Masimo Corporation (MASI) Earnings Call Transcript & Summary

Hello. Thanks for joining Piper Sandler's 32nd Annual Virtual Healthcare Conference. This is Jason Bednar. I cover MedTech here at Piper, and I'm pleased to have with me today from Masimo, Executive Vice President and Chief Financial Officer, Micah Young. Micah, welcome, and thanks for joining us today in this virtual format. And hopefully, the only time we have to conduct the conference in a remote fashion like this.

Thank you, Jason. Appreciate the opportunity.

Absolutely. So just some quick housekeeping items for everyone. We have nearly a half hour here for our discussion. For those tuning in, there is no audio Q&A. So if you have questions, you can type them in the box at the bottom of your screen or you can e-mail them to me at [email protected], and I'll ask Micah on your behalf.

So with that, why don't we dive right in, Micah. 2020 has been something else for all of us here in a lot of ways. Maybe if you could just start as we get underway here, reflecting on the past year, some of the quick response measures from Masimo that help play a role in the pandemic response and management. Just touch on those and kind of expand on them.

Thank you, Jason. Yes. I think you hit it right on the head with the response. We were so focused when all this hit with how quickly we can respond to our customers. And there's a lot of things that we started doing very early on, especially when we started seeing things ramping up in China. We started to look at our manufacturing, for example. And we started accelerating production of kind of our higher demand type monitors and sensors. So we started ramping production up, also having some redundancies in case things got shut down in certain areas. And that allowed us to really narrow down the products or the SKUs for -- that we felt that were going to be used for treating such a respiratory disease like COVID. And so that's where we looked at the Root. We knew that there would be an ability for hospital customers to really increase their bed capacity and Root was a great opportunity for that because it can really connect to everything, and it can also serve as a display in the room and it can consume those sensors. So that was an opportunity for us. We increased our inventory levels as well very early just to make sure that we did not ever run out of the key product or critical product during the pandemic, and we started implementing safety measures. We put in place social distancing measures pretty early on in -- when COVID hit. And we started providing PPE and equipment for our manufacturers, our workers in the manufacturing plants as well as our distribution teams as well, trying to put safety measures in place. And then if you start to think about some of the other things that we did was, we looked at equipment installations, and we were limited with our access to hospitals, especially when you look back in April, May, June time frame. So we moved to really helping them do installations of our -- all the equipment that they were demanding virtually. So we were able to do it remotely and help them navigate through on getting the Root -- our Root product ready, Root equipment ready for deployment and also being able to do more installations of Patient SafetyNet where you can remotely monitor the patients throughout the hospital, in particular, even the general floor. And then, of course, another big thing for us was taking Opioid SafetyNet and repositioning that into Masimo SafetyNet, which is a product or a solution for treating COVID patients. And hospitals looked at 2 different use cases: one, where they can put the device on, the wearable device I have here on my hand. They can put that on the patient and remotely monitor them from outside the room so they can reduce or minimize disease transmission risk to the patient. And we also took this product -- same product and platform and hospitals were able to do another use case where they could manage COVID patients in the home. So if they were less severe in terms of the illness, they can monitor them from a distance, free up their bed capacity and then bring them in if they become more severe. So -- and this has been a critical product. With this technology, we can monitor SpO2, respiration rate and pulse rate. And then here recently, we launched what's called Radius T, which is a patch that goes on the body that can measure core body temperature. So those are some of the solutions that we brought out and rapidly responded. And I think COVID has definitely highlighted the value of Masimo in terms of the value of our pulse oximetry, the accuracy of that technology as well as our innovation with the wearable wireless devices.

Yes. That's really helpful. Great overview. I mean you touched on Masimo SafetyNet. I wanted to come back to that maybe a little bit later. But from here, why don't we talk a little bit, just -- I know it's on the kind of top of mind for a lot of investors, just kind of real-time trends. What we're seeing here just with late year seasonality or what's traditionally late year seasonality for your business? I mean, what are you seeing in terms of elective procedures in hospitals? And we just had some hospital executives on a panel a bit ago that talking about elective procedures generally proceeding as normal. I mean, everyone's kind of adapted to this new normal. So even though this is a non-normal year for all of us for a lot of reasons, I mean, what's the on-the-ground feedback here, again, just in the last several weeks with what you're seeing with your business?

