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Masimo Corporation (NASDAQ:MASI)

November 15, 2011 1:00 pm ET

Executives

Mark P. de Raad - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary

Analysts

Unknown Analyst

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

I think we're going to go ahead and get started. I'm Sean Lavin, Medical Technology Analyst here at Lazard Capital Markets. Our next company is Masimo. We have Mark de Raad, CFO of the company. He's going to present and then take questions. Thank you.

Mark P. de Raad

Thank you, Sean, and good afternoon, everybody. Thanks for joining me in this coveted post-lunch speaking slot. We'll try to keep you as awake as we can through this. My goal in the next 10, 15 minutes or so is just to provide you with a very high-level overview of Masimo as a company, a little bit about the products, a little bit about the new technologies, and then we'll hopefully have a little bit of time towards the end to take some questions and answers. And for a few in the audience that I see, I apologize. I know there are some people that wanted to get one-on-one slots today that weren't able to get it. So I appreciate your joining us here for this presentation.

Let me start by just providing you with the proverbial forward-looking slide. We actually just did release our earnings a couple of weeks ago, and we filed our 10-Q about a week and a half ago. So if you're interested, you can take a look at that.

Masimo's mission. Masimo's mission is essentially to improve patient outcomes and reduce the cost of care by taking noninvasive monitoring to new sites and applications. We've done this essentially over the last 15 years through a number of revolutionary technologies, the first being Masimo SET. This is essentially the world's first motion through tolerant pulse oximetry technology that we actually released in about 1995. We actually had our first product in the market in about the year 2000. In about 2005, that was augmented with a new technology, a new platform really, which we referred to as the Masimo Rainbow platform. This includes Pulse CO-Oximetry, as well as Acoustic Monitoring, which is essentially a respiration technology that we just introduced in the last year and a half ago. Importantly, all of these Rainbow parameters are parameters that are built on top of the core traditional pulse oximetry. So once you've adopted Masimo's traditional pulse oximetry, you now avail yourself of the opportunity to step up to all of these new different revolutionary technologies.

And then most recently, with the addition of the SEDLine business about a year and a half ago, we've now able to offer brain function monitoring technology as well. I think I just spoke essentially to this first bullet in terms of the key new -- key technologies that have driven the Masimo business model over the last 10 years. Of course, any high technology medical device company is very focused on protecting its own intellectual property. And for those of you who know a little bit about Masimo, Masimo has been very, very successful in defending our technology. The most clear evidence of that, the patent infringement settlement that we actually had with one of our major competitors back in January 2006.

The core business model, as the slide indicates here, is essentially a razor/razor blade model. So as I indicated earlier, we have what we refer to as our drivers, which are either our bedside device units or very often, you'll see in a moment boards that we sell to our OEM partners who in turn incorporate those boards into their multiparameter devices. And that's essentially how our technology gets out into the marketplace. Through the end of last quarter, we now estimate that throughout the world, there are over 950,000 Masimo drivers consuming our proprietary sensors.

And essentially, if you look at the growth rate that that's allowed us to generate, as the slide indicates here, over the last couple years, a 21% compounded annual product growth rate in an industry that most people believe today is growing somewhere in the range of about 4% to 5%. So again, our new technologies, our consistent and proprietary read-through motion pulse oximetry technology, continue to attract more and more hospitals to Masimo's technology.

Just a quick comment about the major growth strategies, the areas that we as a company are focused on. There are many of them. We've chosen to highlight 5 of them here for you today. The first essentially that you can see is a continuation of this $1 billion-plus traditional pulse oximetry business. 2 companies, ourselves and our largest competitor, probably comprise somewhere between 70% to 75% of the total market space here. Most people estimate that at somewhere in the range of about $1.2 billion to $1.3 billion today.

Importantly, in this space and especially in a razor/razor blade business, what is so important is the rate at which you are placing new razors. And to that extent, our statistics, as well as third-party statistics, suggest that over the last year or so, we believe that we've been placing new drivers in the marketplace at a rate of almost 50% of those new drivers versus our competition at somewhere around 30%. So, of course, as these new drivers are being placed into the marketplace, the razors, ultimately, they consume our proprietary sensors, hence the razor blade portion of that combination. So we're very excited about the opportunities that we continue to display. And, in fact, just in the most recent quarter, with another 34,000 drivers that we placed in the most recent quarter, we think that number will still be somewhere between 150,000 and 160,000 incremental drivers this year versus last year. And again, that's what ultimately rolls up to that 950,000 total driver number in the marketplace.

