EU member states and are intended to eliminate current differences in the regulation of medical products obtaindevices among EU member states. Devices lawfully placed on the rightmarket pursuant to affix the CE mark, for compliance withEU Medical Devices Directive prior to May 26, 2021, may generally continue to be made available on the Medical Device Directive (93/42/EEC), as amended, to their products before selling them in member countriesmarket or put into service until May 26, 2025, provided that the requirements of the EU. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives.transitional provisions are fulfilled. In order to obtainparticular, the authorization to affix the CE mark to products, a manufacturercertificate in question must obtain certification that its processes and products meet certain European quality standards.still be valid. In January 1999, further to their certification by our notified body, we received permission to affixaffixed the CE mark to our da Vinci Surgical System and EndoWrist instruments and have maintained this authorizationthese certifications continuously since that time. From timeSubsequent products and accessories have received certifications by our notified body, Presafe. However, even in this case, manufacturers must comply with a number of new, or reinforced, requirements set forth in the EU Medical Devices Regulation registration of economic operators and of devices, post-market surveillance, market surveillance, and vigilance requirements.
Subject to timethe transitional provisions, in order to sell our products in EU member states, our products must comply with the general safety and performance requirements of the EU Medical Devices Regulation, which repeals and replaces the former EU Medical Devices Directive. Compliance with these requirements is a prerequisite to be able to affix the European Conformity (“CE”) mark to our products, without which they cannot be sold or marketed in the EU. All medical devices placed on the market in the EU must meet the general safety and performance requirements laid down in Annex I to the EU Medical Devices Regulation, including the requirement that a medical device must be designed and manufactured in such a way that, during normal conditions of use, it is suitable for its intended purpose. It is the responsibility of the Person Responsible for Regulatory Compliance (“PRRC”) to ensure such requirements are fulfilled and in place in the company. Medical devices must be safe and effective and must not compromise the clinical condition or safety of patients or the safety and health of users and, where applicable, other persons, provided that any risks that may be associated with their use constitute acceptable risks when weighed against the benefits to the patient and are compatible with a high level of protection of health and safety, taking into account the generally acknowledged state of the art. To demonstrate compliance with the general safety and performance requirements, we seekmust undergo a conformity assessment procedure, which varies according to the authorizationtype of medical device and its (risk) classification and may include a technical documentation assessment and an onsite audit. Except for low risk medical devices (Class I), where the manufacturer can self-assess the conformity of its products with the general safety and performance requirements (except for any parts which relate to sterility, metrology, or reuse aspects), a conformity assessment procedure requires the intervention of a notified body. The notified body would typically audit and examine the technical file and the quality system for the manufacture, design, and final inspection of our devices. If satisfied that the relevant product conforms to the relevant general safety and performance requirements and we have the organizational structure to support it (i.e., PRRC), the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE mark to the device, which allows the device to be placed on the market throughout the EU. If we fail to comply with applicable laws and regulations, we would be unable to affix the CE mark to newour products, which would prevent us from selling them within the EU or modified products. Subsequent products and accessories have received marketing authorization by our Notified Body, Presafe.any countries recognizing the CE mark.
AsIn the EU, we modify existing productsmust inform the notified body that carried out the conformity assessment of the medical devices that we market or develop new productssell in the future, includingEU and the EEA of any planned substantial changes to our quality system or substantial changes to our medical devices that could affect compliance with the general safety and performance requirements laid down in Annex I to the EU Medical Devices Regulation or cause a substantial change to the intended use for which the device has been CE marked.
The notified body will then assess the planned changes and verify whether they affect the products’ ongoing conformity with the EU Medical Devices Regulation. If the assessment is favorable, the notified body will issue a new instruments, we currently plancertificate of conformity or an addendum to apply for authorizationthe existing certificate attesting compliance with the general safety and performance requirements and quality system requirements laid down in the Annexes to affix the CE mark to such products. EU Medical Devices Regulation.
In addition, we are subject to annual regulatory audits in order to maintain the CE mark authorizationscertifications we have already obtained, including inspection of our compliance to EU legislation and required standards and directives.standards. We cannot be certain that we will be able to affix the CE mark for new or modified products or that we will continue to meet the quality and performance standards required to maintain the authorizationscertifications that we have already received. If we are unable to maintain permission to affix the CE mark to our products,certifications, we will no longer be able to sell our products in EU member countries of the EUstates and many affiliated countries that accept the CE mark, which would have a material adverse effect on our results of operations. Some member
states of the EU have additional requirements for registration and notification which may add to the time and effort to obtain market access. In addition, the regulations applied to end users of our products may increase over time, forcing us to provide additional solutions to regulations whichthat do not apply directly to us but which apply indirectly, as they may limit our customers’ ability to use our products.
In May 2017,The aforementioned EU rules are generally applicable in the EEA. Non-compliance with the above requirements would also prevent us from selling our products in these countries.
Further, Switzerland, which is the country from which we import our products into the EU and where our EU regulatory team is based, has not yet entered into a Mutual Recognition Agreement with the EU that covers the Medical Device Regulation was implemented to replace the Medical Device Directive (93/42/EEC), as amended. The Medical Device Regulation will apply after a three-year transition period and imposes stricter requirements for the marketing and sale ofallows medical devices to move freely between Switzerland and grants Notified Bodies increased post-market surveillance authority. We may be subjectthe EU. Therefore, for future needs, we will adjust the manner in which we bring our products into the EU market. Any such adjustments could cause temporary disruptions in and have adverse financial implications to risks associated with additional testing, modification, certification, or amendment of our existing market authorizations, or we may be required to modify products already installed at our customers’ facilities to comply with the official interpretations of these revised regulations.business in Europe.
To date, we received approvals from the Japanese Ministry of Health, Labor and Welfare (“MHLW”) for our da VinciS, Si, Xi, and X Surgical Systems and various associated instruments and accessories for use in certain da Vinci procedures. We may seek additional approvals for other products and/or indications; however, there can be no assurance that such approvals will be granted. In addition, because not all of our instruments have received product approvals and reimbursement is an additional process to generate market acceptance, it is possible that procedures will be adopted slowly or not at all. Sales of our products depend, in part, on the extent to which the costs of our products are reimbursed by governmental health administration authorities. In April 2012 and April 2016, we have received reimbursement approval for prostatectomy and partial nephrectomy, respectively. An additional 12 procedures were granted reimbursement for Japan in April 2018, including gastrectomy, anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. An additional 7 procedures were granted reimbursement effective April 1, 2020. These additional 1219 reimbursed procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be no assurance that adoption will occur or that the adoption pace for these procedures will be similar to any other da Vinci procedure.procedures. There are multiple pathways to obtain reimbursement for procedures including those that require in-country clinical data and which are considered for reimbursed status in April of even numberedeven-numbered years. If we are not successful in obtaining the necessary reimbursement approvals or obtaining approvals for future products and procedures, then the demand for our products could be limited. These limitations could eliminate a significant market opportunity for our products in Japan.
Our capital sales in China are subject to importation authorizations and purchasing tender processes. In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported and sold in China through 2020. TheAfter an adjustment notice was published in the third quarter of 2020 (ref. NHC Financial Notice [2020] 315), the government will allow for the total sale of 154225 new surgical robotsEndoscopic Surgical Instrument Control Systems (surgical robots) into China, which could include da Vinci Surgical Systems.Systems as well as surgical systems introduced by others. Future system sales and our ability to grow future procedure volumes are dependent on the completion of these purchasing tender authorizations. The timing and magnitude of these future authorizations, which may determine our system placements in future years, is not certain, and we expect to continue to experience variability in the timing of capital sales in China.
IFCHANGES IN HEALTHCARE LEGISLATION AND POLICY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE, OR OTHER MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PARTFINANCIAL CONDITION AND RESULTS OF OUR MANUFACTURING OPERATIONS, IMPORT/EXPORT OF OUR PRODUCTS, AND/OR RECALL SOME PRODUCTS WHICH WOULD RESULT IN SIGNIFICANT PRODUCT DELIVERY DELAYS AND LOST REVENUE.OPERATIONS.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities,In the U.S., there have been, and our operations will continue to be, regulateda number of legislative initiatives to contain healthcare costs. In March 2010, the ACA was enacted, which made changes that have impacted and inspected byare expected to significantly impact the FDApharmaceutical and medical device industries.
The ACA contained a number of provisions designed to generate the revenues necessary to fund health insurance coverage expansions among other things. This included a number of Medicare payment system reforms, including a national pilot program on payment bundling to encourage hospitals, physicians, and other regulatoryproviders to improve the coordination, quality, and efficiency of certain healthcare services through bundled payment models and appropriated funding for comparative effectiveness research.
Since its enactment, there have been judicial, executive branch, and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021, for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included an aggregate reduction in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2030, unless additional Congressional action is taken, with the exception of a temporary suspension from May 1, 2020, through March 31, 2022. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers, and cancer treatment centers, and increased the statute of limitations period for compliancethe government to recover overpayments to providers from three to five years. MACRA repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with Good Manufacturing Practice requirements containedfixed annual updates and a new system of incentive payments that began in 2019, which are based on various performance measures and physicians’ participation in alternative payment models, such as accountable care organizations. It is unclear what impact new quality and payment programs, such as MACRA, may have on our business, financial condition, results of operations, or cash flows. Individual states in the QSRU.S. have also become increasingly aggressive in passing legislation and other regulatory requirements. implementing regulations designed to control product pricing, including price or patient reimbursement constraints and discounts, and require marketing cost disclosure and transparency measures.
We are also requiredexpect additional state and federal healthcare reform measures to comply with International Organization for Standardization (“ISO”) quality system standards as well as European Directives and norms in order to produce products for salebe adopted in the EU. In addition, many countries such as Canada and Japan have very specific additional regulatory requirements for quality assurance and manufacturing. If we fail to continue to comply with Good Manufacturing Practice requirements, as well as ISO or other regulatory standards, we may be required to cease all or part of our operations until we comply with these regulations.
We continue to be subject to FDA and certain other inspections at any time. Maintaining such compliance is difficult and costly. We cannot be certainfuture that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO standards and other regulatory requirements in future inspections and audits by regulatory authorities.
We started participating in the Medical Device Single Audit Program (“MDSAP”), which allows an MDSAP-recognized auditing organization to conduct a single regulatory audit of a medical device manufacturer that evaluates the Company’s quality system to confirm compliance with the requirements of multiple regulatory jurisdictions including the US, Japan, Brazil, Australia, and Canada. The information will be shared and reviewed amongst all the regulatory authorities in the MDSAP who may or may not determine that additional information or auditing is required.
Our Sunnyvale, California facility is licensed by the State of California to manufacture medical devices. We have been subject to periodic inspections by the California Department of Health Services Food and Drug Branch and, if we are unable to maintain
this license following any future inspections, we will be unable to manufacture or ship some products, which wouldcould have a material adverse effect on our industry generally and on our customers. Any changes to, or uncertainty with respect to, future reimbursement rates or changes in hospital admission rates could impact our customers’ demand for our products and services, which, in turn, could have a material adverse effect on our business, financial condition, results of operations.operations, or cash flows.
Further, the federal, state, and local governments, Medicare, Medicaid, managed-care organizations, and foreign governments have, in the past, considered, are currently considering, and may, in the future, consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. Future significant changes in the healthcare systems in the U.S. or other countries, including retroactive and prospective rate and coverage criteria changes, competitive bidding or tender processes for certain products and services, and other changes intended to reduce expenditures along with uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business may be proposed or enacted in the future, what effect such policies would have on our business, or what effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.
WE ARE SUBJECT TO FEDERAL, STATE, AND FOREIGN LAWS GOVERNING OUR BUSINESS PRACTICES, WHICH, IF VIOLATED, COULD RESULT IN SUBSTANTIAL PENALTIES. ADDITIONALLY, CHALLENGES TO, OR INVESTIGATION INTO, OUR PRACTICES COULD CAUSE ADVERSE PUBLICITY AND BE COSTLY TO RESPOND TO AND, THUS, COULD HARM OUR BUSINESS.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of any tantalum, tin, gold, and tungsten used in manufacturing that may originate in the Democratic Republic of the Congo or adjoining regions (so called “conflict minerals”). These metals are central to the technology industry and are present in some of our products as component parts. In 2012most cases, no acceptable alternative material exists that has the Statenecessary properties. Because it is not possible to determine the source of California announced suspensionthe metals by analysis, we must obtain a good faith description of routine inspections butthe source of the intermediate components and raw materials from parties in our supply chain. The components that incorporate those metals may originate from many sources, and we purchase fabricated products from manufacturers who may have a long and difficult-to-trace supply chain. As the spot price of these materials varies, producers of the metal intermediates can be expected to change the mix of sources used. Accordingly, components and assemblies we buy may have a mix of sources as their origin. We are required to carry out a diligent effort to determine and disclose the source of these materials. There can be no assurance that we can obtain this policy couldinformation accurately or reliably, or at all, from intermediate producers who may be modifiedunwilling or inspections could be resumed for specific circumstances.unable to provide this information or further identify their sources of supply or to notify us if these sources change. In addition, both our Sunnyvale, California and Mexicali, Mexico facilitiesthese metals are subject to periodic inspections by other regulatory bodies, including third-party auditorsprice fluctuations and shortages that can affect our ability to obtain the manufactured materials that we rely on behalf of national regulatory authorities. Compliance with multiple regulatory standards is complex, difficult and costly to maintain, and material deficienciesat favorable terms or from consistent sources. These changes could result in significant limitationshave an adverse impact on our ability to manufacture transport, and sellmarket our devices and products.
