| INTUITIVE SURGICAL INC ITEM 1A RISK FACTORS RISKS RELATING TO OUR BUSINESS IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE 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 da Vinci surgery as a preferred method of performing surgery will be crucial to our success |
| If our products fail to achieve market acceptance, hospitals 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 |
| 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 |
| BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO PURCHASE OUR COMPETITORS’ PRODUCTS OR MAY NOT ACCEPT DA VINCI SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE Da Vinci surgery is a new technology that will compete with established and emerging treatment options in both disease management and reconstructive medical procedures |
| These competitive treatment options may take the form of traditional minimally invasive surgery, open surgery, interventional approaches, or 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 |
| We cannot be certain that physicians will use our products to replace or supplement established treatments or that our products will be competitive with current or future technologies |
| In addition, we may face competition from companies that develop wristed, robotic or computer-assisted surgical systems and products in the future |
| Our revenues may be reduced 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 |
| We may not be able to maintain or improve our competitive position against current or potential competitors, especially those with greater resources |
| WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER Our da Vinci Surgical System has a lengthy sales and purchase order cycle because it is a major capital item and generally requires the approval of senior management at purchasing institutions |
| These factors may contribute to substantial fluctuations in our quarterly operating results |
| Because of these fluctuations, it is likely that in some future quarters 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 also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance |
| In addition, 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 |
| 20 ______________________________________________________________________ [46]Table of Contents INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL ACTIVITIES Our business currently depends in part on our activities in Europe and other foreign markets |
| Sales to markets outside of the United States accounted for approximately 17prca, 21prca, and 24prca of our sales for 2005, 2004 and 2003, respectively |
| We are subject to a number of challenges that specifically relate to our international business activities |
| These challenges include: • failure of local laws to provide the same degree of protection against infringement of our intellectual property; • protectionist laws and business practices that favor local competitors, which could slow our growth in international markets; • the risks associated with foreign currency exchange rate fluctuation; • the expense of establishing facilities and operations in new foreign markets; and • building an organization capable of supporting geographically dispersed operations |
| Currently, more than half of our international sales are denominated in United States dollars |
| As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets |
| If we are unable to meet and overcome these challenges, our international operations may not be successful, which would limit the growth of our business |
| 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 products incorporate mechanical parts, electrical components, optical components and computer software, any of which can contain errors or failures, especially when first introduced |
| 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, we expect that our customers will have an increased sensitivity to such defects |
| In the past, we have voluntarily recalled certain products as a result of performance problems |
| We cannot assure you that our products will not experience errors or performance problems in the future |
| If we experience flaws or performance problems, any 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; • increased service or warranty costs; or • product liability claims |
| THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT COULD BE EXPENSIVE, DIVERT MANAGEMENT’S ATTENTION AND HARM OUR BUSINESS Our business exposes us to significant risks of product liability claims |
| The medical device industry has historically been litigious, and we face financial exposure to product liability claims if the use of our products 21 ______________________________________________________________________ [47]Table of Contents were to cause injury or death |
| There is also the possibility that defects in the design or manufacture of our products might necessitate a product recall |
| Any weaknesses in training and services associated with our products may also be subject to product liability lawsuits |
| Although we maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims |
| Particularly as sales of our products increase, we may be unable to maintain product liability insurance in the future at satisfactory rates or in adequate amounts |
| A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs |
| Product liability claims have been made against our company in the past |
| A product liability claim or any product recalls could also harm our reputation or result in a decline in revenues |
| WE MAY ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE Manufacturing our products is a complex process |
| We may encounter difficulties in scaling up production of our products, including: • problems involving production yields; • quality control and assurance; • component supply shortages; • 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 |
| 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 purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory |
| The disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our profitability |
| 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 |
| IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN 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 Domestic institutions will typically bill 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 permit reimbursement for surgical procedures performed using our products, we may not be able to generate the revenues necessary to support our business |
| Our success in international markets also depends upon the eligibility of our products for reimbursement through government- sponsored health care payment 22 ______________________________________________________________________ [48]Table of Contents systems and third-party payors |