What's so exciting about this space is that in addition to our more than fair share of that portion of the market, we have the opportunity to take this technology into other areas of the hospital. One of those major areas is the expansion of continuous monitoring into the general floor. That's an area that we're very much focused on. It's an area, in fact, in the last couple of years, with our introduction of our new respiratory product, as well as products like Patient SafetyNet, which is the ability to wirelessly connect up to over 80 beds in a hospital and essentially have 1 person monitoring 80 beds continuously, these are examples of the opportunities we think will exist for us with the expansion into the general floor.

And in 3 and 4, very much focused on the new Rainbow platform that I alluded to before. First of all, in the hospital, the focus on driving the Rainbow technologies into areas such as the OR, the ICU, recovery, and in many cases, we're hopeful in labor and delivery as another area, especially in terms of total hemoglobin and its ability to constantly monitor the total volume of blood in the patient.

Category 4 here really focuses on another element of our total hemoglobin product, and that is the Pronto device. This is a handheld real-time, essentially, pulse oximeter/total hemoglobin device that will eventually, once approved by the FDA, we hope have a very significant market opportunity here in the U.S., primarily targeted at the physician office marketplace.

Traditionally, Masimo's entire business model to date has resided within hospitals. This will be the first product that allows us to actually move outside of the hospital and move into the physician office marketplace. So this is an area that we're very excited about. We actually have received the necessary approvals from countries all over the world, including recently, Japan. Unfortunately, the only location we've yet to receive the needed approval is here in the U.S., and we hope to be working -- continuing to work with the FDA to get that approval anytime soon.

And then finally, of course, the lifeblood of Masimo has been and will continue to be the ability to introduce these new innovative Rainbow-type technologies or other technologies, frankly, that we think fill out the complete suite of Masimo technology offerings.

Just a quick comment on what is pulse oximetry, for any of you -- those of you who are new to the concept. Essentially, it's the noninvasive measurement of arterial oxygen saturation and pulse rate. And using our device, it's as simply as putting on a clip and actually having that clip tied to a cable, which is attached to, in this case, our bedside device, and typically, you pick up that reading in about 30 to 45 seconds. It's extremely important because, essentially, it's used on every critical care patient as hypoxemia issues can result, obviously. And those are things that everybody is interested in preventing.

Just a quick slide on the innovation that I think is clear vis-à-vis the technologies that I just referred to, and you can see here all the various first-evers that Masimo has been able to introduce into the marketplace. Most recently, the Halo Index, that's an indices that we announced about a little over a year ago. Essentially, what this now represents is this is an indices that combine all the measurements of the different Rainbow elements into 1 consolidated index. The idea is to provide a much more predictive indicator of the overall patient status. This is a technology that we believe will require significant new clinical studies to help support ultimately, but it's certainly a direction that we believe that technology is headed.

Just a quick comment on our product offerings. I alluded earlier to the idea that almost 70% of our units are actually these boards. So on the top of the slide that you're looking at, these are our boards basically the size of about a credit card that we have OEM agreements with, and which our OEM partners include this board within their multi-parameter device. And that's how this technology ends up moving into the hospital.

Alternatively, some hospitals are interested and prefer, in fact, our bedside devices. And for those hospitals, we have the opportunity to move this technology into those hospitals through our own bedside monitors. The general word monitoring system that you can see on the slide here is really a reference to the Patient SafetyNet, the technology that I alluded to before, in terms of our ability to now wirelessly connect up to 80 beds and provide that continuous monitoring capability, and then sensors and cables, over 100 sensors and cable combinations, the largest in the industry.

What is so intriguing, I think, at least from an investment standpoint, about the Masimo model is that essentially, it started in the traditional razor/razor blade structure that I alluded to before, but very much focused on hardware being complemented by these proprietary sensors. What Rainbow has allowed us to do essentially is introduce the concept of software into this existing installed base. And so you can see here, as we've added these Rainbow parameters into the structure with their complementary Rainbow Sensors, we now have moved essentially into a hardware and sensor and software business. And then most recently, you can see here with the introduction of the Acoustic Monitoring capability, this is the respiration monitoring that I mentioned before. And then importantly, all of these sensors are essentially backward-compatible to whatever device they are essentially associated to. So this is the structure that we think is going to continue to allow Masimo to build upon this wonderful base of pulse oximetry business, but adding additional new functionality via new parameters over the years.

The Patient SafetyNet solution, I think I referred to earlier, so we'll flip through this quickly. In terms of the actual clinical benefit of the Patient SafetyNet, there are a number of studies that have been recently presented. This is one that probably is the most significant, in the sense, at least, in this particular case, this hospital is actually able to reduce and document the reduction of almost 135 ICU bed days simply because they were able to identify issues prior to having to transfer patients from the general floor into the ICU. I think the actual dollar calculation of this number equated to something close to $1 million for this particular hospital.

