Okay. Are we good? Yeah. Hi, I'm Rick Wise, Stifel MedTech analyst, and it is my very distinct pleasure to welcome Masimo Corporation today in the forum to my left, Micah Young, Executive Vice President and Chief Financial Officer, and to Micah's left, the distinguished Eli Kammerman, Vice President of Business Development and Investor Relations. Thank you, gentlemen, for being here. It's been an impressive couple of years at Masimo and an ever-growing portfolio of compelling technology, the diversity of the company, focus on cost, focus on execution. It's been impressive. And I know, Micah, it's early, and I hate to be just a standard old MedTech analyst saying, "Okay, fine. What about next year?" But as you contemplate 2020, maybe talk to us a little bit about some of the tailwinds, any headwinds, the puts and the takes.
What are you thinking about now as you get ready to frame next year? More of the same? I mean, I'll leave it to you.
Yeah. Thanks, Rick. So as we look next year, I'm not going to get into the guidance as we mentioned, but we've seen a strong past two years. We've been at the high end, if not higher, than our above our upper end of our range of 8%-10% from investor day, growing close to 12% here recently. Going into each year here recently, we've been guided to that upper end of the range. So that's kind of how we think about 2020 at a high level. Some of the tailwinds that we look at are going into next year, continue to increase our revenue per driver. We're focused on converting more accounts towards our premium-based sensors, which are Rainbow, as well as those advanced parameters.
We also have some significant milestones with our Philips contract next year where we're launching NomoLine capnography as well as O3 cerebral oximetry, and then later next year, we'll have the integration of SedLine, probably for launch late next year or early 2021, and then Rainbow is kind of in its second year of launching with Philips on that contract, so that's going to be an opportunity for us to continue to expand there, and then just we have geographic expansion opportunities. Our OUS business is doing very well, so we're going more and more into some other markets and then also seeing strong growth in different geographic regions that are expanding, so there's a lot of opportunities as we move ahead, but we see continued steady growth.
One thing you already raised, and it seems like the message is evolving a little bit on the last call, this revenue per driver. We've focused, when we think about Masimo, very much on driver growth. And obviously, you're having an extraordinary year this year, over 60,000 drivers run rate. Why are you focusing us now on is the future as much about driver growth or no, it's going to be even more on this penetration of existing accounts?
Yeah. I think we're still seeing very strong growth in our installed base. Actually, it's stepped up in the last two years. If you go back a couple of years, and I'll get into this before I jump into the revenue per driver, but we're seeing strong installed base growth. This year, we're seeing about 8% growth. Last year, we saw about 7%. And the year before, pre the Philips contract, we were seeing growth of about 6%. So we've seen a 2 percentage point increase in our growth rate in the installed base this year because we got to 60,000 drivers a lot faster than we ever expected. Driver shipments are never linear. We provide that information to help analysts and investors build the installed base of what they think those assumptions are. But it's never linear.
There's always we have our big large OEM customers that are purchasing based on inventory, stocking levels, and those types of things. So the best way to look at it is the growth in our installed base, where is it going? But even more importantly is our revenue per driver. As we move more from a $10, let's say, SET sensor and move more—and that's a two LED sensor—and move more along the continuum of 4, 6, 8, 10 LEDs, which could be a Rainbow sensor, we have much higher price points that could go all the way up even to the 10 LED, which could be upwards of $70-$100 per sensor. So we're going to continue to see that shift as driving more revenue per driver as we go more towards those higher, more sophisticated advanced parameters.
And then also what will help as well is the advanced parameters like NomoLine capnography, SedLine, and O3 regional oximetry. Those are additional parameters that are going to provide more and more revenue per driver. And we haven't even got into hospital automation, which will also give us the ability with more of a SaaS model for software and service revenue to contribute to that revenue per driver. So that's where we're heading. And I think the important thing is to focus more on where we can penetrate into each of the markets that we operate in and make it more of a market penetration model. And then you'll see that we'll have more and more revenue per driver over time.
