Joe Kiani has overcome overwhelming personal and professional difficulties to create a better blood oxygen monitoring device. So why would he be afraid to push his company into the consumer electronics industry, challenging companies a hundred times their size?
Joe Kiani had achieved his dream. Masimo Corp. , the company he founded and serves as CEO and president, had carved out a lucrative niche for as one of the leading manufacturers of pulse oximeters , those finger sensors hospitals use to measure oxygen saturation in the blood of patients. Masimo had made Kiani rich, who immigrated to the United States in poverty as a child – now a billionaire, according to Forbes calculations. As an electrical engineer, he took pride in the fact that the devices he had personally designed were excellent, and that hospitals in the United States had a slightly higher pulse oximeter market share than its main competitor, Nellcor, which is a unit ofMedtronic , a company about fifteen times the size of Masimo. Between the two companies they account for about 90% of sales.
It’s also a profitable company: Last year , Irvine, Calif.-based Masimo earned $223 million on revenue of $1.2 billion . Amid a rising stock market and bolstered by increased demand for Masimo’s technology due to Covid-19 (low blood oxygen levels are an early warning that the disease is getting worse), shares of the company rose 85% from the beginning of 2020 to the end of 2021 , giving Masimo a market capitalization of more than $16 billion.
So Kiani decided to complicate her dream. Following the market close on February 15, Masimo announced it was spending just over $1 billion to purchase Sound United , a consumer-focused audio, speaker and headphone business that owns brands including Marantz, Denon , Bowers & Wilkins and Boston Acoustics. The next day, Masimo’s stock plummeted 37% , wiping $5 billion off its market value.
Kiani was surprised. “We thought [investors] would say ‘awesome! And given our track record, we’re not going to screw it up,” he declares, sitting on an ecru sofa in his compulsively tidy office. Do you know what one of them said to me? A very angry shareholder, a large shareholder? ‘Return it. Do not buy it”.
But Mike Polark, an analyst at Wolfe Research in Boston, was not surprised by the backlash: “In medical technology, concentration pays.” At a price of eight times Ebitda, the problem was not that Kiani had overpaid for Sound United. It’s also a healthy and profitable business that is expected to drive Masimo’s revenue to $2 billion this year, an increase of 67%. “The issue for Wall Street is strategic direction,” continues Polark. « Why is Masimo selling earphones? «.
The acquisition would instantly make Kiani’s company less profitable. The gross margin for Masimo’s medical device business had been a whopping 65.8%. In consumer electronics like headphones, 20% is more typical.
This move prompted activist investor Politan Capital Management , a year-old company run by Quentin Koffey, to take a nearly 9% stake in Masimo , according to an early August filing. Politan declined to comment on his plans, but in March he helped the Centene health insurance company replace its CEO.
Bet on the merger of medical devices and consumer electronics
Kiani , who has sold more than $500 million worth of Masimo stock since going public in 2007 and still holds an 8.5% stake worth $650 million, is betting medical devices merge increasingly with consumer electronics.
Masimo Corp.’s president envisions Sound United moving beyond earbuds to enhanced headphones and earphones . He believes that people will use them not only to listen to music (or improve their hearing), but also to measure their vital signs., such as pulse rate and oxygen saturation. Of course, he is not the only one with this vision. Garmin sells watches that track heart rate, blood oxygen saturation, and hydration. The latest Apple Watch can alert the wearer of unusually high or low heart rates or irregular rhythms. In September, Sony announced its entry into the over-the-counter headphone market. The only real difference is that all of these companies are huge multinationals with decades of experience in the consumer space.
defying the odds
This 57-year-old Iranian-born businessman has defied the odds many times so far. In 1974, when he was nine years old, he and his family moved from Iran to Alabama so his father could study engineering. They did not have money; for a time, the family of four lived in a housing project in Huntsville. In 1977, the Kianis moved to San Diego, where Joe’s father had enrolled in an MBA program. Two years later, when Joe was fourteen and his sister fifteen, his parents returned to Iran for work (his mother was a nurse), leaving the teenagers to live on their own . “My sister became the mother,” Kiani says, laughing. “She was tough! She had a curfew ».Kiani graduated from high school at age 15 , mostly, he says, because the math he had studied in Iran was advanced, allowing him to skip some courses.
That same year he joined his sister at San Diego State University, where he studied electrical engineering while working part-time in the diner and managing the apartment complex in which he lived. She took every class she could with Professor Fred Harris, an expert in the field of signal processing, and in 1987 graduated with a master’s degree in electrical engineering .
