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Monday, May 20, 2024

Masimo, Staar Fall On Revenue Outlooks

Shares of two of Orange County’s biggest medical device makers, Masimo Corp. and Staar Surgical Co., each sank 12% on May 8, following their forecasts of possibly sluggish revenue growth in the months ahead.

Masimo, an Irvine-based manufacturer of oxygen-blood monitoring devices, reported first-quarter sales dropped 12% to $492.8 million from the same period a year ago. While that result exceeded analysts’ consensus prediction, shares nevertheless fell to $120.02, for a $6.3 billion market cap (Nasdaq: MASI).

“The MASI story has moved, at least for now, beyond simple quarterly performance and is instead focused on several other issues,” Piper Sandler analyst Jason Bednar wrote in a note to investors.

“MASI’s financials are undoubtedly getting better, and management formalizing a path to improved profitability is a step in the right direction. But other developments are strange, which leaves us wondering ‘what’s next?’” Bednar added.


The reason for Masimo’s first-quarter drag was its consumer unit, where sales fell 30% to $153.2 million.

The consumer unit was the result of Masimo’s biggest-ever acquisition when it bought Sound United for $1 billion in 2022. That unit, best known for making audio speakers and headphones under brands like Boston Acoustics, Polk and Bowers & Wilkins, is also working on new devices, including a baby monitor, a smartwatch and hearing aids.

Masimo’s market cap fell more than $5 billion on the day the acquisition was announced in 2022. Quentin Koffey, founder of activist investor Politan Capital Management, quickly amassed a nearly 9% stake in Masimo, roughly the same as the stake of founder and Chief Executive Joe Kiani’s.

As a result of investor pressure, Masimo executives said they intend to spin off or sell the consumer unit within a year. Kiani would retain his current position at Masimo post-spinoff, according to the company’s plans, and would become chairman of the new stand-alone company. A new CEO would be named for the spinoff business.

“While we believe the consumer health and professional healthcare have greater potential together, the board and management are confident we have come up with a way to enact our shareholders’ wishes without materially sacrificing the vision we have for making lives better and building greater shareholder value,” Kiani last week told analysts on a conference call.

Masimo updated its annual forecast for revenue between $2.06 billion to $2.17 billion, which implies an annual growth rate around 0.3% to almost 6%.

Analyst Bednar said that besides the proposed separation of its consumer unit, other problems facing the company include the remaining healthcare unit’s margins, the relevance of board shipments for revenue forecasting, newly disclosed probes from the federal government and a proxy battle for control of the company.


Starr Surgical, a Lake Forest-based maker of implantable lenses for myopia, astigmatism and presbyopia (Nasdaq: STAA) on May 7 reported revenue rose 5% to $77.4 million, compared with a preliminary report in early April for sales to top $77 million.

“We were very pleased with the U.S. results coming out of Q1, certainly ahead of what we certainly signaled as we started 2024,” Chairman and CEO Tom Frinzi told analysts on a conference call.

On the latest call, even though first-quarter revenue was $3 million higher than expected, the company maintained its 2024 outlook for sales will grow to $335 million to $340 million, implying a 3.9% to 5.5% growth rate. It also forecasts second-quarter sales of $95 million, below the $95.3 million expected by analysts.

“I think it is just prudent,” Frinzi said about maintaining the annual forecast. “Do I think we have upside opportunity in the back half of this year as we signaled originally. I do, but we’re trying to just be cautiously optimistic given some of the macroeconomic headwinds that are out in the marketplace.”

Staar in April surprised Wall Street by saying its U.S. sales is taking off faster than expected. Shares climbed 34% in the subsequent week to around $50 and a $2.4 billion market cap. After last week’s results, they fell to $41.02 and a $2 billion market cap.

Staar makes implantable eye lenses that compete with LASIK and lessen or eliminate the need for glasses or contact lenses. Rival surgery laser vision correction was down 19% in the first quarter while Staar’s implants were up 15%, suggesting the latter is gaining market share in the U.S., Frinzi said.

Staar on April 2 said it has sold 3 million lenses since its founding more than 30 years ago; it said half of those lenses were sold in just the last three years.

The company has told investors it wants to boost that number to 6 million in 2026. It estimated the total addressable market is 180 million eyes.

Some analysts remained bullish on the stock.

“This was a broad-based beat,” Jefferies analyst Young Li, who has a $60 target price, wrote in a note to investors. Staar is “gaining traction.”

Masimo, Activist Fight Over Future Control

The proxy battle for control of Irvine-based Masimo Corp. has heated up in recent weeks.
Politan Capital Management founder Quentin Koffey, who is on Masimo’s board of directors, last week sent a letter to Chief Executive Joe Kiani “to demand” access to records concerning the potential spinoff or joint venture of the company’s consumer unit.

“I have serious concerns that Mr. Kiani intends to cause the company, without proper board oversight or review, to enter into a binding agreement in connection with one of the potential transactions prior to the company’s July 25, 2024 annual meeting in order to entrench his control of the company’s assets and/or entrench himself in office in advance of a contested election,” Koffey wrote in his letter.

Kiani told Fox Business News on April 1 that the activists want to oust him from the company that he began 35 years ago.

“I started Masimo from my garage, built it to a $2 billion company worth anytime between $7 billion to $17 billion,” Kiani said. “Yes, they want to oust me. And I’m the one who invented most of the technology. I’m the one who brought the team together, and I’m the one who has steadily grown shareholder value. They’re going after me now, and they’re going after control of the company.”

Control of the Masimo board became more complicated with the May 10 resignation of Rolf Classon, who joined the board only last November and was a high ranking medtech executive, including as chairman of the executive committee at Bayer HealthCare AG.

Masimo said Classon decided to resign for health reasons and not for any disagreement with the company.

“The board member resignation is the bigger head scratcher, in our opinion,” Piper Sandler analyst Jason Bednar wrote in a note to investors. “This update adds a very defined wrinkle to the proxy battle saga before it’s really gotten underway this year.”

The departure follows the resignation last February of Adam Mikkelson, who said he resigned for personal reasons and not because of disagreements with the company.

The resignations whittled the number of board directors to five, two of whom are linked to Politan.

On May 9, Masimo offered to appoint Politan nominee William Jellison, the former chief financial officer of Stryker, as a director on its board, if the activist investor withdraws its other nominee and drops its proxy contest.

Masimo, which is also amid a long-running court battle over alleged patent infringements with Apple Inc., the world’s second-most valuable publicly traded company, revealed it’s now facing two federal probes.

Masimo received a subpoena on Feb. 21 from the Department of Justice seeking information on the company’s Rad-G and Rad-97 pulse oximeters, including complaints about the products and the company’s decision to recall select Rad-G pulse oximeters in 2024.

The company also received a civil investigative demand from the DOJ pursuant to the False Claims Act on Rad-G and Rad-97 products.

Masimo then received a subpoena on March 26 from the Securities and Exchange Commission on allegations of potential accounting irregularities and internal control deficiencies from employees within the company’s accounting department.

The company said it’s cooperating with the federal government and “may expend significant financial and managerial resources” on the matter.

“In speaking with management on these topics, we’re as comfortable as we can be the former items are nothing more than a minor distraction for now and are currently in information gathering mode,” Bednar said.

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