We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments where we conduct our business. The healthcare laws and regulations that may affect our ability to operate include the federal Anti-Kickback Statute prohibits, among other things, payments or other remuneration that could be considered to induce hospitals, physicians, or other potential purchasers of our products either to refer patients or to purchase, lease, order, or arrange for or recommend the purchase, lease, or order of healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid and any other third-party payor programs. Further, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. Similar laws must be complied with in foreign jurisdiction.
The federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal healthcare programs that are false or fraudulent. Although we do not submit claims directly to government payors, manufacturers can be held liable under the federal false claim act if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
The Health Insurance Portability and Accountability Act of 1996, which created additional federal criminal statutes prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.
These laws may affect our sales, marketing, and other promotional activities by limiting the kinds of financial arrangements that we may have with hospitals, physicians, or other potential purchasers of our products. They particularly impact how we structure our sales offerings, including discount practices, customer support, speaker, education, and training programs, physician consulting, and other service arrangements. These laws are broadly written, and it is often difficult to determine precisely how these laws will be applied to specific circumstances. Violating anti-kickback laws and false claims laws can result in civil and criminal fines and penalties, which can be substantial and include monetary damages and penalties, imprisonment, and exclusion from government healthcare programs for non-compliance. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to defend and, thus, could harm our business and results of operations.
The federal Physicians Payments Sunshine Act imposes reporting and disclosure requirements on certain device manufacturers for any “transfer of value” made or distributed to physicians (including family members), as defined by statute, certain non-physician practitioners, including physician assistants and nurse practitioners, and teaching hospitals. Such information must be made publicly available in a searchable format. In addition, device manufacturers are required to report and disclose any ownership or investment interests held by physicians and their immediate family members, as well as any transfers of value made to such physician owners and investors, during the preceding calendar year. Similar requirements apply in foreign jurisdictions. Failure to submit required information may result in civil monetary penalties for all payments, transfers of value, or ownership or investment interests not reported in an annual submission. Device manufacturers are required to submit reports to CMS by the 90th day of each calendar year.
Many states have similar laws and regulations, such as anti-kickback and false claims laws, that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Certain states mandate implementation of commercial compliance programs to ensure compliance with these laws, impose restrictions on device manufacturer marketing practices, and/or require the tracking and reporting of gifts, compensation, and other remuneration to physicians or marketing expenditures and pricing information. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may be found out of compliance with one or more countries.of the requirements, subjecting us to significant civil monetary penalties.
Additionally, to the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.
Compliance with complex foreign and U.S. laws and regulations that apply to our OUS operations increases our cost of doing business in foreign jurisdictions and could expose us or our employees to fines and penalties in the U.S. and/or abroad. These numerous, and sometimes conflicting, laws and regulations include U.S. laws, such as the FCPA, and similar laws in other countries, such as the U.K. Bribery Act of 2010. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.
Our operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our business, in particular the U.S. and the EU. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements or practices are found to violate or infringe such laws, we may be subject to civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe upon these antitrust and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and enforceable. If we are unable to enforce our commercial agreements, whether at all or in material part, our results of operations, financial position, and cash flows could be adversely affected.
We are also subject to claims, lawsuits, and government investigations involving labor and employment. Such claims, lawsuits, and government investigations are inherently uncertain. Regardless of the outcome, any of these types of legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors.
We are also exposed to the risk that our employees, independent contractors, consultants, manufacturers, suppliers, and any other third parties we may engage in connection with development and commercialization may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless, and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) the laws of the FDA and other similar regulatory authorities, including those laws requiring the reporting of true, complete, and accurate information to such authorities; (ii) manufacturing standards; (iii) data privacy, security, fraud, and abuse laws and regulations; or (iv) laws that require the true, complete, and accurate reporting of financial information or data. Activities subject to these laws could also involve the improper use or misrepresentation of information obtained in the course of clinical trials or the creation of fraudulent data in clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations.
Additionally, we are subject to the risk that a person or government could allege fraud or other misconduct, even if none occurred. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant civil, criminal, and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid, other U.S. federal healthcare programs, or healthcare programs in other jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.
IF HOSPITALS AND OTHER SURGERY FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE, OR OTHER REGULATORY STANDARDS, THEY MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF THEIR DA VINCI UTILIZATION.
Our global customers are subject to periodic inspection by regulatory authorities. Our customers are required to comply with applicable local and international regulations, including with respect to the reprocessing of da Vinciinstruments and accessories. Hospitals may not follow cleaning and sterilization instructions properly, or equipment used for cleaning and sterilization may malfunction or be used improperly. If our customers deviate from cleaning and sterilization instructions, regulatory authorities may require them to suspend use of da Vinci Surgical Systems.
RISKS RELATING TO OUR INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO FULLY PROTECT AND SUCCESSFULLY DEFEND OUR INTELLECTUAL PROPERTY FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILLMAY BE HARMED.
Our commercial success depends in part on obtaining patent protection for the proprietary technologies contained in our products and on successfully defending our patents against infringing products and/or services in litigation or administrative proceedings, including patent oppositions, reviews, or reexaminations. We will incur substantial costs in obtaining patents and, if necessary, defending our patent rights. We do not know whether we will be successful in obtaining the desired patent protection for our new proprietary technologies or that the protection we do obtain will be found valid and enforceable when challenged. The success of defending our proprietary rights can be highly uncertain, because it involves complex and often evolving legal issues and procedures that are dependent on the particular facts of each case.
In addition to patents, we also rely on other intellectual property rights, such as trade secret, copyright, and trademark laws to protect proprietary technologies. We further utilize nondisclosure agreements and other contractual provisions as well as technical measures to protect our proprietary technologies. Nevertheless, these measures may be inadequate in protecting our technologies. If these measures are proved to be inadequate in protecting our technologies, our competitive advantages may be reduced. Moreover, we may not have adequate remedies for potential breaches by employees, consultants, and others who participate in developing our proprietary technologies against their agreements with us regarding intellectual property. As a
result, our trade secrets may be lost. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal to or superior to our technologies without infringing any of our intellectual property, which would harm our ability to compete in the market.
As foreign markets become more significant in revenue for us, our foreign operations and strategic alliances with foreign entities will likely increase. Our exposure to risks associated with these operations requires us to increase our reliance on protecting our intellectual property against infringing products and/or services in markets outside the U.S. The laws and judicial systems in these countries may introduce yet another level of uncertainty to our effort to obtain the desired protection as well as defending our rights.
OTHERS MAY BE SUCCESSFUL IN ASSERTING THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE US TO PAY SUBSTANTIAL DAMAGES AND/OR ENJOIN US FROM COMMERCIALIZING OUR PRODUCTS.
As we continue to introduce and commercialize new products and technologies, there may be U.S. and foreign patents issued to third parties that relate to our products. Some of these patents may be broad enough to cover one or more aspects of our products. We do not know whether any of these patents, if challenged, would be held valid, enforceable, and infringed. From time to time, we receive, and likely will continue to receive, letters from third parties accusing us of infringing and/or inviting us to license their patents. We may be sued by, or become involved in an administrative proceeding with, one or more of these third parties.
We cannot be certain that a court or administrative body would agree with any arguments or defenses that we may have concerning invalidity, unenforceability, or non-infringement of any third-party patent. In addition, other parties may have filed or will file patent applications covering products that are similar to or identical to ours. We cannot be certain that patents issuing from our own patent applicationapplications covering our products will have a priority date over any patents issuing from applications filed by a third party.
The medical device industry has experienced extensive intellectual property litigation and administrative proceedings. If third parties assert infringement claims or institute administrative proceedings against us, our technical and management personnel will
need to spend significant time and effort, and we will incur large expenses in defending against these attacks. We cannot be certain that we will prevail in defending against infringement, invalidityvalidity, or unenforceabilityenforceability claims against us. If plaintiffs in patent administrative proceedings are successful, our patent portfolio may be adversely affected. If plaintiffs in any patent action are successful, we may be enjoined from selling or importing our products, we may have to pay substantial damages, including treble damages, or we may be required to obtain a license that requires us to pay substantial royalties.royalties or relocate our manufacturing facilities. In addition, any public announcements related to litigation or administrative proceedings initiated or threatened against us could cause our stock price to decline.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, WHICH MAY NOT BE AVAILABLE TO US ON COMMERCIALLY REASONABLE TERMS OR AT ALL. IF WE LOSE ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including technology that is integral to our products. There is no assurance that we can obtain licenses on acceptable terms or at all. The license agreements we have entered into with several industry partners may be terminated for breach. If any of these agreements are terminated, we may be unable to reacquire the necessary license on satisfactory terms or at all. The failure to obtain or maintain the licenses could prevent or delay further development or commercialization of our products, which may have a material adverse effect on our business, financial condition, results of operations, or cash flows.
RISKS RELATING TO OUR TRADING MARKETSGENERAL RISK FACTORS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS’ OR INVESTORS’ EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Due to the nascent nature of our industry, we have limited insight into trends that may emerge in our market and affect our business. The revenue and income potential of our market are unproven, and we may be unable to maintain or grow our revenue. Our products typically have lengthy sales cycles. In addition, our costs may be higher than we anticipated. If we fail to generate sufficient revenues or our costs are higher than we expect, our results of operations may be materially adversely affected. Further, future revenue from sales of our products is difficult to forecast, because the market for new surgical technologies is still evolving. Our results of operations will depend upon numerous factors, including:
•the extent to which our products achieve and maintain market acceptance;
•actions relating to regulatory matters;
•product quality and supply problems;
•our timing and ability to develop our manufacturing and sales and marketing capabilities;
•demand for our products;
•the size and timing of particular sales and any collection delays related to those sales;
product quality and supply problems;
•the progress of surgical training in the use of our products;
•our ability to develop, introduce, and market new or enhanced versions of our products on a timely basis;
•third-party payor reimbursement policies;
•our ability to protect our proprietary rights and defend against third-party challenges;
•our ability to license additional intellectual property rights; and
•the progress and results of any clinical trials.
Our operating results in any particular period will not be a reliable indication of our future performance. It is possible that, in future periods, our operating results will be below the expectations of securities analysts or investors. If this occurs, the price of our common stock and the value of your investment will likely decline.
OUR STOCK PRICE HAS BEEN, AND WILL LIKELY CONTINUE TO BE, VOLATILE.
The market price of our common stock has experienced fluctuations and may fluctuate significantly in the future. For example, during fiscal 2016,2019, it reached a high of $241.61$199.60 and a low of $169.09;$150.08; during fiscal 2017,2020, it reached a high of $403.70$272.70 and a low of $209.83;$122.58; and during fiscal 2018,2021, it reached a high of $574.74$365.42 and a low of $375.25.$228.30. Our stock price can fluctuate for a number of reasons, including:
•announcements about us or our competitors;
•variations in operating results and financial guidance;
•introduction or abandonment of new technologies or products;
•regulatory approvals and enforcement actions;
•changes in product pricing policies;
•changes in earnings estimates or recommendations by analysts;
•changes in accounting policies;
•economic changes and overall market volatility;
litigation;•announcements relating to product quality and the supply chain for our products;
•litigation;
•media coverage, whether accurate or inaccurate, fair or misleading;
•political uncertainties;
•short sales on shares of our common stock or other activities by short sellers; and
•our stock repurchase program.
In addition, stock markets generally have experienced, and in the future may experience significant price and volume volatility. This volatility has a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. Further, the securities of many medical device companies, including us, have historically been subject to extensive price and volume fluctuations that may affect the market price of their common stock. If these broad market fluctuations continue, it may have a material adverse impact on the market price of our common stock.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED RESULTS OF OPERATIONS. A change in accounting standards can have a significant effect on our reported results and may retroactively affect previously reported results. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing standards or the reevaluation of current practices may adversely affect our reported financial results or the way we conduct our business.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2018,2021, we own approximately 930,0001.8 million square feet of space on 84111 acres of land in Sunnyvale, California, where we house our principal headquarters, research and development, service, and support functions, and certain of our manufacturing operations.
Outside of Sunnyvale, California, we own facilities in other U.S. locations that are used for sales, training, manufacturing, engineering, and training as well as manufacturing.administrative functions, including approximately 530,000 square feet of space on 60 acres of land in Peachtree Corners, Georgia. We also lease approximately 435,000660,000 square feet of space for certain engineering, warehousing, and warehousing spacesupport functions at various locations in the U.S. Outside of the U.S., we own properties in Mexicali, Mexico, primarily for manufacturing operations, and Aubonne, Switzerland, primarily for our international headquarters. In China, our Joint Venture leases facilities for research and development, manufacturing, and sales operations. In Germany, we own and lease facilities for manufacturing operations, as we build out operations of our acquisition of certain assets and operations from Schölly Fiberoptic GmbH. In Israel, we lease facilities, including space for the operations of our subsidiary, Orpheus Medical. In addition, we lease various international facilities for sales and other operations.
ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All share and per-share information presented have been retroactively adjusted to reflect the three-for-one stock split of our issued and outstanding common stock in October 2021.
COMMON STOCK
Our common stock is being traded on The Nasdaq Global Select Market under the symbol “ISRG.”
As of January 18, 2019,26, 2022, there were 178136 stockholders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We intend to retain earnings for use in the operation and expansion of our business.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table contains information as of December 31, 2018,2021, for two categories of equity compensation plans.
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| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) (2) | | Weighted-average exercise price of outstanding options (3) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (4) |
| Equity compensation plans approved by security holders | 15,620,115 | | | $ | 129.64 | | | 28,243,671 | |
Equity compensation plans not approved by security holders (1) | 821,483 | | | $ | 64.68 | | | — | |
| Total | 16,441,598 | | | $ | 125.07 | | | 28,243,671 | |
(1)Represents options under the Amended and Restated 2009 Employment Commencement Incentive Plan, adopted by the Board in October 2009 and first used in 2010. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed ten years. This plan expired in October 2019 and, therefore, there are no shares reserved for future grant. However, awards granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.
