Irvine medical device maker Masimo Corp., one of last year’s best local stocks, has joined Wall Street’s downturn in 2008.
Even with a gain last week, Masimo’s shares were down about 30% for the year with a market value of about $1.5 billion. That’s not bad, given the state of Wall Street.
But it’s a shift in course from late 2007, when Masimo went public and saw its shares surge. The offering raised $233 million, including $48 million for Masimo.
During its first two months as a public company, Masimo’s shares rose 50% to a market value of about $1.7 billion.
Masimo makes patient monitoring devices and related products. Most of the company’s sales come from reusable and disposable noninvasive sensors used with its core pulse oximetry devices.
These devices continuously measure oxygen levels in patients in operating and emergency rooms, intensive care units and other medical areas.
Part of Masimo’s decline this year can be chalked up to “a general market condition,” said Sean Lavin, an analyst for New York-based Lazard Capital Markets LLC.
Indeed, Masimo’s competitors and peers are down to varying degrees.
Shares of Covidien Ltd., Masimo’s only major public competitor, are down 19% for the year. But Covidien, the former device business of Tyco International Ltd., is a larger, more diversified company with a market value of $18 billion last week.
Others have fared worse. Hologic Inc., a Massachusetts-based device maker, is down 80% for the year on a market value of about $3 billion. Shares of I-Flow Corp., a Lake Forest device maker, are down 65% with a market value of about $135.5 million.
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Masimo device: most sales, profits come from reusable, disposable sensors |
Even with Masimo’s recent pullback, it’s still up about 35% from its initial offering price.
The stock got a boost last week with word that Masimo is being added to Standard & Poor’s MidCap 400 stock index this Thursday.
Joining an S & P; index typically drives a surge in a stock with buying by mutual funds that mimic the indexes as well as investors looking to get in on the gains.
But beyond the larger market meltdown, there are some concerns about Masimo’s profits.
Analysts on average expect the device maker to post a $40.5 million profit in 2008, down from $42.3 million a year earlier. Sales are seen rising 19% to $304 million.
Masimo itself has forecast a 2008 profit of $40.5 million on $303 million in sales.
The company’s profits are expected to decline because of shrinking royalty payments from Covidien’s Nellcor unit.
In 2006, the two settled a long legal battle with Nellcor agreeing to pay Masimo $265 million, $65 million in advanced royalties and additional royalties through 2011.
Nellcor’s payments shrink each year, slowing profit growth and making for tough year-ago comparisons for Masimo.
Analysts also expect Masimo’s research and development costs to rise in the fourth quarter. Masimo spent $6 million on research and development in the third quarter, down 8% from a year earlier.
Credit Crisis Concerns
The company also is dealing with cautiousness among hospitals because of the financial crisis, which has made it more expensive to finance equipment purchases.
Masimo’s products aren’t big ticket items, but it could be seeing some fallout from nervousness among hospital buyers.
“The market conditions are rough,” Chief Executive Joe Kiani said on Masimo’s third-quarter conference call.
The company plans to come out with a monitoring system that can alert hospital workers to slowdowns in a patient’s breathing or seizures in late 2009.
Analyst Lavin is bullish on Masimo, saying he doesn’t think any of its stock issues are due to performance. But there are issues about hospital spending, he said.
“Some investors are a little bit concerned that Masimo will have a hard time placing new machines,” Lavin said.
He said he isn’t convinced that hospitals will slow spending on equipment next year.
Masimo operates on a version of the razor-and-blade business model. It largely gives away or loans devices to hospitals under a five-year contract to provide sensors that only fit its equipment.
Wall Street likes the strategy.
“For now, robust sales of core (devices) and consumables will remain the lion’s share of Masimo’s sales and profitability,” said Matthew Dodds of Citigroup Investment Research after the device maker’s third-quarter results came out.
New Products
Another concern, according to Lavin, is Masimo’s delay of a test launch of its new SpHb hemoglobin monitoring system from early in the first quarter to March or April.
Masimo expects to fully launch the device in 2010.
SpHb continuously monitors blood hemoglobin,a protein that carries oxygen,without having to draw blood.
Continuously monitoring hemoglobin is important for patients who are at risk for blood loss, such as those in the operating room or intensive care unit, according to the company.
There are high hopes for SpHb. Analysts have estimated hemoglobin monitoring eventually could grow into a yearly market of $1 billion or more.
In an earlier note, Lavin called continuous hemoglobin monitoring “a major medical breakthrough” with many likely uses.
Citi’s Dodds, in his report, had more measured early expectations for SpHb. He said he expects the hemoglobin test to account for 3% of his $321 million revenue projection for Masimo in 2009.
Market Share
Meanwhile, Masimo has grown its market share in its main pulse oximetry market.
Deutsche Bank AG analyst Tao Levy said in a recent Investor’s Business Daily story on Masimo that the company now has an estimated 27% of the market, compared to 50% for Covidien.
Besides making its own devices and royalties from Covidien, Masimo gets revenue from licensing its technology to other medical device makers, including Royal Philips Electronics NV of the Netherlands and Medtronic Inc., a Minnesota-based device maker with operations in Santa Ana.
And Masimo said last month that it was going to put its pulse oximetry technology into defibrillators being made by Zoll Medical Corp. of Chelmsford, Mass., to check for carbon monoxide poisoning.