| Reimbursement practices vary significantly by country |
| Many international 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 reimbursement in any country within a particular time |
| In addition, health care cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we intend to sell our products and these efforts are expected to continue |
| IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED We are highly dependent on the principal members of our management and scientific staff |
| Our product development plans depend, in part, on our ability to attract and retain engineers with experience in mechanics, 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 competition for such personnel among technology and healthcare companies and universities |
| The loss of any of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to compete |
| RECENT CHANGES IN THE REQUIRED ACCOUNTING TREATMENT FOR STOCK OPTIONS WILL HAVE A MATERIAL ADVERSE IMPACT ON OUR NET INCOME AND NET INCOME PER SHARE AND MAY ADVERSELY AFFECT OUR STOCK PRICE In December 2004, the Financial Accounting Standards Board issued SFAS Nodtta 123 (revised 2004) “Share Based Payment,” or SFAS 123R, pursuant to which we must measure all stock-based compensation awards, including grants of employee stock options, using a fair value-based method and record such expense in our consolidated financial statements |
| This requirement to expense stock-based compensation awards is effective for public companies for annual periods beginning after June 15, 2005 |
| Accordingly, SFAS 123R will be effective for us starting January 1, 2006 |
| Our net income and our earnings per share will be significantly reduced or may reflect a loss |
| We currently calculate stock-based compensation expense using the Black-Scholes option-pricing model and disclose the pro forma impact on net income (loss) and net income (loss) per share in our consolidated financial statements |
| A fair value based model such as the Black-Scholes option-pricing model requires the input of highly subjective assumptions and does not necessarily provide a reliable single measure of the fair value of stock options |
| Assumptions used under the Black-Scholes option-pricing model that are highly subjective include the expected stock price volatility and expected life of an option |
| The actual impact on our results of operations upon adoption of the new standard could be significantly different from the pro forma information included in Note 2 to our consolidated financial statements due to variations in estimates and assumptions used in the calculation |
| These assumptions will require management to predict the future stock performance and employees’ stock option exercise behavior, which are beyond management’s control |
| Management will apply our best judgement in making the assumptions |
| However, the actual stock based compensation expense upon adoption of the new standard could be significantly different from the pro forma information |
| RISKS RELATING TO OUR REGULATORY ENVIRONMENT OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE UNITED STATES Our products and operations are subject to extensive regulation in the United States by the US Food and Drug Administration, or FDA The FDA regulates the research, testing, manufacturing, safety, labeling, storage, record keeping, promotion, distribution and production of medical devices in the United States to ensure that 23 ______________________________________________________________________ [49]Table of Contents medical products distributed domestically are safe and effective for their intended uses |
| In order for us to market certain products for use in the United States, we generally must first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfather 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, or PMA, for the modified product before we are permitted to market the products in the US 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 grandfather status, we will be required to obtain FDA approval by submitting a PMA 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 sale of new products in the United States |
| Furthermore, the FDA may request additional data or require us to conduct further testing, or compile more data, including clinical data and clinical studies, in support of a 510(k) submission |
| The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA, which is typically a much more complex 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 |
| We may not be able to meet the requirements to obtain 510(k) clearance or PMA approval, or 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 and results of operations |
| In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a device, a company must, among other things, apply for and obtain Institutional Review Board, or 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, or IDE, application |
| Most of our products to date have been 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 US for any new devices we intend to market in the United States in the future |
| If we obtain such approvals, we may not be able to 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 |
| COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING PROCESS, AND OUR FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT ENFORCEMENT ACTIONS Because our products, including the da Vinci Surgical System, are commercially distributed, numerous postmarket regulatory requirements apply, including the following: • Quality System Regulation, or QSR, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the 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; 24 ______________________________________________________________________ [50]Table of Contents • the Reports of Corrections and Removals regulation, 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 FFDCA that may pose a risk to health; and • the Medical Device Reporting regulation, which requires that manufacturers 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 |
| 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 a regulatory letter to a public warning letter to more severe civil and criminal sanctions |
| 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 |
| We have modified the labeling; advertising and user training for the da Vinci Surgical System to call out specific procedures that we believe are within the scope of our existing 510(k) clearances |
| We cannot assure you 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 |
| We also have modified the hardware and software in the da Vinci Surgical System since clearance in ways that we believe do not require new 510(k) clearance |