(2)Number of securities includes options to purchase 11,684,236 shares of common stock and 4,757,362 shares of common stock subject to vesting under RSUs.
(3)The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs, which have no exercise price.
(4)Number of securities includes 2,775,339 shares remaining available for future issuance under the 2000 Employee Stock Purchase Plan.
Material Features of the Amended and Restated 2009 Employment Commencement Incentive Plan
In October 2009, the Board adopted our Amended and Restated 2009 Employment Commencement Incentive Plan (the “2009 Plan”), pursuant to Rule 5653(c)(4) of the Nasdaq Global Market, which was subsequently amended by the Board in February 2011, July 2011, February 2012, July 2012, January 2013, May 2013, December 2013, and April 2015.
Awards granted under the 2009 Plan were intended to constitute “employment inducement awards” under Nasdaq Listing Rule 5635(c)(4) and, therefore, the 2009 Plan was intended to be exempt from the Nasdaq Listing Rules regarding stockholder approval of stock option and stock purchase plans. A total of 13,095,000 shares of our common stock were reserved for issuance under the 2009 Plan. The 2009 Plan provided for the grant of non-qualified stock options, restricted stock units, restricted stock awards, dividend equivalents, or stock appreciation rights. These awards may have been granted to individuals who were then new employees, or were commencing employment with us or one of our subsidiaries following a bona fide period of non-employment with us, and for whom such awards were granted as a material inducement to commencing employment with us or one of our subsidiaries. This plan expired in October 2019 and, therefore, there are no shares reserved for future grant. However, awards granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.
The 2009 Plan is administered by the Compensation Committee or another committee of the Board. The plan administrator has broad discretion to take action under the 2009 Plan, as well as make adjustments to the terms and conditions of existing awards, in the event of certain transactions and events affecting our common stock, including a change in control, stock
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| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted- average exercise price of outstanding options | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by security holders | 5,398,420 |
| | $ | 203.84 |
| | 5,670,804 |
|
| Equity compensation plans not approved by security holders | 765,282 |
| | $ | 179.28 |
| | 102,228 |
|
| Total | 6,163,702 |
| | $ | 200.79 |
| | 5,773,032 |
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The Board may amend, suspend, or terminate the 2009 Plan at any time, provided that no such action may impair any rights under any outstanding awards without the consent of the participant.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
The table below summarizes our stock repurchase activity for the quarter ended December 31, 2021.
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| Fiscal Period | Total Number of
Shares
Repurchased | | Average
Price Paid
Per Share | | Total Number of
Shares Purchased As
Part of a Publicly
Announced Program | | Approximate Dollar
Amount of Shares That
May Yet be Purchased
Under the Program (1) |
| October 1 to October 31, 2021 | — | | | $ | — | | | — | | | $ | 1.6 | billion |
| November 1 to November 30, 2021 | — | | | $ | — | | | — | | | $ | 1.6 | billion |
| December 1 to December 31, 2021 | — | | | $ | �� | | | — | | | $ | 1.6 | billion |
| Total during quarter ended December 31, 2021 | — | | | $ | — | | | — | | | |
(1) Since March 2009, we have had an active stock repurchase program. As of December 31, 2018,2021, our Board of Directors (the(our “Board”) had authorized an aggregate amount of up to $6.2$7.5 billion for stock repurchases, of which the previousmost recent authorization occurred in December 2016January 2019, when theour Board increased the authorized amount available under our share repurchase program to $3.0$2.0 billion. The remaining $1.6 billion represents the amount available to repurchase shares under the authorized repurchase program was $717.5 million as of December 31, 2018.2021. The authorized stock repurchase program does not have an expiration date. During the year ended December 31, 2018, we did not repurchase any
STOCK PERFORMANCE GRAPH
This graph is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to liabilities under that Section, and shall not be deemed incorporated by reference into any filings of Intuitive Surgical, Inc. under the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The graph set forth below compares the cumulative total stockholder return on our common stock between December 31, 2013,2016, and December 31, 2018,2021, with the cumulative total return of (i) the Nasdaq Composite Index, (ii) the S&P 500 Healthcare Index, and (iii) the S&P 500 Index over the same period. This graph assumes thean investment of $100.00 on December 31, 20132016 in our common stock, the Nasdaq Composite Index, the S&P Healthcare Index, and the S&P 500 Index and assumes the re-investment of dividends, if any.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
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COMPARISON OF CUMULATIVE TOTAL RETURN AMONG INTUITIVE, NASDAQ COMPOSITE, S&P HEALTH CAREHEALTHCARE INDEX, AND S&P 500 INDEX |
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| December 31, |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Intuitive Surgical, Inc. | $ | 100.00 | | | $ | 172.64 | | | $ | 226.56 | | | $ | 281.54 | | | $ | 387.01 | | | $ | 509.91 | |
| Nasdaq Composite | $ | 100.00 | | | $ | 129.64 | | | $ | 125.96 | | | $ | 172.18 | | | $ | 249.51 | | | $ | 304.85 | |
| S&P 500 Healthcare Index | $ | 100.00 | | | $ | 120.00 | | | $ | 125.63 | | | $ | 149.10 | | | $ | 166.14 | | | $ | 206.29 | |
| S&P 500 Index | $ | 100.00 | | | $ | 121.83 | | | $ | 116.49 | | | $ | 153.17 | | | $ | 181.35 | | | $ | 233.41 | |
ITEM 6.
[RESERVED]
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| | December 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| Intuitive Surgical, Inc. | $ | 100.00 |
| | $ | 137.72 |
| | $ | 142.20 |
| | $ | 165.11 |
| | $ | 285.05 |
| | $ | 374.08 |
|
| Nasdaq Composite | $ | 100.00 |
| | $ | 114.75 |
| | $ | 122.74 |
| | $ | 133.62 |
| | $ | 173.22 |
| | $ | 168.30 |
|
| S&P 500 Healthcare Index | $ | 100.00 |
| | $ | 125.34 |
| | $ | 133.97 |
| | $ | 145.37 |
| | $ | 177.47 |
| | $ | 188.94 |
|
| S&P 500 Index | $ | 100.00 |
| | $ | 113.69 |
| | $ | 115.26 |
| | $ | 129.05 |
| | $ | 157.22 |
| | $ | 150.33 |
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ITEM 6. | SELECTED FINANCIAL DATA |
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| | Fiscal Year (1) |
| | 2018 | | 2017 (2) | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (In millions, except per share amounts and headcount) |
| Revenue | $ | 3,724.2 |
| | $ | 3,138.2 |
| | $ | 2,706.5 |
| | $ | 2,384.4 |
| | $ | 2,131.7 |
|
| Gross profit | $ | 2,604.1 |
| | $ | 2,202.0 |
| | $ | 1,892.9 |
| | $ | 1,577.9 |
| | $ | 1,413.8 |
|
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,127.9 |
| | $ | 670.9 |
| | $ | 738.3 |
| | $ | 588.8 |
| | $ | 418.8 |
|
| Net income per share attributable to Intuitive Surgical, Inc.: | | | | | | | | | |
| Basic | $ | 9.92 |
| | $ | 6.01 |
| | $ | 6.43 |
| | $ | 5.29 |
| | $ | 3.78 |
|
| Diluted | $ | 9.49 |
| | $ | 5.77 |
| | $ | 6.26 |
| | $ | 5.18 |
| | $ | 3.70 |
|
| Shares used in computing basic and diluted net income per share: | | | | | | | | | |
| Basic | 113.7 |
| | 111.7 |
| | 114.9 |
| | 111.3 |
| | 110.7 |
|
| Diluted | 118.8 |
| | 116.3 |
| | 117.9 |
| | 113.7 |
| | 113.1 |
|
| Cash, cash equivalents, and investments | $ | 4,834.4 |
| | $ | 3,846.5 |
| | $ | 4,837.9 |
| | $ | 3,347.8 |
| | $ | 2,497.0 |
|
| Total assets | $ | 7,846.7 |
| | $ | 5,776.8 |
| | $ | 6,521.4 |
| | $ | 4,907.3 |
| | $ | 3,959.4 |
|
| Other long-term liabilities | $ | 338.6 |
| | $ | 333.6 |
| | $ | 112.1 |
| | $ | 95.9 |
| | $ | 78.8 |
|
| Stockholders’ equity | $ | 6,687.5 |
| | $ | 4,780.4 |
| | $ | 5,820.1 |
| | $ | 4,319.5 |
| | $ | 3,379.4 |
|
| Total headcount | 5,527 |
| | 4,444 |
| | 3,755 |
| | 3,211 |
| | 2,978 |
|
| |
(1) | Fiscal years 2015 and 2014 do not reflect the impact of the adoption of the new revenue accounting standard in fiscal year 2018. |
| |
(2) | Reflects amounts recorded for the enactment of the 2017 Tax Act. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview
Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times, increased hospitalization costs, and additional pain and suffering relative to minimally invasive surgery (“MIS”), where MIS is available. For over three decades, MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions. MIS has been widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a more invasive surgery by using computational, robotic, and imaging technologies to overcome many of the limitations of traditional open surgery or conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3D, high definitionhigh-definition image of the surgical field. This immersive console connects surgeons to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da VinciSurgical Systems,da Vinci instruments and accessories, da Vinci Stapling, da Vinci Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems (“Firefly”), and da Vinci Endoscopes. We also provide a comprehensive suite of systems, learning, and services offerings. Digitally-enabled for more than two decades, these three categories aim to decrease variability by offering dependable, consistent functionality and an integrated user experience. Our systems category includes robotic platforms, software, vision, energy, and instruments and accessories. Our learning category includes educational technology, such as simulation and telepresence, as well as technical training programs and education programs.personalized peer-to-peer learning opportunities. Our services category assists and optimizes minimally invasive programs through readiness, on-demand support, consultation for minimally invasive program optimization, and hospitals customized analytics. Within our integrated ecosystem, our products are designedfocus is to decrease variability in surgery by offering dependable, consistent functionalityactionable insights, with digital solutions, to take action with the potential to improve outcomes, personalize learning, and user experiences for surgeons seeking better outcomes.optimize efficiency. We take a holistic ‘systems’ approach, to offeroffering intelligent technology and systems designed to work together to make MIS intervention more available and applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical System commercialized in 2014. We have extended our fourth generation platform by adding the da Vinci X Surgical System, commercialized in the second quarter of 2017, and the da Vinci SP Surgical System, commercialized in 2018. The da Vinci SP Surgical System accesses the third quarter of 2018.body through a single incision while the other da Vinci Surgical Systems access the body through multiple incisions. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software. We are earlystill in thea measured launch of our da Vinci SP Surgical System, and placed 15we have an installed base of 99 da Vinci SP systems in 2018.Surgical Systems as of December 31, 2021. Our plans for the rollout of the da Vinci SP Surgical System will be measured,include putting systems in the hands of experienced da Vinci users first while we optimize training pathways and our supply chain. We received FDA clearances for the da Vinci SP Surgical System for urological surgical proceduresand certain transoral procedures. We also received clearance in the U.S. and South Korea as well as some other procedure types in South Korea.where the da Vinci SP Surgical System may be used for a broad set of procedures. We plan to seek U.S. FDA clearances for additional indications for da Vinci SP over time. We also plan to seek clearances in other OUS markets over time. The success of the da Vinci SP productSurgical System is dependent on positive experiences and improved clinical outcomes for the procedures for which it has been cleared for and as well as securing additional clinical clearances. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software.
We offer over 80approximately 70 different multi-port da Vinci instruments to provide surgeons’surgeons with flexibility in choosing the types of tools needed to perform a particular surgery. These multi-port instruments are generally robotically controlled and provide end effectors (tips) that are similar to those used in either open or laparoscopic surgery. We offer advanced instrumentation for the da VinciSi,Xiandda VinciXi, andda VinciXplatforms, including the da Vinci Vessel Sealer ExtendEnergy and da Vinci Stapler products, to provide surgeons with sophisticated, computer-aided tools to precisely and efficiently interact with tissue. Da VinciX and da VinciXiSurgical Systems useshare the same instruments that are compatible with both X and Xi systems whereas the da VinciSiSurgical System uses instruments that are not compatible with da Vinci X or da Vinci Xi systems. Initially we are offeringWe currently offer nine core instruments on our da Vinci SP Surgical System. We plan to expand the SP instrument offering over time.
We offer Single-Site instruments for use with the da VinciSi, da VinciXi, and da VinciXSurgical Systems. Single-Site instruments are most commonly used in cholecystectomy and hysterectomy procedures. Single-Site instruments are designed to enable surgeons to perform surgery through a single port via the patient’s umbilicus, resulting in the potential for significantly reduced scarring.
Training technologies include our da Vinci Skills Simulator, da Vinci ConnectIntuitive Simulation products, our Iris augmented reality imaging product, our Intuitive Telepresence remote case observation and mentoring tool,telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic procedures with this first application.
Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We have placed 129 Ion systems as of December 31, 2021. Ion systems are not included in our da Vinci Surgical System installed base. We plan to seek additional clearances for Ion in OUS markets over time.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
COVID-19 Pandemic
Procedures
Beginning in January 2020, as a result of the spread of COVID-19, we saw a substantial reduction in da Vinci procedures in China and, by early February 2020, procedures per week in China had declined by approximately 90% compared to the weekly procedure rates experienced in early January 2020. As the COVID-19 pandemic subsided in China in March 2020, da Vinci procedure volume began to recover and, by the end of the first quarter of 2020, China procedures per week were approximately 70% of the early January 2020 weekly procedure rate. As the COVID-19 pandemic spread to Western Europe and the U.S., we experienced a significant decline in da Vinci procedures in the last half of March 2020 to approximately 65% of the weekly procedure rate experienced earlier in the first quarter of 2020.
