Medtronic 2015 Annual Report Download - page 35

such laws and regulations, which are complex, restrict our business dealings with certain countries and individuals, and are
constantly changing. Further restrictions may be enacted, amended, enforced or interpreted in a manner that materially impacts
our operations.
From time to time, certain of our subsidiaries have limited business dealings in countries subject to comprehensive sanctions,
including Iran, Sudan, Syria, Cuba and those in the region of Crimea. Certain of our subsidiaries sell medical devices and
surgical tools, and may provide related services, to distributors and other purchasing bodies in such countries. These business
dealings represent an insignificant amount of our consolidated revenues and income, but expose us to a heightened risk of
violating applicable sanctions regulations. Violations of these regulations are punishable by civil penalties, including fines,
denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of
licenses, as well as criminal fines and imprisonment. We have established policies and procedures designed to assist with our
compliance with such laws and regulations. However, there can be no assurance that our policies and procedures will effectively
prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely
affect our reputation, business, financial condition, results of operations and cash flows.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations.
Many health care industry companies, including health care systems, are consolidating to create new companies with greater
market power. As the health care industry consolidates, competition to provide goods and services to industry participants will
become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions
for medical devices that incorporate components produced by us. If we are forced to reduce our prices because of consolidation
in the health care industry, our revenues would decrease and our consolidated earnings, financial condition, and/or cash flows
would suffer.
Our business is indirectly subject to health care industry cost-containment measures that could result in reduced sales of
medical devices and medical devices containing our components.
Most of our customers, and the health care providers to whom our customers supply medical devices, rely on third-party payers,
including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in
which medical devices that incorporate components we manufacture or assemble are used. The continuing efforts of
governmental authorities, insurance companies, and other payers of health care costs to contain or reduce these costs could lead
to patients being unable to obtain approval for payment from these third-party payers. If third-party payer payment approval
cannot be obtained by patients, sales of finished medical devices that include our components may decline significantly and our
customers may reduce or eliminate purchases of our components. The cost-containment measures that health care providers are
instituting, both in the U.S. and internationally, could harm our ability to operate profitably. For example, managed care
organizations have successfully negotiated volume discounts for pharmaceuticals.
In an effort to reduce costs, many existing and potential customers for our products within the U.S. have become members of
group purchase organizations (GPOs) and integrated delivery networks (IDNs). GPOs and IDNs negotiate pricing arrangement
with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members.
GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are
generally solicited from multiple manufacturers with the intention of driving down pricing. Due to the highly competitive nature
of the GPO and IDN contracting processes, we may not be able to obtain or maintain contract positions with major GPOs and
IDNs across our product portfolio. Furthermore, the increasing leverage of organized buying groups may reduce market prices
for our products, thereby reducing our profitability.
While having a contract with a GPO and IDN for a given product category can facilitate sales to members of that GPO or IDN,
such contract positions can offer no assurance that sales volumes of those products will be maintained. GPOs and IDNs
increasingly are awarding contracts to multiple suppliers for the same product category. Even when we are the sole contracted
supplier of a GPO or IDN for a certain product category, members of the GPO or IDN generally are free to purchase from other
suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause upon 60 to 90 days’ notice. Accordingly,
although we have multiple contracts with many major GPOs and IDNs, the members of such groups may choose to purchase
from our competitors due to the price or quality offered by such competitors, which could result in a decline in our sales and
profitability.
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