Yes. We have a pretty unique perspective because our sensor volumes track hospital admissions as well as procedural volumes over the long term. And what we're seeing today is our volumes are probably rebounded to about 85% to 90% of where we were pre-COVID. And there's been a steady recovery over time over the past several months as elective procedures have rebounded. We've seen a rebound in lockstep with our sensor volumes. And I think hospitals are more prepared today than they were before. If you look at some of the isolation and safety measures that they're putting in place to where they can manage both the COVID population as well as those who are coming in for surgery or for emergency treatment, I think that they've definitely improved those safety protocols. And that allows them to really -- to where they don't have to shut back down completely again. And you may see some hot pocket -- hot zones right now where they're infections are ramping and they're getting a heavier volume or surge of patients for COVID. But for the most part, in general, we're seeing them being able to manage through that.

Okay. All right. That's helpful. Maybe let's talk about the -- it's been a big year for board shipments for the company. It's been one of the highlights of the year for sure. Any insight or maybe anecdotal feedback on what you're seeing as far as like sensor pull-through, sensor utilization for those boards, in particular? I know that's hard to isolate, but any color you can provide there would be great.

Yes. Yes. Just -- as you know, Jason, we shipped 470,000 drivers this year, 2x our normal run rate. And now our installed base has increased 17%, over 2.1 million drivers. And the way we look at it, we have a lot more visibility, of course, with our Masimo-branded equipment because that's going directly to customers. And where we've seen the demand, and this kind of can give you some background on kind of what we're seeing is the demand has been very strong this year for Root with vital signs and our connectivity platform as well as Patient SafetyNet installations, which were -- we've increased 10% on -- just in one quarter this year. In our second quarter this year, we increased monitor beds by 10%. So if you look at that, both Patient SafetyNet installations and the root cells in that second quarter were up pretty much a full year's level of volume in terms of revenue and installations. So that was a big increase. And what that means is that not only our customers increasing for -- increasing their bed capacity in the short-term to be able to manage any surge of patients, but they're thinking of this longer term that there's going to be a need for more continuous monitoring on the general floor. And I think that that's going to be a great opportunity because the general floor, if you look at critical care areas of the hospitals, in the U.S., there's about 125,000, 150,000 beds. On the general floor, there's about 450,000 in the U.S. in terms of beds. So there's a pretty sizable opportunity here, and it's -- and there's very low penetration. There's not standard of care yet on the general floor, but we think that COVID may be accelerating that into where that's going to be more of a focus moving forward. Critical care areas of the hospitals that it is standard of care. You're monitoring those patients in terms of pulse oximetry, every one of those patients is 100% penetrated. But on the general floor, probably 10%, and we think that, that could be more than double now after COVID hit.

Okay. Okay. Maybe if we think about reflecting on 2020 and starting to look forward for kind of board shipments and kind of how monitoring equipment fits into hospital CapEx budgets going forward. I mean, it's obviously been elevated. You kind of mentioned it their monitoring equipment connected care has been elevated here for good reason in 2020. I guess, do we give back some of this bolus? Is that ratchet down when we move forward or has this kind of been a permanent elevation or permanent move up to pull, if you will, for monitoring equipment when we look forward 2021 and beyond?

Yes. Great question. The way we look at it right now and which is why we are kind of guiding -- or we've communicated, we expect about 60,000 a quarter next year and about 240,000 next year for the year is because we think it's going to be more of a normal equipment replacement cycle, #1. And #2, we think the capital spending environment for monitoring equipment should be very stable. We look at it right now as hospitals are going to -- we expect them to prioritize pulse oximetry. And that's some of the anecdotal feedback that we get. And also if you look at monitoring, just patient monitoring, in general, it's a relatively low price point on a capital budget. When you think about a hospital capital budget, it's very low cost relative to imaging equipment or some other of those budget line items. So I think with COVID being a respiratory disease and everything that's going on now, pneumonia is a big risk, we think that there's definitely going to be a prioritization for pulse oximetry. And we also believe that we'll see more of that expansion, as I just mentioned, of monitoring coverage in lower acuity settings, such as the general floor.