And then just a quick slide on the SET Acoustic Monitoring. This is the -- other than Halo, the most recent introduction into our suite of products. And believe it or not, this is the -- we believe, in a sense, to be the world's first noninvasive respiration monitoring device that is as simple as putting a little BAND-AID-like patch on the patient's neck that is essentially monitoring whether that patient is breathing or not. This is something that when combined with all the other Masimo measurement devices and connected into the Patient SafetyNet system is something that many hospitals are beginning to look at, at ways not only to improve the patient care issue but also ways of reducing their ultimate cost.

Total hemoglobin, as I mentioned before, today's total hemoglobin deployment, as most of you know, is an invasive intermittent and delayed process with Masimo's new development. Essentially, you're doing the same thing as you would do with pulse oximetry. You place the clip on your finger, and in a span of about 45 to 60 seconds, you're able to receive that total hemoglobin reading.

This, like all of our technologies, are going to require more and more clinical evidence to support the reason why hospitals ought to consider moving to these technologies. This is just a slide that provides a high-level overview of one of those studies. And in this particular case it was shown, that almost -- there was an almost 87% reduction in the amount of blood transfusions in this particular trial that included over 300 patients over, I think, about a 6-month period time. So again, we're of the belief that we will require many more of these type of studies, but we're very happy with this result and expect many, many more over the next couple of years. And then Pronto-7 is a device I mentioned a little bit before, the handheld device that we're very excited about what this may mean for us as we move our technology into the Physician Office.

For those of you who didn't get a chance to see our last quarter results, just a quick slide. Our total revenues -- sorry, total product revenues were actually up about 10% year-over-year. I alluded to before about 33,000, 34,000 drivers in the current quarter and that 950,000 unit total installed base, which year-over-year is up about 16%. We had GAAP EPS of 24% -- $0.24 versus about $0.27 in the prior year period. One of the primary reasons for that reduction year-over-year is that we had a very large and expected reduction in the amount of royalty revenues that we received as part of one of those settlements that I alluded to before. And then finally, about -- a little bit over $140 million of cash on the balance sheet.

The beauty of the razor/razor blade, I think, is evident in this slide. If you look to the left, you see the totally increase in the amount of drivers or razors that we've been able to place over the last 10 years. And if you look at the column to the right, it essentially is our revenue stream over that same period of time. So the correlation between these 2 is amazingly consistent, and as a result, creates a business model that we're very, very pleased with and we think will allow us to continue to evolve and expand into these new technologies, some of which we talked about today.

So with that, I will turn it over to Sean.

Question-and-Answer Session

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

We're going to go ahead and open for questions. Okay. I guess I'll start with one on hemoglobin, and that is, we talked in the past about kind of larger-scale multi-center outcome trials. I know before this meeting, you were mentioning that some of those may move forward in the future. Could you talk a little bit about what the company is doing in that area?

Mark P. de Raad

Well, as I mentioned, last year, we had identified -- maybe as I had mentioned to Sean earlier, last year, we had identified a fairly significant amount of incremental marketing costs that we had allocated to move forward in a couple of areas that we had not previously been able to fund. And so in some cases, there are some smaller studies that will fit within that general umbrella of multi-site studies. However, as I was suggesting to Sean earlier, that is another area that we're looking at right now and believe, or at least seriously considering, beginning some of those multi-site trials sometime over the next 6 months.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Sure.

Unknown Analyst

[Indiscernible].

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

So I think the question essentially is, why is Masimo offering a recycling program to its customers? The quick answer is that most of our -- many customers are viewing recycling as an important part of their overall green initiative. And so what we've done in the last year is we've actually introduced our own Masimo recycling program, which last quarter, we actually saw a pretty notable increase in the amount of our customers who actually were interested in the recycling process. The reason they do it is because there's a slightly lower ASP on those reprocessed sensors. The reason we're doing it is to keep our customers happy and to ensure that if our customers do want to reprocess sensors, they're guaranteed the Masimo quality that's inherent in our sensors because when we reprocess one of our sensors, we actually replace the LED, which other third-party reprocess companies essentially can't do. So if you're purchasing a reprocessed sensor from Masimo, you're guaranteed the Masimo integrity in that sensor. The third-party manufacturers do not have that.

Unknown Analyst

[Indiscernible].