| We cannot assure you that the FDA would agree with our determinations not to seek new 510(k) clearance for any of these changes |
| Computer Motion also modified the hardware and software in its products subsequent to 510(k) clearance without seeking new clearance |
| We cannot assure you that the FDA would agree with the determinations not to seek new 510(k) clearance for any of these changes |
| The FDA could impose enforcement sanctions and/or require us to obtain 510(k) clearance for any modification to our products or Computer Motion’s products |
| We may be prohibited from marketing the modified device until such 510(k) clearance is granted |
| In December 2002, the FDA inspected our Sunnyvale manufacturing facility and issued a Form FDA 483 setting forth three observed compliance deficiencies relating to the QSR and two observed deficiencies relating to the Reports of Corrections and Removals regulation |
| In January 2003, we wrote to the FDA indicating our response to each observation with proposed corrective actions |
| That same month, the FDA informed us that the adequacy of our promised corrections and actions would be verified during the next inspection of our facility |
| We cannot assure you that, upon reinspection, the FDA will find that our promised corrective actions are appropriate or that they have been adequately implemented |
| We also cannot assure you that the FDA will not find other deficiencies in our compliance with the QSR and other postmarket regulations |
| In June 2003, we acquired Computer Motion and have integrated its FDA compliance quality system into our own |
| As a result of the integration and review, we identified that Computer Motion has had deficiencies in complaint handling, MDR reporting and Corrections and Removals reporting in the last several years that required submission of retroactive reports to the FDA We reported 52 MDRs and we believe that our reporting decisions regarding these 52 complaints is conservative in part because many of the complaints likely would not have been reportable if more information had been available |
| Also, to our knowledge, none of the reported events resulted in a death or serious injury, prolonged hospitalization, or medical intervention to prevent death or serious injury |
| Computer Motion did respond to complaint trends, and it addressed the trends through corrective actions |
| Accordingly, the incidence of many of the types of events in the reports had been mitigated by June 2003 |
| Our review also suggests that significant complaint trends identified by Computer Motion over the period of four years were addressed by corrective actions, which have proven to be effective over time |
| Computer Motion’s product modifications were completed without 510(k) clearance and we believe that they do not require new 510(k) clearance |
| We cannot assure you that the FDA would agree with our determinations not to seek new 510(k) clearance for any of these changes |
| 25 ______________________________________________________________________ [51]Table of Contents We cannot assure you that the FDA will not seek to impose enforcement actions on us for Computer Motion violations preceding our acquisition of Computer Motion, that the FDA will agree that since the acquisition we have corrected all regulatory problems, or that our review of Computer Motion’s complaint handling will not lead us to initiate recalls or field actions to remedy problems with Computer Motion products already in the field |
| OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL REQUIREMENTS IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN COUNTRIES To be able to market and sell our products in other countries, we must obtain regulatory approvals and comply with the regulations of those countries |
| These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country |
| Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our products |
| If we fail to obtain regulatory approval in any foreign country in which we plan to market our products, our ability to generate revenue will be harmed |
| The European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union |
| The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives |
| In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification that its processes meet certain European quality standards |
| In January 1999, we received permission to affix the CE mark to our da Vinci Surgical System and EndoWrist instruments |
| As we modify existing products or develop new products in the future, including new instruments, we apply for permission to affix the CE mark to such products |
| In addition, we will be subject to annual regulatory audits in order to maintain the CE mark permissions we have already obtained |
| We do not know whether we will be able to obtain permission to affix the CE mark for new or modified products or that we will continue to meet the quality and safety standards required to maintain the permissions we have already received |
| If we are unable to maintain permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the European Union |
| IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT DELIVERY DELAYS AND LOST REVENUE Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements contained in the FDA’s Quality System Regulations, or QSR We are also required to comply with International Organization for Standardization, or ISO, quality system standards in order to produce products for sale in Europe |
| If we fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or part of our operations until we comply with these regulations |
| We are currently in compliance with ISO standards |
| The FDA inspected our Mountain View and Sunnyvale facilities in March 2000 and December 2002, respectively |
| The Good Manufacturing Practice issues raised by the FDA during the inspections either were satisfactorily resolved with the FDA, or we believe can be resolved by us to the FDA’s satisfaction, although we cannot assure you that we will be able to do so |
| We continue to be subject to FDA inspections 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 in future inspections and audits by regulatory authorities |
| 26 ______________________________________________________________________ [52]Table of Contents As required, we are licensed by the State of California to manufacture medical devices |
| We are subject to periodic inspections by the California Department of Health Services and, if we are unable to maintain this license following any future inspections, we will be unable to manufacture or ship any products |
