You probably don't give much thought to the amount of oxygen coursing through your arteries, but your physician sure does. Thanks to Masimo Corporation's (MASI -2.00%) groundbreaking technology, healthcare providers are able to monitor this vital health signal in ways previously unimaginable.
At last count, at least one and a half million of the company's oxygen meters are installed across the spectrum of healthcare providers worldwide. That figure is growing steadily, driving Masimo Corporation stock about 278% higher over the past three years.
Despite the tremendous run-up, there are plenty of reasons to suspect Masimo's best days lie ahead -- perhaps none more important than its ability to defend its intellectual property against the competition.
Turning threats into opportunities
In the medical-device industry, odds of success are stacked against smaller companies such as Masimo. Economies of scale and entrenched relationships with purchasing managers make competing with industry juggernauts nearly impossible.
Technological breakthroughs put Masimo on the map, but successfully defending its patents from infringement will allow it to thrive. So far, it looks as if the company has this area sewn up tight. Last year, the company amended a decade-old settlement with Medtronic that requires the world's largest medical-device company to continue paying Masimo a 7.75% royalty on sales of oximetry devices throughout most of next year.
More recently, Koninklijke Philips NV (PHG -1.02%) agreed to pay Masimo $300 million to settle another patent infringement suit. As icing on the cake, the pair agreed to jointly develop products containing each other's technology. In the first quarter, original equipment manufacturer sales of $23.2 million comprised 13% of total revenue, and the Philips relationship is expected to greatly boost that figure. The Dutch medical-device giant will integrate signals measured with Masimo's technology into its multi-parameter IntelliVue displays.
Philips represents more than half of the overall market for high-acuity patient monitoring, and management expects the added sales to be significant enough that it raised its long-term annual growth projections a full percentage point to 8% following their partnership agreement.
Get ready for an OEM sales explosion
Integrating Masimo technology into IntelliVue displays is a big win for the company in more ways than one. Philips is just one of more than 70 partners that have already plugged the company's circuit boards into more than 200 devices, but it might be the most important of all when it comes to increasing overall demand for Masimo's oximetry monitoring technology.
There's a good chance that Philips' integration of useful yet still underappreciated oximetry measurements could create a new standard that eventually brings the rest of the industry to Masimo's door. The Dutch giant represents more than 50% of a high-acuity monitoring market known to play follow-the-leader.
Not finished shopping
Masimo has a great track record when it comes to acquiring industry peers. Over the past 10 years, it has successfully integrated technology from Andromed, SedLine, Spire Semiconductor, and PhaseIn. The company expects the overall market opportunity for its current portfolio to rise from around $3 billion this year to $6 billion in 2025.
That's a big market for a company that generated just $709 million in total revenue over the past year. Simply expanding its share of markets it currently operates in would give Masimo plenty of room to expand, but it's still looking to expand further. The company has hinted at expanding into five separate product categories with total market potential it estimates at more than $2.9 billion annually, and a strong balance sheet could help it execute the expansion.
The Philips legal settlement injected about $270 million into Masimo's coffers near the end of 2016, and a strong performance in the first quarter of this year raised the company's cash balance to $343.8 million at the end of March. In April the company made a $71.4 million tax payment associated with the settlement, but that still leaves it well positioned to expand through acquisition.
Although Masimo has unveiled plans to expand into the consumer and global health market, four more directions are still under wraps. In the quarters ahead, investors will want to keep their eyes open for deals that could carry the company into new directions.