In the second quarter of 2020, procedures per week in the U.S. continued to decline in April, reaching approximately 30% of pre-COVID-19 levels followed by steady recovery in May and June, as COVID-19 cases dropped and elective procedures were permitted. However, with the resurgence of COVID-19 cases in the last two weeks of June, we experienced a corresponding decline in da Vinci procedures. The impact of COVID-19 in Europe during the second quarter of 2020 varied by country. In China, procedures per week continued to increase to a level consistent with the early January 2020 weekly procedure rate. We experienced little impact on the procedure volume in Korea and Japan in the second quarter of 2020.
In the third quarter of 2020, in the U.S., procedures recovered slowly, leveling off to near pre-COVID-19 levels towards the end of the quarter. Outside of the U.S., da Vinci procedures varied depending on the spread and/or resurgence of COVID-19. Procedures in China grew significantly year over year, while COVID-19 outbreaks resulted in year-over-year procedure growth rates in Japan slowing somewhat relative to the second quarter. The COVID-19 pandemic also affected the volumes of certain procedure types differently.
In the fourth quarter of 2020, procedure volumes continued to be significantly impacted by the COVID-19 pandemic as healthcare systems around the world diverted resources to respond to the pandemic. The impact continued to differ significantly by geography and region, depending on the spread and resurgence of COVID-19. In the U.S., while procedures continued to recover in the early part of the quarter, the resurgence of COVID-19 infections experienced by some states had an increasingly adverse impact on our procedure volumes as the quarter progressed, a trend that continued into January. Outside of the U.S., similar to the trends noted in the third quarter of 2020, procedures also continued to vary significantly by geography and region.
In the first quarter of 2021, in the U.S., the COVID-19 resurgence that affected procedures later in the fourth quarter of 2020 continued well into January 2021. Then, as COVID-19 cases subsided, procedures experienced a steady improvement throughout February and March. In Europe, the spread of COVID-19 varied regionally, and procedure growth rates were mixed. While there were COVID-19 hot spots within some of our Asia Pacific markets, they tended to be isolated and, in general, procedures performed well.
In the second quarter of 2021, as the U.S. continued its broad rollout of vaccinations, COVID-19 cases and hospitalizations decreased, and procedure volumes recovered, partially attributed to the performance of a number of procedures that were deferred during the pandemic. In Europe, the rollout of vaccinations and spread of COVID-19 varied regionally, and procedure growth rates were mixed. We continued to see the impacts of regional resurgences of COVID-19 cases within the Asia Pacific markets. China growth continued to be strong year over year, primarily reflecting the growth in the system installed base.
In the third quarter of 2021, COVID-19 infections resurged as the quarter progressed, and we saw a corresponding impact to our procedures. In the U.S., we saw decreasing procedure volumes in August and September compared to June as COVID-19 cases and hospitalizations increased. Late in the quarter, as COVID-19 cases began to slow, procedures began to recover. Outside of the U.S., in Europe, the impact of COVID-19 in the third quarter of 2021 varied regionally. We continued to see the impacts of regional resurgences of COVID-19 cases within the Asia Pacific markets. China growth in the third quarter continued to be stronger than other Asia Pacific markets.
In the fourth quarter of 2021, procedure volumes continued to recover in October and November from the COVID-19 resurgence related to the Delta variant in the third quarter. However, in December, procedure volumes were adversely impacted by the increase in hospitalizations in the U.S. and parts of Europe (most notably France and Italy) as the Omicron variant began to spread rapidly. This trend has continued into January 2022. In the U.S., high COVID-related hospitalization rates have been
exacerbated by staffing shortages. Despite the fact that hospitals were better equipped to handle COVID patients in the fourth quarter of 2021 compared to the outset of the pandemic, COVID-19 resurgences like those being experienced in the U.S. and parts of Europe have challenged hospital resources and have negatively impacted da Vinci procedure volumes. In addition, delays in diagnosis and treatment of underlying conditions have, and will continue to, negatively impact da Vinci procedure volumes. Benign procedures experienced a more significant impact in December, reflecting the deferability of certain elective surgeries. Our Asia Pacific markets were not significantly impacted by the resurgence in COVID-19 and saw strong procedure growth across multiple specialties in China, South Korea, and Japan.
The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of vaccinations, personal protective equipment, intensive care units and operating rooms, and medical staff, as well as government interventions. The impact of COVID-19 on our procedure volumes varies widely by country, region, and type. When COVID-19 infection rates spike in a particular region, procedure volumes have been negatively impacted and the diagnoses of new conditions and their related treatments have been deferred. While there is a backlog of patients, it is unpredictable when those patients will ultimately seek diagnosis and treatment and whether they will be treated through surgery. Based on our experience during 2020 and 2021, we do not expect all markets, regions, and procedure types to recover at the same time or at the same pace.
System Demand
As the impact of the COVID-19 pandemic progressed throughout 2020, customers in affected regions deferred decisions to purchase or lease systems into future quarters and, in some cases, indefinitely. In addition, the year-over-year stagnation in procedures during 2020 and, in turn, reduced utilization of our systems had resulted in unused capacity in the existing installed base. However, throughout 2021, we experienced strong system demand, as utilization levels recovered. In general, we believe that the COVID-19 pandemic had less of an impact on hospital spending capacity and that customers recognize that surgery meets their quadruple aim objectives better than other surgical approaches. More specifically, during 2021, system demand reflected procedure growth, hospitals purchasing systems in preparation for a post-COVID-19 pandemic environment, and hospitals upgrading their system portfolio to access and/or standardize on fourth generation capabilities. However, hospitals are currently experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care, defer elective surgeries, and impact their profitability, all of which could impact hospitals’ spend on capital equipment.
Customer Relief Program
In April 2020, we announced a program to provide financial relief to our customers. The program was comprised of three main elements. The first element provided credits against service fees otherwise due in the six-month period from April 1 through September 30, 2020, that generally reflected the underutilization of the system during that period. Those credits were offered to most customers worldwide. The second element of the program deferred certain lease payments, and the third element extended certain payment terms. Service fee credits resulted in an $80 million decrease in service revenue in 2020. While the short-term payment relief offered did not have a material impact to the results of operations, we deferred $15 million of lease billings and extended payment terms associated with $181 million of trade receivables during the program, of which $19 million remained outstanding as of December 31, 2020. All of the trade receivables with extended payment terms have been collected as of December 31, 2021. We may be subject to increased credit risks resulting in collection delinquencies and defaults, which could materially impact our bad debt write-offs and provisions for credit losses. Although we have programs in place that are designed to monitor and mitigate the associated risks, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements and extended payment terms. There was no similar customer relief program offered in 2021.
General Increase in Risks
Worldwide economies have been significantly impacted by the COVID-19 pandemic, and it is possible that factors related to the COVID-19 pandemic could cause a prolonged recession in local and/or global economies. Such an economic recession could have a material adverse effect on our long-term business as hospitals curtail and reduce capital and overall spending. The COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on our ability to travel and access our customers or temporary closures of our facilities, including our training and manufacturing operations, or the facilities of our suppliers and their contract manufacturers, could further significantly impact our sales and our ability to produce and ship our products and supply our customers.
In particular, we have experienced increased difficulties in obtaining a sufficient supply of component materials used in our products, including those in the semiconductor market, as global supply has become significantly constrained due to increased demand in semiconductors and other materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. The global semiconductor and other materials supply shortage is likely to remain a challenge for the foreseeable future. We have also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in our supply chain. To date, these challenges have not materially impacted our ability to deliver
product and services to our customers. However, if shortages in important supply chain materials in the semiconductor or other markets continue, we could fail to meet product demand, which would adversely impact our business, financial condition, results of operations, or cash flows.
Increased labor shortages globally, including staff burnout and attrition, could also impact our ability to hire and retain personnel critical to our manufacturing, logistics, and commercial operations. We are also highly dependent on the principal members of our management and scientific staff. Attracting and retaining qualified personnel is critical to our success, and competition for them has become more intense. The loss of critical members of our team, or our inability to attract and retain qualified personnel, could significantly harm our operations, business, and ability to compete. In addition, hospitals are also experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care. Any of these events could negatively impact the number of procedures performed or the number of system placements and have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Our Response
Our priorities and actions during the COVID-19 pandemic have been and remain as follows. First, we are focused on the health and safety of all those we serve – patients, customers, our communities, and our employees – implementing continuous updates to our health and safety policies and processes. Second, we are supporting our customers according to their priorities – clinical, operational, and economic – and ensuring continuity of supply by working with our suppliers and our distributors. Third, we are securing our workforce economically. We have built a valuable team over the years, and we believe they will be important in a recovery that follows the pandemic. Finally, we will continue to invest in our priority development programs while eliminating avoidable spend.
As COVID-19 vaccination rates increase and cases decline, we have enhanced our focus on evaluating and implementing our return-to-office strategy. We intend to remain flexible, allowing many of our employees to work remotely on at least a partial basis, while maintaining productivity and our culture. Our top priority in this process continues to be the health and safety of our employees.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in salesales or sales-type lease arrangements where revenue is recognized up-front at a point in time or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and service,services, as well as the revenue from operating leases. The da Vinci Surgical System generally
sells for approximately between $0.5 million and $2.5 million, depending upon the model, configuration, and geography, and represents a significant capital equipment investment for our customers when purchased. Our instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We generally earn between approximately $700 to$600 and $3,500 of instrumentinstruments and accessoryaccessories revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. During the fourth quarter of 2020, we launched our Extended Use Program (refer to further discussion immediately below) with the intention to reduce the cost for customers to treat patients, which in turn will reduce our overall instruments and accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or leased at an annual fee of approximatelybetween $80,000 toand $190,000, depending upon the configuration of the underlying system and composition of the services offered under the contract. These service contracts have generally been renewed at the end of the initial contractual service periods.
We adopted ASC 606, Revenuegenerate revenue from Contractsour Ion endoluminal system in a business model consistent with Customers, effective January 1, 2018, using the full retrospective method.da Vinci Surgical System model described above. We generate revenue from the placement of Ion systems, in sales or sales-type lease arrangements where revenue is recognized up-front at a point in time or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service, as well as revenue from operating leases. The financial results for 2016average selling price of an Ion system is generally significantly lower than the average selling price of a da Vinci Surgical System. We are introducing our Ion system in a measured fashion. For the years ended December 31, 2021, and 20172020, the associated impact to revenue and gross margin was not significant.
Additionally, as part of our ecosystem of products and services, we provide a portfolio of learning offerings and digital solutions. We do not currently generate material revenue from these offerings.
Extended Use Program
In 2020, we introduced our “Extended Use Program,” which consists of select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses (“Extended Use Instruments”) compared to previously 10 uses. These Extended Use Instruments represent some of our higher volume instruments but exclude stapling, monopolar, and advanced energy instruments.
Instruments included in the program are used across a number of da Vinci surgeries. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our instruments, resulting in improved quality and durability. Extended Use Instruments have been restatedintroduced in the U.S. and Europe in the fourth quarter of 2020 and have launched in most other countries around the world in the first half of 2021, except China due to regulatory timelines. They will continue to be introduced at various times throughout 2022 in other geographies, depending on regulatory processes. In addition, simultaneous with the regional launches of Extended Use Instruments, we have lowered the price of certain instruments that are most commonly used in lower acuity procedures and/or lower reimbursed procedures within the region. These actions have reduced the cost for customers to treat patients, which in turn has reduced our revenue per procedure. In the U.S. and Europe, during 2021, we saw customers adjust their instrument buying patterns to reduce their inventory levels to reflect this adoption.the additional uses per instrument. We believe that, as of the end of 2021, in the U.S. and Europe, full cutover to Extended Use Instruments has occurred, as customers have utilized substantially all of their remaining 10 use instruments. The adoption did not have a materialprecise impact of these actions on future revenue recognized for the periods presented in our Financial Statements. Refer to “Note 2. Summary of Significant Accounting Policies” within Part II, Item 8 of this Form 10-K for further informationwill be dependent on the impactfuture volume and mix of adopting ASC 606.procedures and whether cost elasticity will enable greater penetration into available markets.
Recurring Revenue
Recurring revenue consists of instrumentinstruments and accessoryaccessories revenue, service revenue, and operating lease revenue. Recurring revenue increased to $2.6$4.3 billion, or 71%75% of total revenue in 2018,2021, compared with $2.2to $3.4 billion, or 71%77% of total revenue in 2017,2020, and $1.9$3.2 billion, or 71%72% of total revenue in 2016.2019.
InstrumentInstruments and accessoryaccessories revenue has grown at a faster rate than systemsystems revenue over time. InstrumentInstruments and accessoryaccessories revenue increased to $2.0$3.10 billion in 2018,2021, compared with $1.6to $2.46 billion in 20172020 and $1.4$2.41 billion in 2016.2019. The growth of instrumentincrease in instruments and accessoryaccessories revenue largely reflects continued procedure adoption.
Service revenue growth has beenwas $916 million in 2021, compared to $724 million in 2020 and 2019. The increase in service revenue was primarily driven by the growth of the base of installed da Vinci Surgical Systems.Systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in an $80 million decrease in service revenue in 2020. The installed base of da Vinci Surgical Systems grew 13%12% to approximately 4,986 at December 31, 2018; 13% to approximately 4,409 at December 31, 2017; and 9% to approximately 3,919 at December 31, 2016. Service revenue grew 11% to $635.1 million in 2018; 12% to $572.9 million in 2017; and 10% to $510.7 million in 2016.
Operating lease revenue has grown6,730 as a larger proportion of systems shipped are under operating lease arrangements. In the years ended December 31, 2018, 2017, and 2016, a total of 229, 108, and 62 of system placements were classified as operating leases, respectively. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage. Operating lease revenue for the years ended December 31, 2018, 2017, and 2016, was $51.4 million, $25.9 million and $16.6 million, respectively. As of December 31, 2018, a total2021; 7% to approximately 5,989 as of 350December 31, 2020; and 12% to approximately 5,582 as of December 31, 2019.