In the late 1980s, while working as an engineer at Anthem Electronics, he took a side job designing a low-cost, $100 pulse oximeter for a start-up company. Kiani learned that these devices often gave off false alarms, often triggered when patients accidentally moved their finger.
With his knowledge of signal processing and adaptive filters – software to remove noise, essentially – Kiani told the company he could reduce the number of false alarms. The company was not interested. So in 1989, Kiani, then 24, decided to start his own company, Masimo , financing it with a $40,000 second mortgage on his apartment. For two years, he worked nights and weekends out of the garage of his home in Southern California while keeping his day job at Anthem.
Using an equation the entrepreneur describes as something out of fifth-grade algebra, Kiani worked on a prototype that kept pulse oximeters working even when patients wearing them were moving or had low blood flow . One place where he was especially critical: the neonatal intensive care unit, because you can’t tell newborns not to squirm. He patented his idea almost immediately and contacted four US companies hoping to integrate Masimo’s technology into their systems. He was out of luck. He had better luck abroad, making deals with NEC in Japan and with various companies in Europe.
No gap in the US hospital market, for the moment
Breaking into the US hospital market proved virtually impossible. Hospital buying groups had already signed exclusive (and lucrative) deals with Masimo’s competitors . In March 2002, the New York Timespublished a front-page article exposing the purchasing practices of these groups, portraying Masimo as a company with a superior pulse oximeter that was essentially locked out of the market. A month later, Kiani testified before the Senate Judiciary Committee’s antitrust subcommittee alongside officials from Novation and Premier, two hospital buyout groups. “The fact that our main competitor [Nellcor], which owns over 90% of the pulse oximetry market, can pay group buying organizations to exclude Masimo is totally wrong,” he told senators. . Within a month, Premier offered Masimo a contract. Novation followed suit a year later.
Kiani is more than willing to fight much bigger competitors . In 1999 he sued Nellcor (then owned by Tyco) for patent infringement; ten years later, he filed a similar complaint against Royal Philips. In 2006 Nellcor began paying Masimo damages that ultimately totaled nearly $800 million, with Royal Philips paying out $300 million in 2016. Masimo also received $45 million as a result of an antitrust lawsuit it filed against Nellcor in 2002.
Next up: Apple, which Masimo has accused of both patent infringement and trade secret theft . Shortly after Masimo launched the first smartphone -powered pulse oximeter in 2013, the company received a call from Apple, saying it wanted to talk about working together. Kiani attended a meeting at Apple headquarters, but nothing came of it. That same year, Masimo’s chief medical officer joined Apple, followed by the chief technology officer from a Masimo spinoff in 2014. Apple filed several patents that Kiani said were based on its technology. Masimo sued in 2020; the case is scheduled to go to trial next year .
More innovative products
Masimo is working to expand beyond pulse oximetry. He has a product that can monitor hemoglobin non-invasively and has acquired a German company, TNI, which makes a respiratory assist device to deliver oxygen to patients with emphysema or chronic bronchitis . However, an estimated 80% of Masimo’s medical revenue still comes from its core pulse oximetry unit.
During the early part of the pandemic, Masimo launched a pulse oximeter with a smart bracelet linked to a smartphone app that hundreds of hospitals provided to Covid patients, allowing them to do continuous monitoring at home. This August, Masimo launched its first smartwatch : a $499 “Advanced Health Tracking” watch that measures oxygen saturation, pulse, heart rate, and hydration, among other things. A chain of hospitals in Saudi Arabia is conducting a pilot test. “If it goes well, it will go from a few hundred patients to 80,000,” says Kiani.
Will he be able to make a hole among the greats?
Could a medtech company without consumer brand recognition take on heavyweights like Apple and Garmin? Needham & Co. analyst Mike Matson points out that the smartwatch market is huge, at $25 billion, and fragmented. « I don’t see them taking quota from Apple «, He says. But there could also be a niche for Masimo watches among serious athletes — those who train for triathlons and marathons and need highly accurate health statistics, for example. Garmin has made $1 billion in smartwatch sales by focusing on fitness , Matson notes.Kiani says singers are also interested in using the watch to measure their hydration level, which affects voice quality .
“In the consumer world,” he adds, “I think the best technology wins. I believe that the more committed the entity is, the better it is. And I am committed to this.” On the other hand, so are Apple and Garmin.