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Device IPO

Masimo Corp., an Irvine medical device maker known for its willingness to take on larger rivals in the court of law and public opinion, now is setting its sights on Wall Street.

The company filed plans for an initial public offering earlier this month, hoping to raise up to $150 million. With fast-growing sales and profits and a healthy amount of cash, Masimo is one of the more solid medical device offering prospects in recent years.

The company, a maker of devices to measure a patient’s oxygen level, hasn’t set a date for the offering.

Masimo is looking to raise money for research and development, sales and marketing and other business purposes, according to its Securities and Exchange Commission filing.

The company could be the second local medical device maker to go public this year.

Aliso Viejo-based SenoRx Inc. went public in late March, raising about $45 million. Shares of the breast biopsy device maker are flat since their debut with a recent market value of $140 million.

Masimo’s offering stands to be bigger. The company hasn’t disclosed terms yet. A ballpark guess could put its market value at $200 million or more after going public.

Chief Executive Joe Kiani, the company’s largest shareholder at 11%, declined to comment in the run-up to the offering.

Masimo makes a device called a pulse oximeter, which attaches to a finger or toe and measures oxygen in critically ill adults or newborns. The company sells devices, sensors and cables to hospitals and licenses its signal extraction technology to other medical device makers, including GE Medical Systems, Medtronic Inc. and Royal Philips Electronics NV.

Masimo’s inroads with hospitals and big device makers likely led to the offering, according to Robert Cvengros, a senior healthcare analyst for B. Riley & Co., an investment bank with offices in Newport Beach and Los Angeles.

“It’s always been my experience that if a technology’s demonstrating in clinical studies superior efficacy of care and is not cost-prohibitive, it will make inroads into the market,” Cvengros said.


Room for Growth

Masimo sees room for growth, according to its SEC filing. It estimated the market as being more than $900 million in 2006.

The company had sales of $224 million last year, more than double that of a year earlier.

The devices are a staple of critical care wards at hospitals. Masimo is looking to expand their use to other parts of hospitals, according to its filing.

The company is profitable. It made $182 million last year, up from $31 million a year earlier.

And Masimo is sitting on a lot of cash, thanks to its own cash flow and legal wins over other medical device makers.

“As a result of some litigation wins, the company now has pretty good cash on the balance sheet,” Cvengros said. “Cash and a revenue stream definitely give the company a lot more leverage and security.”

Masimo had $55 million in cash and equivalents as of Dec. 31, up from $14.2 million in 2005. The company’s long-term debt was $21 million.

Masimo cautions in its filing it did have a history of losses prior to 2005.

Another concern, according to Cvengros, is that Masimo is dependent on other companies for a portion of its revenue.

“If those partners do not devote significant resources to the promotion of those products, the company’s earning potential could be hurt,” he said. “That’s what your risk is when you do a licensing agreement.”

Masimo’s licensed its technology to more than 35 global patient monitoring systems companies, “which make up over 60% of the world’s pulse oximeter shipments,” according to the company’s Web site.

The company had $60 million in licensing and royalty revenue last year.

The main source of competition for Masimo comes from two Tyco International Ltd. units, Nellcor Puritan Bennett Inc. and Mallinckrodt Inc.

Last year, Masimo collected some $330 million from Tyco after a long fight over technology patents.

In 1999, Masimo sued Nellcor for violating patents on its motion-tolerant pulse oximetry technology.

Nellcor then went on the offensive, filing lawsuits of its own against Masimo before the case was settled.

Masimo also has fought hard to get its oximeters and sensors in hospitals, where big buying groups hold sway. The fight made Masimo something of a media darling, including in the New York Times.


Current Contracts

These days, Masimo contracts with Premier Inc., a large, San Diego-based nonprofit that helps hospitals buy supplies and equipment, and Novation LLC, a rival group out of Irving, Texas.

Masimo’s first Premier deal, signed five years ago, came after criticism of Premier’s tendency to award buying pacts to larger device makers. A U.S. Senate subcommittee criticized Premier and Novation for not signing deals with smaller device makers such as Masimo.

Masimo, which has about 1,200 workers, including some 275 locally, was started in 1989 by Chief Executive Kiani and Mohamed Diab, a director who owns about 6% of the company.

Other investors include Invesco Private Capital Inc. of New York, Steelpoint Capital Partners LP, also of New York and San Mateo-based Franklin Resources Inc.’s Franklin Templeton Group.

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