Okay. Maybe I'll push you a little bit here. I mean you just mentioned that 240,000 board figure for 2021, that's back at -- I mean if I wanted to really nitpick, it's just below 2019 levels. This is a part of your business that had been expanding 6% to 8% annually in the 5 years leading up to 2019. If I was to extend that growth rate and just simplistically off of '19 levels, I'd be sitting somewhere probably closer to 275,000 boards for 2021. I don't think anyone would really fall to here for taking a conservative approach out of the gate, especially none of us have a great crystal ball sitting here right now on how 2021 is going to play out. But -- I mean how should we view this initial board shipment discussion that you and Joe are having with everyone? Is this mainly conservatism and then you aim to kind of execute above that guidance?

Yes. I think that's a way to look at it. Given the uncertainty around COVID and the potential that some of the OEMs and we've been working closely, we're trying to understand where they are in terms of inventory levels as well as future demand for next year. And there's potential that there's been some inventory built in the channel with our OEM partners, and we're taking more of a prudent and thoughtful approach to how we're forecasting that 240,000 drivers next year. To your point, normal growth would put us well above that, but we're being a little bit cautious at this point. We're still working through the 2021 planning process and hopefully, we'll have more clarity around that number here soon. But we felt good enough to at least get a number out there that we felt that it's going to get back to normal kind of levels or just shy of normal levels next year. And it's still a very strong forecast coming off a year where we grew the installed base 17%. So we'd be very happy even just seeing that 240,000 level next year.

Yes. No, absolutely. I mean, I'll maybe ask one follow-up, and I'm not sure to what extent you'll be able to comment. But I mean, I think the team typically has decent visibility into board shipments kind of 3 months forward. I mean, so take it to think right now, you still feel pretty comfortable just with that 60,000 board shipment number when we look out to Q1?

Yes, still early because the timing is -- we're still working through just the full year, but also we're still looking at the gate -- phasing and the timing of how those orders will happen. But I think that that's going to be in the ballpark that we're thinking about at 60,000 a quarter at the moment.

Okay. All right. Why don't we shift over a little bit to some product development topics. I mean, team, as you've kind of mentioned before, did an amazing job fast tracking SafetyNet, kind of the COVID response measure, Masimo SafetyNet that is. I mean, so what are some of the learnings from this development project? And how does this help maybe set in form some of the bigger plans the company has to move into remote patient monitoring and home-based care?

Yes. I think we've learned a lot by being able to reposition and really take Masimo SafetyNet to the market. Even though it's limited use to COVID patients right now, what we found is we've learned a lot about how to commercialize. We've learned a lot about how the value of home-based monitoring and also the importance of the data flow back into the hospital and how -- we understand a lot about connectivity and data flow in the hospital, but it's really good when we're able to have an opportunity to really test that flow of data from the home back into the clinician's office or the hospital as well. So that's been a lot of learning for us. We've also found interest beyond what we can do right now for COVID patients, and we think there's a lot of interest for expanding the platform. Our SET pulse oximetry, which is part of this wearable device, is one of the most accurate technologies out there. It's medical-grade technology we can move into the home. And there's a lot of things we can do with our parameters and our -- and the technologies we have that we can go beyond just COVID. We can go into other disease states. If you think about long-term chronic diseases like respiratory diseases like COPD or heart disease like CHF, those are going to be opportunities that we can expand this platform and much further beyond what we're using it for today. So I think that's a big interest there. Also, the interest we've seen with hospitals of being able to preserve bed capacity by being able to shift more through telehealth, through home monitoring, that's going to be an opportunity where we can help hospitals manage the real estate in the hospital.

Yes. That's fantastic. I mean it definitely sound yesterday, I mean, I'm sure you'd agree, but just we had Omar in our panel, one of your SVP engineering guy. I mean it definitely sounded from him like that Masimo SafetyNet and Patient SafetyNet, both even taken off further here in 4Q, again, really strong demand as we kind of all would probably presume there would be during a COVID surge. So anything to add on to that or just you're simply supportive of that statement?