I mean, it's very clear. But help us understand why somebody who's happily using a $10 SET sensor is going to say, "Yeah, let me spend two or four times as much on Rainbow." Why are they ready now? And maybe, Micah, talk a little bit about, because I haven't heard you all really talk about the logistics of making that happen. What do you have to do? Do you need a specialized sales force or clinical group to make it happen? Help us understand how you're going to drive that process.
I think we're continuing to build more and more clinical data, and we believe that what we can do in terms of if you think about a hospital system and some of the largest cost items, for example, are blood transfusion costs, and when we look at hemoglobin, which is in our Rainbow sensor, and you combine that with PVI, which is fluid responsiveness, you can make better transfusion decisions, and if you can lower transfusion costs, you can, based on what we've seen in some of the clinical studies, you can lower costs for a hospital system that way more than offset the cost of those sensors, so that's going to be something that we're willing to even put our money where our mouth is and look at risk-sharing type structures as well that could help us drive deeper penetration there.
We're going to come back on more specifically, but another comment you all have made in recent quarters, I feel like price headwinds have eased, if that's the right word, or are less onerous, and that's helped growth, obviously. Help us better understand why that's happened, why it's happening, and how confident you are that it's going to stay that way.
Yeah. So Joe and the leadership team over five years ago set a floor on our pricing because they looked at it and said, "Based on what our technology can offer and the differentiation of our technology, we will not go lower than this price." And they set that floor five, six years ago. And our sensor contracts are five-to-seven-year contracts. So that's why we've seen what used to be a heavy price competition, and we were willing to compete on price, and we finally held the ground. We're seeing those prices stabilize because we're getting further along in that five-to-seven-year contract cycle, and we're now towards the tail end of it. And we're seeing those prices stabilize. And in some cases with CPI and different things, we're able to increase pricing. So that's something that used to be a headwind for us.
If you go back five years ago, that now has stabilized.
Great, and one of the things I want to try to bring out today is some of the key growth drivers. You've touched on general floor as an opportunity. Pulse oximetry today is standard of care, obviously in the critical care setting, or the NICU, the ICU, not so much on the general floor. What initiatives, what catalysts are ahead, and how should we frame our expectations about your ability to penetrate that much larger opportunity on the general floor?
That's right. I think when you combine Masimo's SET technology, the accuracy, and the ability to minimize false alarms and detect true alarms, then you combine that with Patient SafetyNet where you can monitor up to 200 patients on a general floor. We've already seen studies like Dartmouth-Hitchcock study that they started that back in 2008 right after we launched Patient SafetyNet. And they did a study over a five-year period where they saw no more brain damage or dead in bed from out on the general floor, especially those who are taking opioids after a surgery because they're being continuously monitored. And they also saw a reduction of over 50% in ICU transfers, rapid response team activations, and all those things combined caused a reduction in cost by $1.5 million per year.
So I think it's those types of studies, and we heard that they're going to be publishing a new study that has now 10 years' worth of data because they went and expanded even further throughout their hospital system, and they've got much higher cost savings that we should see coming out of that study. But those are the types of things that we're really focused on. And also with hospital automation and things we're doing there, we think that that's going to also now start to drive deeper adoption as we start to kind of land and expand within hospital systems, not only from the critical care areas but also onto the general floor.
You opened the door beautifully. My next question is about hospital automation. And I just want to better understand, help us better understand what that means. I mean, I feel like there's so many elements. You do have an ecosystem. You do have various components in various places. But this last quarter, for the first time, you called out that you have seven hospitals around the world who have, I don't know, are officially designated Masimo hospital automation adopters. What's that mean? How are you defining it? And maybe help us better understand which products are critical to saying that hospital is hospital automation or something.
