Irvine medical device maker Masimo Corp. has assured itself of some reoccurring revenue and staved off another round of patent litigation with a recently struck settlement.
The maker of patient monitoring devices is set to receive a 7.75% royalty from longtime rival Covidien Ltd. on U.S. sales of pulse oximeters, which monitor the amount of oxygen in a patient’s blood.
The renewed deal starts March 15 and lasts for three years. It extends a lawsuit settlement reached in 2006 that saw Covidien pay Masimo about $300 million in the past few years.
Without the expanded deal, there “would have been litigation,” Masimo Chief Financial Officer Mark de Raad said.
Covidien, which has a tax-friendly headquarters in Ireland and operates from Massachusetts, has continued to use technology covered by Masimo patents in its pulse oximeters, according to de Raad.
Unless Covidien had “changed something dramatically” in its devices, a second patent infringement lawsuit was likely, he said.
Pulse oximeters attach to a finger or toe and measure oxygen in critically ill adults or newborns.
Masimo’s technology is used in its own pulse oximeters and those of others and purports to cut down on false alarms and other misreadings.
Chief Executive Joe Kiani, an electrical engineer by training, developed the technology with friend and fellow engineer Mohamed Diab.
Covidien and Masimo have been rivals for years and have traded several lawsuits.
Masimo sought a new settlement to “create certainty for both the company and in fact, for stockholders,” de Raad said.
Some investors had been concerned about a loss of royalty revenue, he said. There also were concerns about legal costs and management distractions if Masimo sued Covidien again, according to de Raad.
Masimo’s royalty revenue from the 2006 settlement was set to end March 31.
The extension is a positive development for Masimo, which plans to reinvest as much as 50% of the payments, according to analyst Matt Dolan of Newport Beach’s Roth Capital Partners LLC.
Royalty revenue had always been “a fairly important part” of Masimo’s overall financial model, de Raad said.
“We had directed people to assume that the royalties would discontinue,” he said. “So the fact that we’ve been able to come to this settlement puts us in a position that shareholders now know there will be an additional revenue stream” for the next three years.
Masimo projects 2011 royalty revenue of $31 million to $33 million.
The company forecasts overall sales of $446 million to $463 million this year, up about 10% from 2010.
More Money
Masimo could get more money from Covidien if it chooses to introduce a product that competes with a Masimo device for monitoring hemoglobin, a protein that carries oxygen in blood.
If that happens, Masimo’s royalty rate would jump from 7.75% to 11.75%, according to de Raad.
Masimo plans to use some of the royalty money on what de Raad called “selected key additional investment areas.”
Those areas include clinical research and trials that are focused on all of Masimo’s products.
Masimo reported fourth-quarter results last week.
Excluding onetime expenses, the company’s quarterly profit rose 24% to $17.5 million, surpassing the average $15.8 million estimate of analysts.
Quarterly sales rose 14% to $105.6 million, slightly above Wall Street’s estimate of $105 million.