We use the installed base, number of placements, and utilization of da VinciSurgical Systems wereas metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the installed atbase, number of placements, and utilization of da Vinci Surgical Systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of placements, and utilization of da Vinci Surgical Systems are an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future recurring revenue (particularly service revenue). Management believes that both it and investors benefit from referring to the installed base, number of placements, and utilization of da Vinci Surgical Systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base, number of placements, and utilization of da Vinci Surgical Systems also facilitate management’s internal comparisons of our historical performance. We believe that the installed base, number of placements, and utilization of da Vinci Surgical Systems are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of da Vinci Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize this information as well as other information from agreements and discussions with our customers under operating lease arrangements.
Intuitive Surgical that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base, number of placements, and utilization of da Vinci Surgical Systems may be impacted over time by various factors, including system internet connectivity, hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical errors. In addition, the relationship between the installed base, number of placements, and utilization of da Vinci Surgical Systems and our revenues may fluctuate from period to period, and growth in the installed base, number of placements, and utilization of da Vinci Surgical Systems may not correspond to an increase in revenue. The installed base, number of placements, and utilization of da Vinci Surgical Systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
Intuitive System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire da Vinci Surgical Systemssystems and expand their robotic-assisted surgery availabilityprograms while leveraging our balance sheet. These leases generally have commercially competitive terms as compared with other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with qualified customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We believe that these alternative
financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. We include both operating and sales-type leases, and systems placed under usage-based arrangements, in our system shipmentplacement and installed base disclosures. We exclude operating leaseslease-related revenue, usage-based revenue, and Ion system revenue from our systemda Vinci Surgical System average selling price (“ASP”) computations.
In the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, we shipped 272, 139,placed 668, 432, and 95 systems425 da Vinci Surgical Systems, respectively, under lease and usage-based arrangements, respectively, of which 229, 108,517, 317, and 62384 systems, respectively, were classified as operating leases, respectively. Generally, thelease and usage-based arrangements. Revenue from operating lease arrangements provide our customers with the right to purchase the leased system at some point during and/or at the end ofis generally recognized on a straight-line basis over the lease term. Revenue generated from customer purchasesterm or, in the case of usage-based arrangements, as the systems underare used. We generally set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, (“Lease Buyouts”)the risk that system utilization may fall short of anticipated levels. The proportion of revenue recognized from usage-based arrangements has not been significant and has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $48.8$277 million, $39.5$177 million, and $38.2$107 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. We expect thatAs revenue for operating leases and usage-based systems is recognized from customer exercisesover time, total systems revenue growth is reduced in a period when the number of the buyout options will fluctuate based on the timingoperating lease and usage-based placements increases as a proportion of when, and if, customers choose to exercise their buyout options. We believe our leasing program has been effective and well-received, and we are willing to expand it based on customer demand, including alternative structures such as usage-based payment models. Our da Vincitotal system leasing provides customers with flexibility regarding how they acquire da Vinci Surgical Systems.placements. Generally, lease transactions generate similar gross margins as our sale transactions. As of December 31, 2021, a total of 1,294 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements.
Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. Also,In addition, as customers divert resources to the treatment of or the preparation to treat patients with COVID-19, we may be exposed to defaults under our lease financing arrangements. Moreover, usage-based leasesarrangements generally contain no minimum lease payments; therefore, customers may exit such leasesarrangements without paying a financial penalty to us. As a result of the COVID-19 pandemic, we anticipate that some customers will exit such arrangements or seek to amend the terms of our operating lease and usage-based arrangements with them.
For some operating lease arrangements, our customers are provided with the right to purchase the leased system at certain points during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $96.0 million, $52.2 million, and $92.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options.
Systems Revenue
System placements are driven by procedure growth in most markets. In some markets, system placements are constrained by regulation. In geographies where da Vinciprocedureadoption is in an early stage or system placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. System revenue grew 21% to $1,127.1 million in 2018; 16% to $928.4 million
in 2017; and 11% to $800.0 million in 2016. SystemSystems revenue is also affected by the proportion of systems placed that aresystem placements under operating lease and usage-based arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and trade-in activities.customer mix. Systems revenue grew 44% to $1.69 billion in 2021. Systems revenue declined 12% to $1.18 billion in 2020. Systems revenue grew 19% to $1.35 billion in 2019. Based on the factors outlined in the COVID-19 Pandemic section above, we believe that historical system placement trends may not be a good indicator of future system placements.
Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments including the(including da Vinci Energy and EndoWrist Vessel Sealer, EndoWristand SureForm Stapler products,products) and our Integrated Table Motion product targettargets the more complex procedure segment. Our da Vinci X Surgical System and Single-Site instruments areis targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably benign hysterectomies, hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer
operations and surgeries for other life threateninglife-threatening conditions. Seasonality in the U.S. for these procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside the U.S. varies and is more pronounced around local holidays and vacation periods. As a result of the factors outlined in the COVID-19 Pandemic section above, including past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European countries), China, Japan, South Korea, India, and Taiwan. In May and December 2018, weJanuary 2019, our Intuitive-Fosun joint venture began direct operationssales for da Vinci products and services in India and Taiwan, respectively.China. In the remainder of our OUS markets, we provide our products through distributors. Chindex,
Regulatory Activities
Overview
Our products must meet the requirements of a subsidiarylarge and growing body of Fosun Pharma, has beeninternational standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our distribution partner for da Vinci Surgical Systemsproducts. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in China. In January 2019, the Joint Venture acquired certain assets relatedthose regions that require compliance to the distribution business of Chindex and began direct operations for da Vincisuch standards.
Our products and servicesoperations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations. For example, we have seen elongated regulatory approval timelines in China.
Regulatory Activitiesthe U.S. and the EU.
Clearances and Approvals
We have generally obtained the clearances required to market our multi-port products associated with all of our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2019, we obtained regulatory clearances for the following products:
•In December 2018,2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. The 8 mm SureForm 30 stapler is expected to launch in the U.S. in 2022, with other countries to follow.
•In late 2020 and early 2021, we obtained FDA clearance, CE mark clearance, and other regulatory clearances in most of our significant markets to market our Extended Use Instruments.
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance in South Korea to market our SynchroSeal instrument and E-100 generator in January 2020 and August 2020, respectively.
•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload, which round out our SureForm 45 portfolio. We have also received CE mark clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. In September 2019, we received regulatory clearance in Japan to market both our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. We received regulatory clearance in South Korea to market our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload in June 2021 and July 2021, respectively.
•In June 2019, we received CE mark clearance for our da Vinci Xi Surgical System in China. The Xi clearance does not include advanced energy, stapling, or wireless table motion products which attach to the Xi system. Separate clearances are required for each of these products by China National Medical Products Administration (“NMPA”).
In May 2018, we obtained U.S. FDA clearanceEndoscope Plus for the da Vinci SPXi and da Vinci X Surgical SystemSystems in Europe. Following the CE mark, in July 2019, we obtained FDA clearance for urologic surgical procedures that are appropriate for a single port approach.our da Vinci Endoscope Plus. We have also received regulatory clearance for the da Vinci SP Surgical Systemclearances in South Korea in May 2018. We planand Japan to launch themarket our da Vinci SP Surgical SystemEndoscope Plus in a measured fashionDecember 2019 and placed 15May 2020, respectively.
•In June 2019, we obtained FDA clearance for our da Vinci SPHandheld Camera and, in February 2020, we received CE mark clearance.
•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our flexible, robotic-assisted, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We have placed 129 Ion systems with customersas of December 31, 2021.
•In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in 2018.both pre- and intra-operative settings. We are currently conducting a pilot study of our Iris product and service in the field at a small group of U.S. hospitals to gain initial product experience and insights.
Refer to the descriptions of our products that received regulatory clearances in 2021, 2020, and 2019 in the New Product Introductions section below.
In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported and sold in China through 2020. TheAfter an adjustment notice was published in the third quarter of 2020, the government will now allow for the total sale of 154225 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. SalesAs of December 31, 2021, we have sold 161 da Vinci Surgical Systems under this quota, and one system quota has expired; therefore, 63 surgical robots can still be imported and sold under this quota. Future sales of da Vinci Surgical Systems under the quotequota are uncertain, as they are dependent on hospitals completing a tender process and receiving associated approvals.
In July 2018, we received U.S. FDA clearance to market SureForm 60, our da Vinci EndoWrist 60mm Stapler. In January 2019, we received U.S. FDA clearance to market SureForm 45 (see the description of the SureForm 45 and 60 Staplers in the New Product Introductions section below).
In April 2018, we received U.S. FDA clearance for our Vessel Sealer Extend (see the description of the da Vinci Vessel Sealer Extend in the New Product Introductions section below).
In April 2017, we received CE mark clearance for ourda VinciX Surgical System in Europe. Following the CE mark, in May 2017, we received U.S. FDA clearance to market ourda VinciX Surgical System in the U.S. We received regulatory clearance for theda VinciX Surgical System in South Korea and Japan in September 2017 and April 2018, respectively (see the description
of theda VinciX Surgical System in the New Product Introductions section below). Regulatory clearances for the da VinciX Surgical System may be received in other markets over time.
The Japanese Ministry of Health, Labor, and Welfare (“MHLW”) considers reimbursement for procedures in April of even numberedeven-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. In April 2012 and April 2016, the MHLW granted reimbursement status for da Vinci Prostatectomy (“dVP”)prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy for both malignant and benign conditions. An additional 7 da Vinci procedures were granted reimbursement effective April 1, 2020. These additional 1219 reimbursed procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at rates equal to the conventional, laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be no assurance that adoption will occur or, that the adoption pace for these procedures will be similar to prostatectomy or partial nephrectomy, given their higher reimbursement, or any other da Vinci procedure. If these procedures are not adopted and we are not successful in obtaining adequate procedure reimbursements for additional procedures, then the demand for our products in Japan could be limited.
In the third quarter of 2018, we filed for U.S. FDA clearance of our Ionendoluminal system for obtaining lung biopsies (see the description of the Ion endoluminal system in the New Product Introductions section below). There can be no assurance that we will receive U.S. FDA clearance for this product.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions that a medical device manufacturer may take in the field without reporting including, but not limited to, routine servicing and stock rotations.
As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action whichthat is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, return or replacement of the affected product or a field service visit to perform the correction.
Field actions as well as certain outcomes from regulatory activities can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer robotic-assisted surgery with the da Vinci Surgical System.Surgery, which could potentially result in a local market share shift. Adoption of da Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of da Vinci procedures as compared withto alternative treatment options for the same disease state or condition.
We use the number and type of da Vinci procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the number and type of da Vinci procedures provide meaningful supplemental information regarding our performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future revenue (including revenue from
usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type of da Vinci procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of da Vinci procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of da Vinci procedures are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of da Vinci Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize certain methods that rely on information collected from the systems installed for determining the number and type of da Vinci procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the number and type of da Vinci procedures may be impacted over time by various factors, including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are also susceptible to algorithmic or other technical errors. In addition, the relationship between the number and type of da Vinci procedures and our revenues may fluctuate from period to period, and da Vinci procedure volume growth may not correspond to an increase in revenue. The number and type of da Vinci procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da Vinci products and is not intended to promote for sale or use any Intuitive Surgical product outside of its licensed or cleared labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient value than non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general surgery, gynecologicurologic surgery, urologicgynecologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, cholecystectomies, and colorectal procedures.bariatrics. Target procedures in urology include prostatectomy and partial nephrectomy. Target procedures in gynecology include da Vinci hysterectomy (“dVH”), for both cancer and benign conditions and sacrocolpopexy. Target procedures in urology include prostatectomy (“dVP”) and partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci lobectomy and da Vincimitral valve repair.lobectomy. In head and neck surgery, target procedures include certain procedures resecting benign and malignant tumors classified as T1 and T2.transoral surgery. Not all the indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci Surgical Systems. Surgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as important limitations, restrictions, or contraindications.
In 2018,2021, approximately 1,037,0001,594,000 surgical procedures were performed with the da Vinci Surgical Systems, compared withto approximately 877,0001,243,000 and 753,0001,229,000 surgical procedures performed with da Vinci Surgical Systems in 20172020 and 2016,2019, respectively. The growthincrease in our overall procedure volume in 20182021 reflects the significant disruption caused by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section above, and was driven by growth in U.S. general surgery and gynecology procedures and worldwide urologicurology procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 753,0001,109,000 in 2018,2021, compared withto approximately 644,000876,000 in 2017,2020 and approximately 563,000883,000 in 2016.2019. General surgery was our largest and fastest growing U.S. specialty in 20182021 with procedure volume that grew to approximately 325,000589,000 in 2018,2021, compared withto approximately 246,000434,000 in 20172020 and 186,000approximately 421,000 in 2016.2019. Gynecology was our second largest U.S. surgical specialty in 20182021 with procedure volume ofthat grew to approximately 265,000316,000 in 2018,2021, compared with 252,000to approximately 267,000 in 20172020 and 246,000approximately 282,000 in 2016.2019. Urology was our third largest U.S. urologysurgical specialty in 2021 with procedure volume wasthat grew to approximately 128,000153,000 in 2018,2021, compared withto approximately 118,000134,000 in 20172020 and 109,000approximately 138,000 in 2016.2019.
Procedures Outside of the U.S.
