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Masimo on Watch

Hospital Device Maker Pivots Toward Consumer Products

The future of a hospital bed might very well be in a patient’s own home bedroom.
Or so says Joe Kiani, the founder and chief executive of Irvine’s Masimo Corp. (Nasdaq: MASI), the Irvine-based maker of pulse oximeters and other body measuring devices for hospitals.

“We believe the future of the hospital recovery room is in the home,” Kiani told the Business Journal.

Kiani is moving his company into much larger industries such as smartwatches and hearing aids, two products with combined total addressable markets close to $50 billion annually.

By contrast, the U.S. pulse oximeter market, one of Masimo’s main sources of business, was about $2.3 billion in 2020, with an annual growth rate around 6.4% until 2028, according to Grand View Research.

The transition also fits a growing movement in the medical industry toward ambulatory services, where patients don’t stay overnight in hospitals and rather are sent home on the same day as operations.

“We are looking forward to continuing to be the technology of choice in top hospitals around the world,” Kiani said. “We are equally committed to bringing the accuracy and reliability we are known for directly to consumers and solving the ‘unsolvable’ in personal health technology.”

The W1

The company, Orange County’s fifth-most valuable public company with a $8.2 billion market cap, in the current quarter will globally launch W1, a “biosensing health watch for consumers.”

It made a limited launch of the product in May; pricing hasn’t been announced.
Masimo “noted that reception has been positive, and early adopters have applauded the accuracy of the continuous oxygen saturation and pulse rate,” Needham & Co. analyst Mike Matson wrote in an Aug. 10 report.

“We believe that the smartwatch market is very large (~$23B in 2021) with multiple segments, and that the W1 may find an initial foothold in the fitness segment with serious athletes due to its accurate continuous measurements,” he wrote.

Masimo promises the watch will have continuous and accurate information of oxygen saturation, respiration and pulse rates. The company says the watch can be used by patients recovering at home after surgery or illness, as well as patients with chronic conditions such as heart failure or cancer. It can be used to remotely monitor patients or for athletes who want more precise information for better training.

The watch is being manufactured in a 127,000-square-foot building on 58 Discovery in Irvine, next to the company’s headquarters.

Next spring, Masimo plans another watch called Freedom with some unique features that have never been made available before, Kiani said.

“We think we have a great product,” Kiani told analysts on an Aug. 10 conference call to discuss second-quarter results. “We think we have a product that should command 100% market share, which is what you want to have, what you want for your team to feel.”

Other products now available for consumers include Sleep, a wearable seven-night sleep system; the MightySat, a fingertip device to measure vital signs; and the Radius T, a wireless wearable continuous thermometer.

Kiani is waiting for FDA approval for its Opioid SafetyNet, a device that Masimo has adapted from monitoring patients at hospitals to use at home where it can prevent accidental deaths from opioids. Kiani noted that of the more than 100,000 deaths last year from opioids, about 20,000 of the victims were receiving prescribed medications.

“Our strategy to be a leader in the deployment of clinically relevant monitoring devices within the hospitals and home settings is now taking shape as we initiate the development of new products that integrate our healthcare technologies with our consumer non-healthcare technologies,” he said.

Activist Investor Attention

Masimo’s pivot to consumer devices faced a skeptical Wall Street when its shares fell 37% to $144.20 on Feb. 16 after it announced its largest ever purchase would be a consumer audio device maker, Sound United, for $1 billion.

Last month, Masimo announced the departure of Kevin Duffy, who was Sound United’s CEO and president for Masimo’s new consumer unit (see story, this page). Sound United is best known for making high-end speakers and headphones.

In the past four months, investors have become more optimistic, as shares have rebounded from a 52-week low of $112.07 in May to around $160 at press time.

Shares were boosted last week upon news that activist investor Politan Capital Management LP had taken an 8.4% stake in Masimo worth roughly $750 million; the firm says it believes the company’s shares are undervalued and plans to engage with Masimo’s board and management to discuss the company’s business and strategic plans.

On Aug. 10, Masimo reported second-quarter sales rose 85% to $565.3 million. The sales boost was expected because of Masimo’s acquisition of Sound United, which was completed in April.
The company healthcare revenue climbed 17% to $357 million for the quarter. Non-healthcare revenue was $208.3 million.

Its non-GAAP net income rose 39% to $74.8 million.

Besides the increased competition that Masimo faces in the consumer products markets, one reason Wall Street didn’t like the United Sound deal was due to the effect on the Irvine company’s profitability.

While its gross margin in its healthcare unit was 66.3% last quarter, its consumer unit, where Sound United is located, reported 34.8% gross margin.

The company this month slightly reduced its full-year guidance by $15 million to $1.98 billion from $2.04 billion.

1,000 Salespeople

Masimo is planning a global launch of the W1 during the current quarter with almost 1,000 salespeople and distribution in 130 countries.

“We did not buy Sound United only because they make great audio products,” Kiani said. “We bought them because of what we thought we could do with them with Freedom and other consumer healthcare products. That will model a lot after our healthcare business, which will be technology as a service.”

Kiani was reluctant to provide too much information to analysts, lest it aid competitors. He promised analysts they would get a better grasp of the new consumer strategy at the company’s annual investor meeting in December.

“We are innovators at heart and in order to be the first in technology requires us to be forward looking,” Kiani said. “We believe people want to take a more active role in their health and their data.”

New Masimo Executive Wasn’t a ‘Good Fit’

When Masimo Corp. completed its $1 billion acquisition of Carlsbad consumer-focused audio entertainment company Sound United in April, it named its chief executive Kevin Duffy as head of its new consumer division.

Three months later, Masimo announced Duffy’s departure, causing questions from analysts on an Aug. 10 conference call to discuss the company’s second-quarter results. One analyst noted that company executives had previously said retaining Sound United’s leadership and talent was the top priority.

“I think as you go through this journey and you’re working side-by-side, sometimes it feels like it’s a good fit and sometimes it doesn’t feel like it’s a good fit,” Masimo CEO Joe Kiani told the analysts.

“The good news is we have a very strong team below Kevin that have really been running the business.”

Brands under the Sound United banner include Boston Acoustics, Polk, and Bowers and Wilkins. The company is best known for making headphones and speakers.

“We still feel great about the team,” Kiani said. We obviously are going to do our best to keep everyone that we really think we need for the journey. And along the way, these things will happen, may happen, and we certainly did not anticipate it. So, to be honest with you, I did not believe we would be parting ways with Kevin.

“But it is what ended up happening, and we’re going to be good. I’m really excited about the future. We’re going to be naming a new leader to lead that team from the Sound United team, and we’re just going through the process right now, and we have a lot of good candidates to choose from.”
—Peter J. Brennan

Apple Battle Update

In the past couple of years, Apple Inc., the world’s most valuable publicly traded company with a $2.8 trillion market cap, announced its watches would include monitoring features for sleep, as well as pulse oximetry and blood oxygen levels.

It has recruited at least 10 Masimo employees who had worked on these products.
Masimo has alleged Apple stole the technology and has sued the computer giant, a trade secret case that is scheduled to be heard next March.

It has also taken Apple to the U.S. International Trade Commission where an initial decision is expected on Sept. 15 followed by final rulings early next year.

“You never know what’s going to happen, but we feel good about it,” Kiani told analysts of the ongoing cases.
—Peter J. Brennan

Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.
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