Masimo Corp.’s pulse is surging on Wall Street.
In August, the Irvine maker of medical monitoring devices staged the most successful initial public offering among local companies in years. Last week, Masimo’s shares were up 50% from their debut two months ago, with a market value of $1.7 billion.
The offering raised $233 million, including $48 million for Masimo.
Investors are responding “because of our business model and our track record of innovation,” said Joe Kiani, Masimo’s chief executive, who started the company with partner Mohammed Diab in 1989 in classic entrepreneurial fashion,in his Mission Viejo garage.
Masimo is due to report third-quarter results on Tuesday. Analysts expect the company to make $6.5 million, down 47% from a year earlier (more on the profit drop below). Sales are expected at $61 million, up 6%.
The company’s main device is a pulse oximeter, which attaches to a finger or toe and measures oxygen in critically ill adults or newborns.
It cuts down on false alarms and other misreadings caused by patient 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.
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Masimo sensor: source of reoccurring revenue |
One attraction for Wall Street, according to Kiani: Masimo’s “sticky” business model.
The majority of the company’s $245 million in yearly sales comes from the sale of reusable and disposable sensors, which Kiani calls “consumables.” The sensors attach to a patient’s finger or toe as part of the company’s devices.
“Once you place these devices in the hospitals or into the firefighters’ hands, 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 into our revenue going forward.”
Masimo’s “razor and blade” model has a “straightforward and attractive nature,” according to Citi Investment Research analyst Matthew Dodds.
One complicating factor: a licensing settlement with Covidien Ltd., a Tyco International Ltd. spinoff that’s the parent of medical device maker Nellcor. Last year, Masimo prevailed in a long-running patent battle against Nellcor.
The settlement provided a big boost in 2006 that’s starting to fade. In the second quarter, Masimo’s profit fell 23% from a year earlier to $10.6 million.
“In the short term, investors will have to sift through the ‘noise’ created by an eroding stream of royalty revenues from a windfall patent settlement against Covidien, Masimo’s primary competitor,” Dodds said.
“But solid end market fundamentals and an expanding product margin signal attractive (earnings) growth,” he said.
Masimo’s products primarily are sold to hospitals. They’re also used in what Kiani calls the “continuum of care”,in surgery centers, ambulances and by firefighters.
Masimo recently signed a deal with Lake Forest-based Apria Healthcare Group Inc. to provide pulse oximetry for the patients who are treated in their homes.
Kiani is ambitious: “I hope one day, (Masimo devices will) land in the Sharper Image catalog.”
Masimo licenses the signal extraction technology that drives its devices to some 30 medical equipment companies.
The company plans to grow on its own, rather than expand through acquisitions, according to Kiani.
“We have a very rich product pipeline. We really believe that Masimo can be one of those unique companies that organically grows,” he said.
Kiani calls research and development “the soul of Masimo.”
“What can change a company’s worth dramatically over-night is what new innovations you can come up with that not only ensure your current business, but can also expand your current market opportunity,” he said
Masimo spent $5.4 million, or about 9%, of its $63.6 million in revenue on re-search and development in the second quarter. It has some 100 engineers.
The company is working on products to monitor breathing and hemoglobin, a protein that carries oxygen in the blood, according to Tao Levy, an analyst with Deutsche Bank North America.
“We are excited about the company’s late-stage pipeline,” he said.
Masimo has proven itself to be a fighter. A few years ago, the company took on hospital group purchasing organizations, which buy supplies for member hospitals.
The company hit a wall trying to get its products before the buying groups, which preferred Nellcor’s devices.
Some buying groups told companies that license Masimo’s technology their contracts wouldn’t be renewed, according to Kiani. Because of that, Masimo lost some licensees, he said, and one company that stuck with Masimo lost its contract.
“That’s how powerful those GPOs are,” said Kiani, who was wearing a dark suit with a slim pinstripe and a pale blue, open-necked shirt during an interview at Masimo’s headquarters.
As Masimo fought to get its oximeters and sensors into hospitals, it gained media attention, including a New York Times piece.
Later, a Senate subcommittee criticized 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 landed deals with both groups.
The fight with the buying groups was a proxy battle with what is Masimo’s only real competitor, Covidien.
“What we did is analogous to a software company going after Microsoft,” Kiani said.
At one point, Covidien’s Nellcor had 89% of the pulse oximetry market before it opened up.
The companies traded patent lawsuits and countersuits for roughly seven years, starting in 1999. Masimo finally collected some $265 million from Nellcor last year, and Nellcor agreed to pay Masimo royalties.
“This decision has helped Masimo gain considerable market share in the U.S. over the past several quarters,” Dodds said.
The two continue to spar.
Covidien recently released a video that Kiani said makes false claims about Masimo’s devices.
“What (Covidien) should do is innovate, leapfrog us. Instead, they don’t want to do that or can’t do that,” Kiani said.
Diane Hunt, a Covidien spokeswoman, declined to address Kiani’s video assertion but said, “As the market leader in pulse oximetry, Covidien has consistently delivered technology advancements along with value, choice and exceptional customer service. We encourage side-by-side product evaluations.”
Winning the patent battle against Covidien, Kiani said, played a role in Masimo’s going public.
“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,'” Kiani said.
Masimo’s stock debut has given hope to smaller medical device makers looking to go public. But venture capitalists say it’s an exception.
“For every Masimo, there are 50 companies that would like to go public but cannot,” Jack Lasersohn, general partner of Vertical Group, a venture capital firm with an office in Palo Alto that invested in Masimo, told the VentureWire news service. “People have seen big returns and figure it’s the place to invest, which it is, but not to the tune of $3 (billion) to $4 (billion) or $5 billion.”
Masimo raised some $90 million in venture funding since 1992. Investors also included Franklin Resources Inc., Invesco Private Capital and DSV Partners.
The device maker, which is based in the Irvine Spectrum near Bake Parkway and Irvine Boulevard, is firmly rooted in OC, according to Kiani. Masimo has 370 local workers and employs 1,224 people overall.
“We’ve been in Orange County since the founding of the company. I can’t imagine going any other place,” said Kiani, who came to the U.S. from Iran at age 9, graduated high school at 15 and received bachelor’s and master’s degrees from San Diego State University by the age of 22.