Overall OUS proceduresprocedure volume with da Vinci Surgical Systems grew to approximately 284,000485,000 in 2018,2021, compared withto approximately 233,000367,000 in 20172020 and approximately 190,000346,000 in 2016. Procedure growth2019. Urology was our largest OUS specialty in most OUS markets was driven largely by urology2021 with procedure volume whichthat grew to approximately 175,000264,000 in 2018,2021, compared withto approximately 149,000214,000 in 20172020 and approximately 124,000206,000 in 2016.2019. General surgery was our second largest OUS specialty in 2021 with procedure volume that grew to approximately 101,000 in 2021, compared to approximately 68,000 in 2020 and gynecologic oncologyapproximately 62,000 in 2019. Thoracic procedures also contributed to OUS procedure growth.growth with higher growth rates than urology and general surgery procedures.
Recent Business Events and Trends
Procedures
Overall. During the year ended December 31, 2018, total Total da Vinci procedures performed by our customers grew approximately 18% compared with 16%28% for the year ended December 31, 2017. U.S. procedure growth during the year ended December 31, 2018, was2021, compared to approximately 17% compared with approximately 14%1% for the year ended December 31, 2017.2020. Total da Vinci procedures performed by our customers grew approximately 19% for the three months ended December 31, 2021, compared to approximately 6% for the three months ended December 31, 2020. The higher 2018full year and fourth quarter 2021 procedure growth was largely attributable to growth in U.S. general surgery and growth in OUS markets. The full year and fourth quarter 2020 procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The COVID-19 pandemic continued to impact our procedures in 2021 in geographies and markets where there was a resurgence of the virus. Delays in both the diagnosis of and treatments of disease reflecting patient concerns over contracting COVID-19 has also impacted the number of procedures. This was most pronounced in prostatectomy procedures.
U.S. da Vinci procedures grew approximately 27% for the year ended December 31, 2021, as compared to the prior year. U.S. da Vinci procedures declined approximately 1% for the year ended December 31, 2020. The 2021 U.S. procedure growth was largely attributable to growth in general surgery procedures, (mostmost notably hernia repair, colorectal, cholecystectomy, and bariatric procedures) and thoracic procedures, as well as moderate growth in the more mature gynecologic procedure category, most notably hysterectomies. The 2020 U.S. procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the 2021 procedure results reflected COVID-19 resurgences throughout the year, which also significantly impacted our procedures.
U.S. da Vinci procedures grew approximately 16% for the three months ended December 31, 2021, compared to approximately 5% for the three months ended December 31, 2020. The fourth quarter 2021 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably hernia repair, cholecystectomy, and urologicbariatric procedures. The fourth quarter 2020 U.S. procedure categories.results reflect significant disruption caused by the COVID-19 pandemic and regional resurgences, as noted in the COVID-19 Pandemic section above, whereas the fourth quarter of 2021 reflected a COVID-19 resurgence later in the quarter, which also impacted our procedures.
Procedure volume OUS da Vinci procedures grew approximately 32% for the year ended December 31, 2018, grew2021, compared to approximately 22% compared with approximately 23% growth6% for the year ended December 31, 2017,2020. The 2021 OUS procedure growth was driven by continued growth in dVPurologic procedures, including prostatectomies and partial nephrectomies, and earlier stage growth in general surgery (particularly colorectal), gynecology, and kidney cancerthoracic procedures. The 2021 OUS procedure growth also reflects continued adoption in European and Asian markets. We saw strong procedure growth in China, Japan, South Korea, and Germany during 2021. The 2020 OUS procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the 2021 procedure results reflected COVID-19 resurgences throughout the year, which also significantly impacted our procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.
OUS da Vinci procedures grew approximately 28% for the three months ended December 31, 2021, compared to approximately 11% for the three months ended December 31, 2020. The fourth quarter 2021 OUS procedure growth rate for 2018 was lower than thedriven by continued growth rate in the previous year primarily due to lowerurologic procedures, including prostatectomies, and earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. We saw strong procedure growth in China. Procedure growth in China, moderated as da Vinci system capacity expansion was constrained by system quota requirements, as the previous quota expired at the end of 2015Japan, Germany, South Korea, and the most recent quota was not issued untilItaly during the fourth quarter of 2018 (see discussion2021. The fourth quarter 2020 OUS procedure growth reflects significant procedure disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the fourth quarter of 2021 reflected a COVID-19 resurgence later in the China quota below under “OUS Procedures”).quarter, which also impacted our procedures.
U.S. General Surgery. In 2018,2021, general surgery was our largest and fastest growing specialtyprocedures in the U.S. with procedure volume that grew to approximately 325,000589,000 in 2018,2021, compared withto approximately 246,000434,000 in 2017,2020 and 186,000approximately 421,000 in 2016. Ventral2019. Inguinal and inguinalventral hernia combined,repairs, cholecystectomies, and bariatric procedures contributed the most incremental procedures in 2021, while cholecystectomies and bariatric procedures contributed to the most incremental growth in U.S. general surgery procedures in 20182020 and 2017. inguinal and ventral hernia repairs contributed the most incremental procedures in 2019.
We believe that growth in hernia repair using da Vinci hernia repair reflects improved clinical outcomes within certain patient populations, as well as potential cost benefits relative to certain alternative treatments. We believe hernia repair procedures represent a significant opportunity with the potential to drive growth in future periods. However, given the differences in surgical complexity amongassociated with treatment of various hernia patient populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what extent da Vinci hernia repair procedure volume will grow in the future. We expect a large portion of hernia repairs will continue to be performed via different modalities of surgery.
Given the already very high level of laparoscopic techniques used in cholecystectomy, it is unclear whether growth is sustainable and to what extent da Vinci may be adopted.
Bariatric procedures have grown significantly for the last two years. These procedures have been an increased area of focus in 2021 and 2020 and may also have benefited from certain patients prioritizing weight loss as obesity is a significant COVID-19 risk factor. In addition, our SureForm 60mm Stapler provides surgeons a more optimized robotic tool set for bariatric procedures. However, the diagnoses and treatment pathways for bariatric patients are long, and many of the patients may have begun their treatment pathway prior to the spread of COVID-19; therefore, we cannot provide any assurance that we will continue to see significant growth in bariatric procedures in future periods.
Adoption of da Vinci for colorectal procedures, which encompassesincludes several underlying procedures, including low anterior resections for rectal cancers and certain colon procedures for benign and cancerous conditions, has been ongoing for several years. This adoptionyears and is supported by our recently launchedcertain technologies, such as the da Vinci XiSurgical System, EndoWrist Stapler products, EndoWrist Vessel Sealer,and SureForm Staplers, energy devices, and Integrated Table Motion.
During 2018, we have seen increasing contributions to growth from other U.S. general surgery procedures, including cholecystectomy and bariatric procedures. Our third quarter 2018 introduction of the SureForm 60mm stapler product optimizes our robotic tool set for bariatric procedures. We introduced the SureForm 60mm stapler at a measured pace during the second half of 2018 and we intend to broaden availability in 2019.
U.S. Gynecology. In 2018,2021, gynecology procedures in the U.S. gynecology grew mid-single digitsto approximately 316,000 in 2021, compared to 2017. Procedure volume was approximately 265,000267,000 in 2018, compared with 252,0002020 and approximately 282,000 in 20172019, driven by an increase in benign hysterectomy procedures and, 246,000 in 2016.to a lesser extent, hysterectomy procedures for cancer. Combining robotic, laparoscopic, and vaginal approaches, MIS represents approximatelyabout 80% of the U.S. hysterectomy market for benign conditions. We believe that our growth in gynecologic procedures over the past several years has primarily been driven by consolidation of gynecologic procedures into higher volume surgeons that focus on cancer and complex surgeries.
Global Urology. Along with U.S. general surgery and gynecology, global urology procedures drovehave also been a strong contributor to our recentoverall procedure growth. In the U.S., dVPda Vinci is the largest urology procedure. 2018standard of care for the surgical treatment of prostate cancer, and we believe growth in U.S. dVP procedures moderated slightly compared with 2017. We believe our growth in U.S. dVP procedures is largely aligned with overall prostate cancer surgical volumes as dVPof prostate cancer. In 2021, U.S. prostatectomy procedures grew, compared to a modest decline in 2020. For OUS, prostatectomy is a highly penetrated procedure. DVPat varying states of adoption in different areas of the world but is the largest overall OUSda Vinci procedure. 2018In 2021, we saw high-teens growth in OUS dVP was consistent withprostatectomy procedures compared to slight growth in 2017. Adoption of dVP is at varying stages in our OUS markets.2020.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated that the presenceuse of ada Vinci system in a hospital or market increases the likelihood that a patient will receive nephron sparing surgery through a partial nephrectomy, which is typically conforms tothe surgical society guideline recommendations.recommended therapy.
OUS Procedures. The 20182021 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. In China, we have experiencedmarkets, although it also reflects disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. We saw strong procedure utilization on systems sold under the previous public hospital quota. In 2018, procedure growth in China, moderated as the previous quota expired at the end of 2015Japan, South Korea, Germany, Brazil, France, and the 38 systems shipped under that quota reached high levelsUK during 2021. In China, procedure growth accelerated as a result of utilization. In October 2018,new system placements during the China National Health Commission announced a new quota to allow the sale of 154 new surgical robots into China through 2020, which could include da Vinci Surgical Systems. This quota applies to the da Vinci Si and recently approved Xi Surgical Systems (refer to the previous discussion in the “Clearances and Approvals” section),year as well as competitors’ products when and if cleared by NMPA. Sales ofvery high system utilization.
System Demand
We placed 1,347 da Vinci Surgical Systems underin 2021, compared to 936 systems in 2020. The increase in systems placed reflects the quota are uncertain,significant disruption experienced as they are dependent on hospitals completing a tender process and receiving associated approvals. In Japan, we have experienced strongresult of the COVID-19 pandemic in 2020, as well as procedure growth since receiving national reimbursements for dVP and partial nephrectomy. However, as adoption for these procedures has progressed towards higher levels of penetration, growth in these two urologic procedures has moderated. Reimbursement for dVP and partial nephrectomy were set at a premium to reimbursements for open procedures, which was the dominant treatment modality. A total of 12 additional2021, more customers trading in da Vinci procedures were granted national reimbursements status effective April 1, 2018, including gastrectomy, low anterior resection, lobectomySi Surgical Systems for fourth generation systems in order to access fourth generation instruments and hysterectomy, for both malignantcapabilities as well as to standardize their system portfolio, and benign conditions. Procedure growth has accelerated in Japan since the new reimbursements became effective. However, these additional 12 procedures have reimbursement rates equal to conventional laparoscopic procedures, which are the dominant surgical approaches. Given the reimbursement level and laparoscopic penetration for these procedures, there can be no assurancefurther customer validation that adoption will occur or that the adoption pace for these procedures will be similar to other da Vinci procedures. If these procedures are not adopted and we are not successful in obtaining adequate procedure reimbursement for additional procedures, then the demand for our products in Japan could be limited.surgery addresses their quadruple aim objectives.
System Demand
Future demand forWhile 2021 placements grew 44% compared with 2020, future placements of da Vinci Surgical Systems will be impacted by factors includinga number of factors: supply chain risks; economic and geopolitical factors; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving health care environment under the current U.S. administration,healthcare environment; procedure growth rates,rates; hospital consolidation trends,trends; evolving system utilization and point of care dynamics,dynamics; capital replacement trends, including a declining number of older generation systems available for trade-in transactions; additional reimbursements in various global markets, including Japan,Japan: the timing around governmental tenders and authorizations, including China,China; the timing of when we receive regulatory clearance in our other OUS markets for ourda Vinci Xi Surgical System,da Vinci X Surgical System, and da Vinci SP Surgical System, and related instruments,instruments; and market response as well as other economic and geopolitical factors.response. Market acceptance of our recently launched da Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements.
Demand may also be impacted by roboticrobotic-assisted surgery competition, including from companies that have introduced products in the field of roboticrobotic-assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to: Auris Health,to, the following companies: Asensus Surgical, Inc.; Avatera Medicalavateramedical GmbH; CMR Surgical Limited;Ltd.; Johnson & Johnson and Google Inc. and their joint venture, Verb Surgical Inc.;Johnson; Medicaroid, Inc.; MedRobotics Corp.;Medrobotics Corporation; Medtronic PLC.;plc; meerecompany Inc.; MicroPort Scientific Corporation; Olympus Corp.Corporation; Samsung Group; Shandong Weigao Group Medical Polymer Company Ltd.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.;and Titan Medical Inc.; TransEnterix, Inc.;
Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and Wego Holding Co., Ltd.our supply chain, competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
Ion endoluminal system.SureForm 30 Curved-Tip Stapler and Reloads.In the third quarter of 2018, we filed for U.S. FDA clearance of our Ionendoluminal system for obtaining lung biopsies. Ion is our new flexible robotic-assisted catheter-based platform, designed to navigate through very small airways to reach peripheral nodes for biopsies. There can be no assurance that we will receive the clearance we are seeking.
Da Vinci SP Surgical System. In May 2018,December 2021, we obtained U.S. FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. It has been designed to help surgeons better visualize and reach anatomy through a combination of the 8 mm diameter instrument shaft and jaws, 120-degree cone of wristed articulation, and the curved tip. As it fits through the 8 mm da Vinci surgical system instrument cannula, the stapler allows different angles for surgeons to approach patient anatomy. Consistent with the other SureForm staplers, the 8 mm SureForm 30 Curved-Tip Stapler integrates SmartFire technology, which makes automatic adjustments to the firing process as staples are formed and the transection is made. The technology makes more than 1,000 measurements per second, helping achieve a consistent staple line. The 8 mm SureForm 30 stapler is expected to launch in the U.S. in 2022, with other countries to follow.