| RISKS RELATING TO OUR INTELLECTUAL PROPERTY IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED Our commercial success will depend in part on obtaining patent and other intellectual property protection for the technologies contained in our products, and on successfully defending our patents and other intellectual property against third party challenges |
| We will incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights |
| The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions |
| We do not know whether we will obtain the patent protection we seek, or that the protection we do obtain will be found valid and enforceable if challenged |
| We also do not know whether we will be able to develop additional patentable proprietary technologies |
| If we fail to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business |
| We may also determine that it is in our best interests to voluntarily challenge a third party’s products or patents in litigation or administrative proceedings, including patent interferences or reexaminations |
| Furthermore, the laws of certain foreign countries do not protect intellectual property rights to the same extent, as do the laws of the United States |
| In addition to patents, we typically rely on a combination of trade secret, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights |
| Nevertheless, these measures may not be adequate to safeguard the technology underlying our products |
| If they do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced |
| In addition, employees, consultants and others who participate in developing our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach |
| We also may not be able to effectively protect our intellectual property rights in some foreign countries |
| For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside the United States |
| We also realize that our trade secrets may become known through other means not currently foreseen by us |
| Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing any of our intellectual property rights, or may design around our proprietary technologies |
| OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS There may be United States and foreign patents issued to third parties that relate to computer-assisted surgery, remote surgery, and minimally invasive surgery |
| Some of these patents may be broad enough to cover one or more aspects of our present technology, and may cover aspects of our future technology |
| 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 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 assure you that a court or administrative body would agree with any arguments or defenses we may have concerning invalidity, unenforceability or noninfringement of any third-party patent |
| In addition to the issued patents of which we are aware, other parties may have filed, and in the future are likely to file, patent 27 ______________________________________________________________________ [53]Table of Contents applications covering surgical products that are similar or identical to ours |
| We cannot assure you that any patents issuing from applications filed by a third party will not cover our products or will not have priority over our patent applications |
| The medical device industry has been characterized by extensive litigation and administrative proceedings regarding patents and other intellectual property rights, and companies have employed such actions to gain a competitive advantage |
| If third parties assert infringement or other intellectual property claims against us, our technical and management personnel will experience a significant diversion of time and effort and we will incur large expenses defending our company |
| If third parties in any patent action are successful, our patent portfolio may be damaged, we may have to pay substantial damages, including treble damages, and we may be required to stop selling our products or obtain a license which, if available at all, may require us to pay substantial royalties |
| We cannot be certain that we will have the financial resources or the substantive arguments to defend our patents from infringement or claims of invalidity or unenforceability, or to defend against allegations of infringement of third-party patents |
| In addition, any public announcements related to litigation or administrative proceedings initiated by us, or initiated or threatened against us, could cause our stock price to decline |
| OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND 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 |
| We have entered into license agreements with Brookhill-Wilk, LLC , Hansen Medical, Inc, Heartport, Inc, now part of Johnson & Johnson, IBM Corporation, Medtronic, Inc, MIT, Olympus Optical Co, Ltd |
| and SRI International |
| Any of these agreements may be terminated for breach |
| If any of these agreements is terminated, we may be unable to reacquire the necessary license on satisfactory terms, or at all |
| The loss or failure to maintain these licenses could prevent or delay further development or commercialization of our products |
| RISKS RELATING TO OUR TRADING MARKETS 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 continue to generate significant revenues |
| 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 will suffer |
| 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 gain market acceptance; • actions relating to regulatory matters; • 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; 28 ______________________________________________________________________ [54]Table of Contents • our ability to license additional intellectual property rights; and • the progress and results of clinical trials |
| Our operating results in any particular period will not be a reliable indication of our future performance |
| It is likely that in some future quarters, 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 is likely to fluctuate significantly in the future |
| Our stock price can fluctuate for a number of reasons, including: • announcements about us or our competitors; • quarterly variations in operating results; • introduction or abandonment of new technologies or products; • changes in product pricing policies; • changes in earnings estimates by analysts or changes in accounting policies, including expensing stock options in accordance with Statement of Financial Accounting Standard (SFAS) Nodtta 123R, “Shared-Based Payment;” and • economic changes and political uncertainties |
| In addition, stock markets have experienced significant price and volume volatility in the past |
| This volatility has had 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 |
| In addition, the securities of many medical device companies, including Intuitive Surgical, 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, they may adversely affect the market price of our common stock |