Mark P. de Raad

Well, there's no doubt -- yes, there's no doubt from a customer perspective that from a pricing standpoint, there is a lower price to purchase a reprocessed sensor. Our focus, of course, is to reduce that cost to the extent we can to counterbalance at least the gross margin impact of that. And we're making some really good progress on that. There's another new technology that we expect to introduce next year, which we're calling the ReSposable Sensor, which essentially will allow that green decision to be made at the bedside. The idea of a ReSposable Sensor is that part of that sensor really is disposable and part of it is reusable. But you make that decision at the bedside. So the carbon footprint that many studies, one of which we intend to release shortly, actually shows that the total carbon footprint of the current reprocessing process is much larger than simply sending a new sensor to a customer. So it's somewhat ironic, but we think our ReSposable Sensor solution will address that next year. And we think a lot of customers will actually migrate to that from the traditional remanufactured sensor.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

I guess, can you talk a little bit about the sales strategy for Pronto? Assuming that it gets through the FDA, how many reps do you have now? How many do you think you need? And what will your marketing message be to the doctors?

Mark P. de Raad

Pronto-7?

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Right, Pronto-7.

Mark P. de Raad

So the Pronto-7 device is -- as many of you know, has been a device that we've been eagerly awaiting this approval since early last year. As I said earlier, haven't received it yet. While waiting for that approval, we've had a sales force in about the range of 20 direct salespeople that have been focused not only on the Pronto-7 but its predicate product, the Pronto. And they've been engaged with hospitals, they've been engaged with emergency departments in essentially relaying the concept of the new handheld technology to those areas. So we intend to continue that. However, when we do receive FDA approval for the Pronto-7, we also intend to engage some fairly large and well-known distributors who are much more attuned at distributing these kind of products into the physician office marketplace. And so we continue to have negotiations with those distributors, and we hope that as soon as this FDA approval comes to bear, we'll be in a position to actually have a distribution channel that will allow the revenue potential from that product to increase much more quickly than we could obviously do with the relatively small sales force. And then our direct sales people will actually -- essentially become distribution managers.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

We have another hand over here. Nope.

Mark P. de Raad

The floor is yours.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

It's all yours.

Unknown Analyst

I just had a [indiscernible].

Mark P. de Raad

So the question has to do with our relationships with an independent company referred to as Cercacor. Its previous name was Masimo Labs. It's really a question that deserves a much longer answer that we can do here. What I'll simply suggest is that the 2 companies, when they were separated back in 1998, were separated for a specific reason at the time. The structure of those 2 separate company has served both companies very well. The Cercacor entity has been able to focus on a lot of unique different technologies, as has the core Masimo engineering organization. And at least to date, there's no intention of changing that or potentially bringing those together. The obvious issue that whenever that question is raised is under what premise would those 2 companies ever be brought together again and at what value. There clearly would be difference of value perception, we believe, between both companies. And actually, to that effect, a little -- almost about a year ago now, there was actually a discussion between both companies to inquire as to whether or not there was any interest on the part of Masimo Labs or Cercacor to at least engage in some additional conversation. And the answer, as we -- that we said since then publicly, is that their response was no. They had no interest in any kind of relationship beyond the relationship that exists today.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

And then maybe one last one around pricing. We've seen the last couple of years that pricing on sensors for both probably yourself and Covidien have come down a little bit. Do you expect that type of competitive bidding for hospitals to continue? Is there a point where you think both companies kind of push back and hold things stable? How do you look at pricing going forward?

Mark P. de Raad

Pricing has always been a very interesting element of this marketplace. Back in 2008, 2009, during the depths of the recession, both companies got very aggressive in their pricing simply because hospitals were unable, in most cases, to take any kind of action because of their economic situation. That subsided a little bit in the year 2010. We said earlier this year, beginning of 2011, we were beginning to see what we thought were some, I would call them, sporadic cases of more aggressive price points being identified in the marketplace. Typically, those have been very, very large potential deals. And obviously, the larger the deal, the more aggressive occasionally the pricing does get. So I think we would characterize the pricing environment today, Sean, as being or continuing to be competitive. There has been no dramatic shift that we're aware of. And clearly, pricing within this environment is one that we watch very carefully and do everything we can to focus the discussion with our existing and potential customers ultimately not on price but on the quality of the technology that they'll be receiving when they move to Masimo. We've said for a couple of years now that we would not lose a deal on price. That is still our mantra. But in many cases, we don't have to get to that point because the Masimo technology speaks for itself.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Right. Thank you, Mark. We are out of time.

Mark P. de Raad

Thank you, all, very much.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Thank you very much. I appreciate it.

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Source: Masimo Corporation Presents at Lazard Capital Markets 8th Annual Healthcare Conference, Nov-15-2011 01:00 PM

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