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. In August 2020, we received regulatory clearance in South Korea to market our E-100 generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach.Energy portfolio. The da Vinci SP system includes three, multi-jointed, wristed instrumentsE-100 generator is an electrosurgical generator developed to power two key instruments–Vessel Sealer Extend and the first da Vinci fully wristed 3DHD camera. The instruments and the camera all emerge through a single cannula and are triangulated around the target anatomy to avoid external instrument collisions that can occur in narrow surgical workspaces. The system enables flexible port placement and broad internal and external range of motion (e.g. 360-degrees of anatomical access) through the single SP arm. Surgeons control the fully articulating instruments and the camera SynchroSeal–on the da Vinci SP system, which uses the same fourth generation surgeon console as the da Vinci X and Xi systems. The da Vinci SP system provides surgeons with robotic-assisted technology designedXi Surgical Systems. The generator delivers high frequency energy for deepcutting, coagulation, and narrow access to tissue in the body. We anticipate pursuing further regulatory clearancesvessel sealing of tissues.
SureForm 45 Curved-Tip Stapler and Gray Reload. In July 2019, we obtained FDA clearance for the da Vinci SP, including transoral and colorectal applications, broadening the applicability of the SP platform over time. We plan to launch the da Vinci SP Surgical System in a measured fashion, having shipped 15 SP Surgical Systems to customers during 2018.
Da Vinci X Surgical System.In May 2017, we launched a newda Vinci model, theda VinciX, in the U.S. Theda VinciX system provides surgeons and hospitals with access to some of the most advanced fourth generation da Vinci surgery technology at a lower cost. Theda VinciX uses the same vision cart and surgeon console that are found on our flagship product, theda VinciXi system. For new customers, the da Vinci X System provides a cost effective capital entry point while providing a pathway for upgrading to other fourth generation systems. Existing customers may negotiate to trade in their older da Vinci systems in order to standardize their robotics programs onto the fourth generation platform, and choosing which system model by considering clinical and economic factors.
Theda VinciX enables optimized, focused-quadrant surgery including procedures like prostatectomy, hernia repair, and benign hysterectomy, among others. The system features flexible port placement and 3D digital optics, while incorporating the same advanced instruments and accessories as theda VinciXi. The new system drives operational efficiencies through set-up technology that uses voice and laser guidance, drape design that simplifies surgery preparations, and a lightweight, fully integrated endoscope.
SureForm 6045 Curved-Tip Stapler and SureForm 45 Staplers. Gray reload. We have also received CE mark clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. In July 2018, we received U.S. FDA clearance in the U.S. for SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads. In JanuarySeptember 2019, we received U.S. FDAregulatory clearance in the U.S. forJapan to market both our SureForm 45 instrument with White, Blue, Green, and Black 45mm reloads. The SureForm 60Curved-Tip Stapler and SureForm 45 areGray reload. We received regulatory clearance in South Korea to market our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload in June 2021 and July 2021, respectively. SureForm 45 Curved-Tip Stapler is a single-use, fully wristed stapling instrumentsinstrument with a curved tip intended for resection, transection, and/or creation of anastomoses. SureForm 45 Gray reload is a new, single-use cartridge that contains multiple staggered rows of implantable staples and a stainless steel knife. The SureForm 60 has45 Curved-Tip Stapler and Gray reload have particular utility in bariatricthoracic procedures while theand round out our SureForm 45 has particular utility in colorectal procedures. SureForm 60 and SureForm 45 broaden our existing stapler product line, which also includes EndoWrist Stapler 45 with White, Blue, and Green, 45mm reloads and EndoWrist 30 with White, Blue, Green, and Gray 30mm reloads.portfolio. Not all reloads or staplers are available for use on all systems or in all countries.
Da Vinci Vessel Sealer Extend.Endoscope Plus. In April 2018,June 2019, we received U.S.CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Vessel Sealer Extend,Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our newest instrumentda Vinci Endoscope Plus in December 2019 and May 2020, respectively. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the Vessel Sealing family of products. Daoperating room and increasing procedure efficiency. In February 2020, we received CE mark clearance for our da Vinci Vessel Sealer Extend is a single-use, fully wristed bipolar electrosurgical instrument compatible withHandheld Camera. We broadly launched the da Vinci Handheld Camera in our fourth generation multiport systems. It is intended for grasping and blunt dissection of tissue and for bipolar coagulation and mechanical transection of vessels up to 7mm in diameter and tissue bundles that fitEuropean direct markets as well as in the jawsU.S. in May 2020 and June 2020, respectively.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The Ion system uses an ultra-thin articulating robotic catheter that can articulate 180 degrees in all directions. The outer diameter of the instrument.
Intuitive Surgical-Fosun Joint Venture
In September 2016, we agreedcatheter is 3.5mm, which allows physicians to establishnavigate through small and tortuous airways to reach nodules in most airway segments within the Joint Venturelung. The Ion system’s flexible biopsy needle can also pass through very tight bends via Ion’s catheter to research, develop, manufacture, and sell robotic-assisted catheter-based medical devices.collect tissue in the peripheral lung. The catheter-based technology will initially target early diagnosis and cost-effective treatment of lung cancer, onecatheter’s 2mm working channel can also accommodate other biopsy tools, such as biopsy forceps or cytology brushes, if necessary. Our rollout of the most commonly diagnosed forms of cancer in the world. The technology will be used in robotic-assisted medical devices based on cathetersIon system is progressing well, and incorporates proprietary intellectual property developed or owned by us. Distribution of catheter-based medical devices in China will be conducted by the Joint Venture, while distribution outside of China will be conducted by us. The Joint Venture is located in China. In January 2019, the Joint Venture acquired these distribution rights along with certain other assets relatedwe are continuing to the distribution business of Chindex, a wholly-owned subsidiary of Fosun Pharma, and began direct operations for da Vinci products and services in China. The Joint Venture is owned 60% by us and 40% by Fosun Pharma. Asgather additional clinical evidence. We have placed 129 Ion systems as of December 31, 2018,2021.
Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the companiespatient anatomy (initially targeting kidneys) to aid surgeons in both the pre- and intra-operative settings. The
service is currently being used in pilot studies. We launched our first pilot site in 2019, continued in 2020 with select sites, and have contributed $30 millionsix pilot sites as of upDecember 31, 2021.
Acquisition of Orpheus Medical
In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned subsidiaries to deepen and expand our integrated informatics platform. Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos. Orpheus Medical is a wholly owned subsidiary of Intuitive.
Intuitive Ventures
In 2020, we launched Intuitive Ventures, an inaugural $100 million stipulated by the joint venture agreement. In 2018, the net loss attributablefund focused on investment opportunities in companies that share Intuitive’s commitment to the noncontrolling interestadvancing positive outcomes in the joint venture was $2.9 million.healthcare.
We do not expect the Joint Venture to generate revenue in 2019 related to the sale of robotic-assisted catheter-based medical devices. There can be no assurance that we and the Joint Venture can successfully complete the development of the robotic-assisted catheter-based medical devices; or that we and the Joint Venture will successfully commercialize such products. There can also be no assurance that the Joint Venture will not require additional contributions to fund its business; that the Joint Venture will become profitable; or that the acquired Chindex assets will be successfully integrated and the expected benefits realized.
20182021 Operational and Financial Highlights
•Total revenue increased by 19%31% to $3.7$5.7 billion for the year ended December 31, 2018,2021, compared with $3.1to $4.4 billion for the year ended December 31, 2017.2020.
•Approximately 1,037,0001,594,000 da Vinci procedures were performed during the year ended December 31, 2018,2021, an increase of 28% compared to approximately 18% compared with approximately 877,0001,243,000 da Vinci procedures for the year ended December 31, 2017.2020.
Instrument•Instruments and accessoryaccessories revenue increased by 20%26% to $2.0$3.10 billion for the year ended December 31, 2018,2021, compared with $1.6to $2.46 billion for the year ended December 31, 2017.2020.
•Systems revenue increased by 21%44% to $1,127.1 million$1.69 billion for the year ended December 31, 2018,2021, compared with $928.4 millionto $1.18 billion for the year ended December 31, 2017. 2020.
•A total of 9261,347da Vinci Surgical Systems were shipped forplaced during the year ended December 31, 2018,2021, an increase of 44% compared with 684 forto 936 systems during the year ended December 31, 2017.
2020.•As of December 31, 2018,2021, we had a da Vinci Surgical System installed base of approximately 4,9866,730 systems, an increase of approximately 13%12% compared withto the installed base of approximately 5,989 systems as of December 31, 2017.2020.
•Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, increased 17% relative to 2020.
•During the year ended December 31,2021, we placed 93 Ion systems, an increase of 258% compared to 26 Ion systems during the year ended December 31, 2020.
•Gross profit as a percentage of revenue decreased to 69.9%was 69.3% for the year ended December 31, 2018,2021, compared with 70.2%to 65.6% for the year ended December 31, 2017. Lower gross profit in 2018 is primarily attributable to lower service margins.2020.
•Operating income increased by 13%73% to $1,199.4 million$1.82 billion for the year ended December 31, 2018,2021, compared with $1,062.9 millionto $1.05 billion for the year ended December 31, 2017.2020. Operating income included $262.6$457 million and $209.9$399 million of share-based compensation expense related to employee stock plans and $37.0 million and $60.9 million of intangible asset-related charges for the years ended December 31, 2018,2021, and 2017,2020, respectively. Operating income for the years ended December 31, 2018, and 2017, also included pre-tax net litigation charges of $45.2 million and $25.3 million, respectively. Operating income for the year ended December 31, 2018, included $25.2 million of expense related to a contribution made to the Intuitive Foundation.
•As of December 31, 2018,2021, we had $4.8$8.62 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $987.9 million$1.75 billion, compared withto $6.87 billion as of December 31, 2017,2020, primarily as a result of cash generated from operating activities.activities, partially offset by capital expenditures.
| |
• | In August 2018, we filed for U.S. FDA clearance of the Ionendoluminal system, our new flexible robotic-assisted catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies.
|
Results of Operations
We adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, usingThis section of the full retrospective method. The 2017Annual Report on Form 10-K generally discusses 2021 and 2016 financial results presented below have been restated to reflect2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this adoption. Refer to “Note 2. Summaryreport on Form 10-K can be found in “Management’s Discussion and Analysis of Significant Accounting Policies” withinFinancial Condition and Results of Operations” in Part II, Item 87 of thisthe Company’s Annual Report on Form 10-K for further information on the impact of adopting ASC 606.fiscal year ended December 31, 2020.
The following table sets forth, for the years indicated, certain Consolidated Statements of Income information (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | % of
total
revenue | | 2020 | | % of
total
revenue | | 2019 | | % of
total
revenue |
| Revenue: | | | | | | | | | | | |
| Product | $ | 4,793.9 | | | 84 | % | | $ | 3,634.6 | | | 83 | % | | $ | 3,754.3 | | | 84 | % |
| Service | 916.2 | | | 16 | % | | 723.8 | | | 17 | % | | 724.2 | | | 16 | % |
| Total revenue | 5,710.1 | | | 100 | % | | 4,358.4 | | | 100 | % | | 4,478.5 | | | 100 | % |
| Cost of revenue: | | | | | | | | | | | |
| Product | 1,464.1 | | | 26 | % | | 1,230.3 | | | 28 | % | | 1,119.1 | | | 25 | % |
| Service | 287.5 | | | 5 | % | | 266.9 | | | 6 | % | | 249.2 | | | 6 | % |
| Total cost of revenue | 1,751.6 | | | 31 | % | | 1,497.2 | | | 34 | % | | 1,368.3 | | | 31 | % |
| Product gross profit | 3,329.8 | | | 58 | % | | 2,404.3 | | | 55 | % | | 2,635.2 | | | 59 | % |
| Service gross profit | 628.7 | | | 11 | % | | 456.9 | | | 11 | % | | 475.0 | | | 10 | % |
| Gross profit | 3,958.5 | | | 69 | % | | 2,861.2 | | | 66 | % | | 3,110.2 | | | 69 | % |
| Operating expenses: | | | | | | | | | | | |
| Selling, general and administrative | 1,466.5 | | | 25 | % | | 1,216.3 | | | 28 | % | | 1,178.4 | | | 26 | % |
| Research and development | 671.0 | | | 12 | % | | 595.1 | | | 14 | % | | 557.3 | | | 12 | % |
| Total operating expenses | 2,137.5 | | | 37 | % | | 1,811.4 | | | 42 | % | | 1,735.7 | | | 38 | % |
| Income from operations | 1,821.0 | | | 32 | % | | 1,049.8 | | | 24 | % | | 1,374.5 | | | 31 | % |
| Interest and other income, net | 69.3 | | | 1 | % | | 157.2 | | | 4 | % | | 127.7 | | | 3 | % |
| Income before taxes | 1,890.3 | | | 33 | % | | 1,207.0 | | | 28 | % | | 1,502.2 | | | 34 | % |
| Income tax expense | 162.2 | | | 3 | % | | 140.2 | | | 3 | % | | 120.4 | | | 3 | % |
| Net income | 1,728.1 | | | 30 | % | | 1,066.8 | | | 24 | % | | 1,381.8 | | | 31 | % |
| Less: net income attributable to noncontrolling interest in joint venture | 23.5 | | | — | % | | 6.2 | | | — | % | | 2.5 | | | — | % |
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,704.6 | | | 30 | % | | $ | 1,060.6 | | | 24 | % | | $ | 1,379.3 | | | 31 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | % of total revenue | | 2017 | | % of total revenue | | 2016 | | % of total revenue |
| Revenue: | | | | | | | | | | | |
| Product | $ | 3,089.1 |
| | 83 | % | | $ | 2,565.3 |
| | 82 | % | | $ | 2,195.8 |
| | 81 | % |
| Service | 635.1 |
| | 17 | % | | 572.9 |
| | 18 | % | | 510.7 |
| | 19 | % |
| Total revenue | 3,724.2 |
| | 100 | % | | 3,138.2 |
| | 100 | % | | 2,706.5 |
| | 100 | % |
| Cost of revenue: | | | | | | | | | | | |
| Product | 906.2 |
| | 24 | % | | 756.3 |
| | 24 | % | | 662.6 |
| | 24 | % |
| Service | 213.9 |
| | 6 | % | | 179.9 |
| | 6 | % | | 151.0 |
| | 6 | % |
| Total cost of revenue | 1,120.1 |
| | 30 | % | | 936.2 |
| | 30 | % | | 813.6 |
| | 30 | % |
| Product gross profit | 2,182.9 |
| | 59 | % | | 1,809.0 |
| | 58 | % | | 1,533.2 |
| | 57 | % |
| Service gross profit | 421.2 |
| | 11 | % | | 393.0 |
| | 12 | % | | 359.7 |
| | 13 | % |
| Gross profit | 2,604.1 |
| | 70 | % | | 2,202.0 |
| | 70 | % | | 1,892.9 |
| | 70 | % |
| Operating expenses: | | | | | | | | | | | |
| Selling, general and administrative | 986.6 |
| | 27 | % | | 810.5 |
| | 26 | % | | 703.6 |
| | 26 | % |
| Research and development | 418.1 |
| | 11 | % | | 328.6 |
| | 10 | % | | 239.6 |
| | 9 | % |
| Total operating expenses | 1,404.7 |
| | 38 | % | | 1,139.1 |
| | 36 | % | | 943.2 |
| | 35 | % |
| Income from operations | 1,199.4 |
| | 32 | % | | 1,062.9 |
| | 34 | % | | 949.7 |
| | 35 | % |
| Interest and other income, net | 80.1 |
| | 2 | % | | 41.9 |
| | 1 | % | | 35.6 |
| | 1 | % |
| Income before taxes | 1,279.5 |
| | 34 | % | | 1,104.8 |
| | 35 | % | | 985.3 |
| | 36 | % |
| Income tax expense | 154.5 |
| | 4 | % | | 433.9 |
| | 14 | % | | 247.0 |
| | 9 | % |
| Net income | 1,125.0 |
| | 30 | % | | 670.9 |
| | 21 | % | | 738.3 |
| | 27 | % |
| Less: net loss attributable to noncontrolling interest in joint venture | (2.9 | ) | | — | % | | — |
| | — | % | | — |
| | — | % |
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,127.9 |
| | 30 | % | | $ | 670.9 |
| | 21 | % | | $ | 738.3 |
| | 27 | % |
Total Revenue
Total revenue increased by 19%31% to $3.7$5.7 billion for the year ended December 31, 2018,2021, compared with $3.1to $4.4 billion for the year ended December 31, 2017.2020. Total revenue for the year ended December 31, 2017, increased2020, decreased by 16%3% compared with $2.7to $4.5 billion for the year ended December 31, 2016.2019. The increase in total revenue for the year ended December 31, 2018, reflects 20%2021, resulted from 44% higher instrumentsystems revenue, driven by 44% higher system placements, 26% higher instruments and accessoryaccessories revenue, driven by approximately 18%28% higher procedure volume 21% higher systems revenue,partially offset by the effects of the Extended Use Program, and 11%27% higher service revenue. The increaseIn conjunction with our 2020 COVID-19 Customer Relief Program implemented in totalthe second quarter of 2020, service revenue for the year ended December 31, 2017, reflects 17% higher instrument and accessory revenue drivenin 2020 was reduced by approximately 16% higher procedure volume, 16% higher systems revenue, and 12% higher$80 million as a result of service revenue.
