On Intuitive Surgical’s trifecta of events

February 8, 2017

The massive geopolitical shifts recently have us watching filings closely to see how companies are reacting to the new Trump administration.

While the meaning of this new reality is still coming into focus, there may be no better example of how companies face a growing list of question marks than high-flying Intuitive Surgical. In a 10-K filed on Monday, the company added extensive disclosures about how it could be hit by a triple whammy: Changes to NAFTA, an overhaul or repeal of Obamacare, and the United Kingdom’s decision to pull out of the European Union.

Intuitive is one of Silicon Valley’s biggest, if somewhat quiet, successes. The robotic surgical company quietly debuted on the stock exchange on June 16, 2000, closing at a split-adjusted $18.25 per share. Last Friday, its stock closed at $702.13 per share. As it expands its surgical tools into more types of surgery, it’s been growing its international salesforce, particularly in Europe. These should be the best of times.

Instead, as the 10-K indicates, there are several large clouds looming on the horizon. While the company certainly discussed other emerging risks, as we footnoted here, it’s the policy and regulatory ones that caught our eye given the current political atmosphere.

Let’s start with Intuitive’s new disclosure on Brexit. While lots of companies have added boiler-plate Brexit disclosures, Intuitive’s is a bit more detailed. That’s because  the company has its international headquarters in Aubonne, Switzerland, where it owns 35,000 square feet of space on 2 acres. Switzerland, of course, is not an EU member, but does have EU trade agreements. If the UK exits, it must negotiate a direct trade deal with Switzerland, which could impact Intuitive’s sales into that market, one of its most important in Europe.

Closer to home, the company is nervous about changes to NAFTA, and for good reason. As the company disclosed in the 10-K, Mexico is “where we manufacture a majority of our instruments that we sell.” That includes a 157,000 square feet manufacturing facility in Mexicali, Mexico. A location that would most certainly put it on the wrong side of any wall built along the border.

“The U.S. federal government has made explicit statements about its intention to make 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.,” Intuitive noted. “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.”

Finally, for the moment anyways, there is the The Patient Protection and Affordable Care Act (PPACA), otherwise known as Affordable Care Act (ACA), or by its nickname, Obamacare.

The company added rather lengthy risk disclosures about the “ongoing health care reform initiatives and the evolving U.S. health care environment following the 2016 U.S. elections.and the evolving U.S. health care environment following the 2016 U.S. elections.”

It pointed to the January 20 executive order by President Trump which “stated that it is the U.S. federal government’s policy to seek the prompt repeal of the PPACA” and which also “directed the heads of all executive departments and agencies to minimize the economic and regulatory burdens of the PPACA to the maximum extent permitted by law.”

Amid the uncertainly, Intuitive worries that drastic changes could lead to fewer people seeking medical attention or visiting hospitals, which could result in fewer procedures involving its surgical tools. The company also worries that changes in Medicaid and Medicare funding and reimbursement plans could limit people’s ability to undergo procedures involving its tools.

“Any changes of, or uncertainty with respect to recommend proposals future reimbursement rates, or changes in hospital admission rates could impact our customers’ demand for our products and services, which in turn could impact our ability to successfully commercialize our products, or could limit or eliminate our spending on new projects,” the company wrote.

In all of the cases, (NAFTA, Brexit, Obamacare), the details of what will change or when remain fuzzy. Given that most companies love predictability, these policy changes means they will have to endure long periods of something the also hate: uncertainty.

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