Joe Kiani’s had some remarkable years in his nearly two decades at the helm of Irvine medical device maker Masimo Corp.
But 2007 could be tough to top.
In August, Kiani staged the most successful initial public offering for an Orange County company in years, raising $233 million, including $48 million for Masimo.
The company’s shares closed up 23% in their first day of trading and have kept on climbing. As of last week, Masimo’s stock had doubled since its debut with a $2.2 billion market value, making it the best performing local stock of 2007.
“2007 was a lucky year for us, like a lucky No. 7,” Kiani said. “It was, in many ways, a year we got to realize the fruits of our labor for so many years.”
Kiani, who cofounded Masimo in 1989, owns 11% of the company, a stake with a market value of $225 million.
“Going public was a big milestone,” he said. “It’s changed a lot of people’s lives for the better. Given that Masimo is doing well being public amplifies things.”
Before going public, Masimo raised some $90 million in venture funding since 1992. Investors included Summit, N.J.-based Vertical Group, San Mateo’s Franklin Resources Inc. and Atlanta-based Invesco Ltd.’s Invesco Private Capital.
The company makes pulse oximeters, which attach to a finger or toe and measure oxygen in critically sick adults or newborns. The devices cut down on false alarms and other misreadings caused by motion or low blood flow, according to the company.
Masimo sells products under its own name and licenses its technology to Royal Philips Electronics NV, Cardinal Health Inc., General Electric Co., Medtronic Inc. and Welch Allyn Inc., among others.
Masimo, which expects sales of $250 million in 2007, has caught the eye of some Wall Street watchers, notably stock guru Jim Cramer of CNBC’s “Mad Money” TV show.
“This is one that has potential to be a much bigger medical device stock than most in a slowing environment,” Cramer said.
Wall Street has taken to Masimo because of “our business model and our track record of innovation,” Kiani said.
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Kiani: cofounded company in 1989 |
When Masimo’s fourth quarter and 2007 results come out in early 2008, analysts expect sales to come in 10% higher than 2006 with a profit of about $30 million.
Masimo’s profits are expected to be down significantly year-over-year, because of a windfall settlement that boosted 2006’s net income. The company settled a long-running patent lawsuit against Covidien Ltd.’s Nellcor that drove its $163 million in 2006 earnings.
The majority of Masimo’s yearly revenue comes from selling reusable and disposable sensors, which Kiani calls “consumables.” The sensors are the part of Masimo’s devices that attach to a patient.
Once Masimo sells a device to a hospital or customers, “They’ll continue using sensors or consumables for seven to 10 years,” Kiani said.
“Because of that, investors like the fact they have good prediction in our revenue,” he said.
There are some skeptics, though remarkably few. The amount of shorted shares of Masimo’s stock has been steadily rising and stood at 921,300 in late November, up 11% from two weeks earlier. Short sellers bet on a pending drop in a company’s stock.
Still, the amount of shares shorted as of late November was a low 1% of the company’s outstanding stock, despite its big run-up.
The company’s “razor and blade” business model has a “straightforward and attractive nature,” said Matthew Dodds, an analyst with Citi Investment Research.
Demand from solid customers and increasing profits on Masimo’s products could bring “attractive (earnings) growth” for Masimo, Dodds said.
Hospitals are Masimo’s biggest buyers. Its products also are used in surgery centers, ambulances and by firefighters.
The company has been seeking to expand sales outside of hospitals.
Earlier in 2007, Masimo signed a deal with Apria Healthcare Group Inc. of Lake Forest to provide devices for patients who get healthcare treatment in their homes.
In December, Masimo struck a deal to have its products offered to other home healthcare providers via Nationwide Respiratory, part of Iowa’s VGM Group, a buying group.
Kiani, who won a 2006 Excellence in Entreprenuership award from the Business Journal, is ambitious about new markets: “I hope one day, (Masimo devices will) land in the Sharper Image catalog.”
Masimo’s growth has come in part from licensing the signal extraction technology that drives its devices to some 30 medical equipment companies.
Royalty and license fees made up 22% of Masimo’s $187 million in sales for the first three quarters of 2007.
Kiani, an engineer who started Masimo with partner Mohammed Diab in 1989 in a Mission Viejo garage, calls research and development “the soul of Masimo.”
Masimo spent $6.5 million, or about 10% of its third-quarter revenue of $64.4 million, on research and development. It counts some 100 engineers.
In the works are products to monitor breathing and hemoglobin, a protein that carries oxygen in the blood, said Tao Levy, an analyst who follows Masimo for Deutsche Bank North America.
Kiani and Masimo have a fighting spirit. A few years ago, the company took on hospital group purchasing organizations, which buy supplies for member hospitals.
Masimo hit a wall earlier in the decade with the buying groups, which sold Nellcor’s pulse oximeters.
As Masimo fought to get its oximeters and sensors into hospitals, it gained media attention, including a New York Times piece. Later on, a U.S. Senate subcommittee blasted two large group purchasing organizations,Premier Inc. of San Diego and Novation LLC of Irving, Texas,for not signing deals with smaller medical device makers.
Masimo eventually got deals with both companies.
At one point, Covidien’s Nellcor had 89% of the pulse oximetry market. Masimo and Covidien traded patent lawsuits for roughly seven years, starting in 1999.
In 2006, Masimo was awarded about $265 million from Nellcor, plus an agreement for ongoing royalties.
Winning the battle played a role in the timing of Masimo’s public offering, Kiani said.
“Once we won, then we felt investors could rationally look at our opportunity without the fear of ‘What if the litigation goes south on us,'” said Kiani, who came to the U.S. from Iran at age 9, graduated high school at age 15 and received bachelor’s and master’s degrees from San Diego State University by the age of 22.