Yes. No, I think the tailwind opportunities that we have seen is going to be increased demand for Masimo SafetyNet. It's going to be an opportunity for us, especially as we go through this tough season. And I think another tailwind opportunity would be the increased demand for more equipment, particularly Root and other -- the Masimo-branded equipment that we have. So if you think about hospitals that may not have prepared well for the first wave and now are playing catch up for the second wave, those are some opportunities for us as we move into the fourth quarter and the first quarter.

Okay. Okay. That's helpful. When I think about your product development pipeline, I mean, I think it's been a pretty steady cadence, maybe 1 to 2 new products per quarter. And correct me if I'm wrong on that. But I also -- in terms of -- in baseball terms, I tend to think of Masimo hitting a lot of singles and doubles, like missing out kind of a high on base percentage type hitter that, again, you connect on a lot of balls, but none of them are really leaving the park. And -- but I do think Opioid SafetyNet might potentially be that home run type offering, and we can get into that in a second. But I guess would you first agree with that characterization from a product cadence or product launch cadence? Any change that we should expect on that product launch cadence? And then similarly, think about the -- again, the kind of the launch -- the types of products you're launching are more like, again, the single and double variety.

Yes, absolutely. I think that's certainly the way I think about it. And those always add up and they become more significant over time. And then, of course, we've got the home run shots that we're looking for with the Opioid SafetyNet and those -- and some other things we have in the pipeline as well. One way to think about it too is we're focused on accelerating our growth profile within kind of 3 key verticals right now, and that's our parameters, hospital automation as well as hospital to home. And if you look at where we're investing, we're investing over 10% of our revenues today into R&D, and we have a rich pipeline of innovation that's expected to really advance those 3 verticals of our business moving forward. And I'm sure we'll get it more into the M&A side of things as well, but that's another thing as we're looking both organically as well as inorganically.

Okay. Okay. That's helpful. So maybe saying, I know Opioid SafetyNet, your possible home run swing here. You have breakthrough device designation from the FDA on that technology. There's proposed legislation out there that could help expedite reimbursement for devices approved with that breakthrough device designation. I mean -- so this really could serve as an accelerant to realizing revenue for the solution and allow you to potentially move even quicker on other SafetyNet extensions. And I know it's just not that simple though for Masimo. I mean there's other considerations here, particularly trade-offs of the short-term versus long-term benefits. So there's a lot to be figured out, but what are the types of conversations that you're having with Joe and the team regarding what's best for Masimo when it comes to accepting the reimbursement that's handed to you versus maybe fighting for something that's a bit higher but takes a little bit longer to achieve?

Yes. Well, Jason, I think we're focused on going after full reimbursement. I mean that's what we're hoping for. And we've built out an internal team in terms of a reimbursement team here at Masimo for the first time. We put a leader in place, and that leader is building out the team here and trying to really secure reimbursement from the CMS side for Medicare patients as well as the private payer side. So there's going to be a lot of work there. I think one thing that's encouraging is the new CMS proposed rule that came out the MCIT, which is Medicare Coverage for Innovative Technologies. And it basically, we're hopeful that it will get finalized early next year and we're still trying to figure out where we fit, but it could provide coverage for up to 4 years for breakthrough devices, just like the breakthrough technology we have for Opioid SafetyNet. We still need to understand how we meet those qualifications, and we also need to understand coding and payment. But that could be encouraging because we -- that could accelerate our reimbursement opportunity by probably 2 to 3 years because we thought it would take a while to get through reimbursement. So that can give us a pathway that's earlier than we expected. Even if we weren't to get that in the near term, we think we've done a lot of market research. It's revealed to us that there's a significant interest and willingness to pay. And we also believe that hospitals may be interested in adopting the system to manage their patient population for post-surgical patients. If you look at what we did in -- over the last few years, we've been working with a large system in Utah. And they've been sending home Rad-97s to help monitor patients at home who are on opioids, and that's been encouraging. And we think that that's going to be another pathway for us. And we think that there's going to be hospital systems that will buy this product.