fee credits provided to customers.
Revenue denominated in foreign currencies was approximately 20%, 17%, and 19%as a percentage of total revenue was approximately 23%, 23%, and 20% for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign currency rate fluctuations did not have a material impact on total revenue for the year ended December 31, 2018,2021, as compared with 2017,to 2020, or for the year ended December 31, 2017,2020, as compared with 2016.to 2019.
Revenue generated in the U.S. accounted for 71%67%, 73%68%, and 72%70% of total revenue duringfor the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and method of treatment, in the U.S., reimbursement structures supportive of innovation and minimally invasive surgery, MIS,
and our initial investments focused on our U.S. infrastructure. We have been investing in our business in the OUS marketmarkets, and our OUS procedures have grown faster in proportion to U.S. procedures. We expect that our OUS procedures and revenue will make up a greater portion of our business in the long term.
As the COVID-19 pandemic is expected to continue to cause strain on hospital resources, as outlined in the COVID-19 Pandemic section above, we cannot reliably estimate the extent total revenue will be impacted in the first quarter of 2022 and beyond.
The following table summarizes our revenue and
da Vinci Surgical Systemsystem unit
shipmentsplacements for the years ended December 31,
2018, 2017,2021, 2020, and
2016,2019, respectively (in millions, except percentages and unit
shipments)placements):
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Revenue | | | | | | Revenue | | | | | |
| Instruments and accessories | $ | 1,962.0 |
| | $ | 1,636.9 |
| | $ | 1,395.8 |
| Instruments and accessories | $ | 3,100.5 | | | $ | 2,455.7 | | | $ | 2,408.2 | |
| Systems | 1,127.1 |
| | 928.4 |
| | 800.0 |
| Systems | 1,693.4 | | | 1,178.9 | | | 1,346.1 | |
| Total product revenue | 3,089.1 |
| | 2,565.3 |
| | 2,195.8 |
| Total product revenue | 4,793.9 | | | 3,634.6 | | | 3,754.3 | |
| Services | 635.1 |
| | 572.9 |
| | 510.7 |
| Services | 916.2 | | | 723.8 | | | 724.2 | |
| Total revenue | $ | 3,724.2 |
| | $ | 3,138.2 |
| | $ | 2,706.5 |
| Total revenue | $ | 5,710.1 | | | $ | 4,358.4 | | | $ | 4,478.5 | |
| United States | $ | 2,633.5 |
| | $ | 2,285.8 |
| | $ | 1,956.4 |
| |
| U.S. | | U.S. | $ | 3,853.2 | | | $ | 2,962.7 | | | $ | 3,129.5 | |
| OUS | 1,090.7 |
| | 852.4 |
| | 750.1 |
| OUS | 1,856.9 | | | 1,395.7 | | | 1,349.0 | |
| Total revenue | $ | 3,724.2 |
| | $ | 3,138.2 |
| | $ | 2,706.5 |
| Total revenue | $ | 5,710.1 | | | $ | 4,358.4 | | | $ | 4,478.5 | |
| % of Revenue - U.S. | 71 | % | | 73 | % | | 72 | % | % of Revenue - U.S. | 67 | % | | 68 | % | | 70 | % |
| % of Revenue - OUS | 29 | % | | 27 | % | | 28 | % | % of Revenue - OUS | 33 | % | | 32 | % | | 30 | % |
| | | | | | | |
| Instruments and accessories | $ | 1,962.0 |
| | $ | 1,636.9 |
| | $ | 1,395.8 |
| Instruments and accessories | $ | 3,100.5 | | | $ | 2,455.7 | | | $ | 2,408.2 | |
| Services | 635.1 |
| | 572.9 |
| | 510.7 |
| Services | 916.2 | | | 723.8 | | | 724.2 | |
| Operating lease | 51.4 |
| | 25.9 |
| | 16.6 |
| |
| Operating lease revenue | | Operating lease revenue | 276.9 | | | 176.7 | | | 106.9 | |
| Total recurring revenue | $ | 2,648.5 |
| | $ | 2,235.7 |
| | $ | 1,923.1 |
| Total recurring revenue | $ | 4,293.6 | | | $ | 3,356.2 | | | $ | 3,239.3 | |
| % of Total revenue | 71 | % | | 71 | % | | 71 | % | % of Total revenue | 75 | % | | 77 | % | | 72 | % |
| | | | | | | |
| Unit Shipments by Region: | | | | | | |
| U.S. unit shipments | 581 |
| | 417 |
| | 338 |
| |
| OUS unit shipments | 345 |
| | 267 |
| | 199 |
| |
| Total unit shipments* | 926 |
| | 684 |
| | 537 |
| |
| *Systems shipped under operating leases (included in total unit shipments) | 229 |
| | 108 |
| | 62 |
| |
| Da Vinci Surgical System Placements by Region: | | Da Vinci Surgical System Placements by Region: | |
| U.S. unit placements | | U.S. unit placements | 865 | | | 600 | | | 728 | |
| OUS unit placements | | OUS unit placements | 482 | | | 336 | | | 391 | |
| Total unit placements* | | Total unit placements* | 1,347 | | | 936 | | | 1,119 | |
| *Systems placed under operating leases (included in total unit placements) | | *Systems placed under operating leases (included in total unit placements) | 517 | | | 317 | | | 384 | |
| | | | | | | |
| Unit Shipments involving System Trade-ins: | | | | | | |
| Unit shipments involving trade-ins | 277 |
| | 163 |
| | 156 |
| |
| Unit shipments not involving trade-ins | 649 |
| | 521 |
| | 381 |
| |
| Da Vinci Surgical System Placements involving System Trade-ins: | | Da Vinci Surgical System Placements involving System Trade-ins: | |
| Unit placements involving trade-ins | | Unit placements involving trade-ins | 510 | | | 447 | | | 442 | |
| Unit placements not involving trade-ins | | Unit placements not involving trade-ins | 837 | | | 489 | | | 677 | |
| | Ion System Placements | | Ion System Placements | 93 | | | 26 | | | 10 | |
Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses.
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 20152016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could reverse based onchange due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they reverse.change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.
We are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided fromby our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements beyond one year and for the foreseeable future. However, as a result of the COVID-19 pandemic, we may experience reduced cash flow from operations if we experience decreased revenues or if we extend payment terms on sales and operating lease and usage-based arrangements.
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make judgments, estimates, and assumptions. See “Note 2. Summary of Significant Accounting Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates, and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
No significant impairment charges were recorded during the years ended December 31, 2018, 2017,2021, 2020, and 2016.2019. As of December 31, 2018,2021, and 2017,2020, net unrealized losses on investments of $9.8$16.0 million and $11.3$29.5 million, net of tax, respectively, were included in accumulated other comprehensive loss.income/(loss).
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. We regularly review standalone selling prices and maintain internal controls over establishing and updating these estimates.
Our system sales arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are billed at a stated service price. Revenue that is allocated to the service obligation is deferred and recognized ratably over the service period.
Similarly, we make estimates of the collectability of accounts receivable, especially analyzing the aging and nature of accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount that we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported accounts receivable and operating expenses could result.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that the carrying value of an asset is not recoverable and its carrying amount exceeds its fair value. We evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record additional impairment charges.
The valuation and classification of intangible assets and goodwill and the assignment of useful lives for purposes of amortization involves judgments and the use of estimates. The evaluation of these intangiblesintangible assets and goodwill for impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions could potentially require future adjustments to the assumptions made. When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful lives. No impairment charge or accelerated amortization was recorded for the years ended December 31, 2018, 2017,2021, 2020, and 2016.2019. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts. If conditions are different from management’s current estimates, material write-downs of long-lived assets may be required, which would adversely affect our operating results.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to exercise. We determine expected term based on historical exercise patterns and our expectation of the time it will take for employees to exercise options still outstanding.
We must assess the likelihood that we will be able to recover our deferred tax assets. In the event that all or part of our deferred tax assets are not recoverable in the future, we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In order for our deferred tax assets to be recoverable, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, in determining the need for a valuation allowance. As of December 31, 2018,2021, we believe it is more likely than not that our deferred tax assets ultimately will be recovered with the exception of our California deferred tax assets. We believe that, due to the computation of California taxes under the single sales factor, it is more likely than not that our California deferred tax assets will not be realized. Should there be a change in our ability to recover our deferred tax assets, our tax provision would be affected in the period in which such change takes place.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, then the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
other matters. We record a liability and related charge to earnings in our Consolidated Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. Our assessment is re-evaluated each accounting period and is based on all available information, including discussion with any outside legal counsel that represents us. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a loss is reasonably possible, but not probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the Notes to the Consolidated Financial Statements.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in
judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements.
The primary objective of our investment activities is to preserve principal while atsupporting the same time maximizing the income we receive from our investments without significantly increasing risk.Company’s liquidity requirements. To achieve this objective, we maintain oura diversified portfolio of cash equivalents and short- and long-term investments in a variety of high quality securities, including U.S. treasuries,treasury and U.S. government agencies,agency securities, municipal notes, corporate debt, cash deposits, money market funds,notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and taxable or tax exempt municipal bonds.money market funds. The securities are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. The weighted average duration of our portfolio as of December 31, 2018,2021, was approximately 0.71.2 years. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. A hypothetical increase or decrease in interest rate by 25 basis points would have resulted in a decrease or increase in the fair value of our net investment position of approximately $8.5$23 million, respectively, as of December 31, 2018.2021. We do not utilize derivative financial instruments to manage our interest rate risks.
The majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we generally sell our products and services in local currencies where we have direct distribution channels. We operate in a number of markets on a direct sales basis and incur operating expenses in local currencies. We also purchase certain product components from non-U.S. suppliers in local currency. As a result, because a portion of our operations consist of sales activities outside of the U.S., we have foreign exchange exposures to non-U.S. dollar revenues, operating expenses, accounts receivable, accounts payable, and foreign currency bank balances.
Although we sell to distributors outside of the U.S. in U.S. dollars, strengthening of the dollar can impact our distributors’ margins and could impact the end customers’ ability to purchase our product if our distributors seek to recover the impact of the change in the dollar by increasing product and service prices. Less than 10% of our revenue is conducted through distributors outside the U.S. Strengthening of the dollar relative to non-U.S. currencies could have an adverse impact on our business.
Our operations outside of the U.S. are subject to risks typical of operations outside of the U.S. including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
All other schedules have been omitted, because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2014.