Okay. Yes, absolutely. And since staying on Opioid SafetyNet just for a moment, I think you've talked about rolling that system out -- that offering out in the first half of '21, correct me if I'm wrong there. But assuming that's right, should we take that to mean that you'll be submitting to the FDA for approval here in the next couple of months?

Yes. I mean if you go back, we were hoping to get approval earlier in 2020. Of course, the pandemic hit and things got -- took longer than expected, and we've had -- it's almost been a good -- a positive for us because I think it's giving -- it's going to give us a competitive advantage over the long-term because we're going back and submitting information and data. Originally, we submitted through a de novo process application. We submitted a lot of data from the hospital, that's in the hospital. So if you think about Dartmouth-Hitchcock studies where it shows what we've been able to accomplish there with modern patients on the general floor, that data has been very important. We've also gone back and had to submit data that's outside the hospital, and we're having dialogue today with the FDA back and forth. So it's very difficult to set a time frame around it, but we're making a lot of progress. I think it's going to give us a greater advantage than we had when we were looking at this more limited on the front end. And -- but I think we're hopeful that we will get approval and be able to start commercializing hopefully in the first half of next year.

Okay. Is it something where you would let us all know when you submit or should we just wait for an announcement on approval?

Yes. I think we would -- just wait for an announcement on approval. It will be more -- because we're having ongoing dialogues, and it will be more on when we get it approved.

Okay. Okay. Great. So in the last minute here, maybe a couple of quick margin questions. I think you're trying to base everyone that 68% might be the kind of the rough place to start for at least the '21 assumption. So I guess what pushes you potentially higher than that? Is it rainbow uptake? Is it single sensor use in Europe? I mean, are those some of the factors, anything else that I might be missing? And then I'll just ask one other one upfront, and I'll let you go. I think The Street's gotten your model right now for 3% revenue growth for '21. Does SG&A grow in a scenario where revenue is growing 3%?

Yes. Great. So gross margins, I think the way to think about that is we originally guided coming into this year at 68%. And we've had a lot of headwinds, over 200 basis points of headwind in the second and third quarter due to our product mix being so unfavorable between the sensor volumes and capital volumes. As that mix starts to normalize, we've -- what I've mentioned in the past calls is, that should -- we should get back to that kind of 68% trend line. But keep in mind, we do have COVID-related costs that have impacted this, and that's been over 100 basis points of headwinds due to all the safety measures that I mentioned earlier that we put in place and -- plus freight costs have been much higher than normal just due to COVID. It's put a lot of pressure on free carrier. So all those costs have given us about 100 basis points of headwinds. So if you think about that, as we start to recover on mix, we should probably look closer to a 67% next year. But the potential upsides are -- we get a greater mix of sensors coming back as we start to generate more revenue off that growing installed base. We've already made the investment this year. So that's going to be an opportunity to leverage that installed base. And then also, if we're able to reduce some of those COVID-related costs. Right now, we're keeping them in. We're planning for them because we're making sure that we sustain our manufacturing and distribution. So those are some of the upside opportunities. And then if you look at kind of where we're investing today, there's a few key areas: R&D trying to maintain the 10% continued investment in marketing and advertising so we can drive adoption of new products and then we've also had higher legal expenses related to the Apple lawsuit, which we factored in this year, and there will be a little bit more next year as well. So -- but in terms of margin expansion next year, we think the Street's modeled in around 24.8%. I think gross margins are around 67.2%. And I feel like everyone's listening to what we've been saying about the headwinds and challenges. So I feel like that's in a reasonable spot. But the expansion that will come from improved product mix, increased leverage from our existing installed base as we pull through additional revenues from new products, hospital automation and, again, rainbow and some of those other opportunities are going to be able to leverage our revenue per driver. And that should help us to expand as well.

All right. Great. Well, excellent discussion here, Micah. I think with that, we are actually a little bit over time. So really appreciate the time here today. Thank you, everyone, for tuning in, and enjoy the rest of the conference for everybody.

All right. Thank you.