Yeah. Yeah. So we look at it as having multiple elements that we offer because we're now offering this ecosystem, this enterprise-wide solution for being able to manage the flow of patient data through a whole hospital system and also manage it real-time continuously where we can actually take the data, learn from that data, and then make predictive algorithms that can help improve patient outcomes. So if you think about the ecosystem we've created in hospital automation, the components of it are, for example, if you're in the hospital room and you're at the bedside, you've got Root, which is the open architecture, high connectivity hub that can pull parameter data, high fidelity waveform data, alarms, events, two-way audio video. All that stuff can then be shuttled into what we have as an Iris Gateway server.
That server can basically take all that data, and the flow of the data is not limited. It could take it to any endpoint within that hospital system. It can shuttle it into the translator in the HL7, get it into the electronic medical records. It can also take it back into the hospital room to display all those different parameters on Root, and there's also what's called a cockpit display, which is UniView, where it's thought of as a large screen monitor where you can take data from any of the OEM devices in the room where you can show the parameters on the screen. You can also show the oxygenation state of a patient. You can see ventilators, infusion pumps, all the data being collected, and clinicians and physicians can customize those screens so they can provide better care as a team within the OR.
So that's one example of being able to take the data and put it into the room so they can real-time continuously monitor that patient and their status. The other thing we can do is take it to the nursing station where we have what's Patient SafetyNet, where you can monitor up to 200 patients. There's alarms and events. We build in algorithms too that can signal when a patient is deteriorating so then they can respond to that patient. And then the other one is, as we think about getting it to Replica, which is the software application for smartphones where we have two-way intelligent notification between clinicians. You can escalate alarms and alerts to those who are on duty and those who are nearest to those patients. So there's a lot of things we can do with data.
And one of the most important things, and we're now getting into, is with Halo ION, which we recently launched, we can now deploy advanced algorithms. So we can learn from the trends in the patient data, whether it's waveform, parameter data. We can establish baselines for those patients and then deploy advanced algorithms to help with decision support. So whether we want to prompt a caregiver, a nurse, or a clinician that, "Hey, this is some of the options you have for that patient based on where they're at the moment," they can do that. Or we can provide alarms that signal, for example, a Halo Index score that shows that a patient is deteriorating. Here's some of the areas or the parameters that are at risk.
And then ultimately, we want to get to the point where we can deploy algorithms that can detect early stages of sepsis so they can treat them with antibiotics earlier. But it's really ultimately getting to earlier intervention to where we can reduce the length of stay for a patient and ultimately take that continuum of care into the home.
It's clearly compelling, and anybody who visits Masimo headquarters can see the suite where it's all laid out. But when we hear you say seven and imagining that these are all, to some extent, already Masimo customers, how do we think about each (and I'm just throwing this out there, Micah) each incremental full hospital automation could be, I'm making it up, $5 million, $50 million in incremental revenues. And so how are we going to track this progress? Are we going to hear, "This quarter, we added another three. Our goal is to add 25 this year." How are you going to frame it to us as we talk about 2020 and beyond?
I think we'll continue to talk about the accounts that are starting to convert. Think of it this way. Whenever we go in, it is a land and expand that I mentioned earlier where we may go into one care area, the hospital, and bring the suite of automation or several of those multiple components of that, and then we start out, let's say, in the OR where you're using UniView or Root and then maybe Iris Gateway and Patient SafetyNet, then our hopes are to then continue to prove out that concept and then expand through the whole hospital system, so the seven or eight that we've contracted with so far are kind of those land and expand opportunities where we're getting in a care area, and then we are hopeful that they'll see the clinical value and expand that through the hospital system.
As we think about the market, we look at it as about a $1.5 billion market or more.
Global.
Global. Or even higher than that. Because if you think about it, in the U.S., there's about 125,000-150,000 critical care beds and about 450,000 general floor beds. We think that the average selling price per bed per year will be anywhere from $1,000-$5,000 per bed depending on which care area and what all technology is being used. So this is a big opportunity, and I think that that's how you think about it as we talk about some of these contracts coming on. They're getting a carrier, and then they're going to expand.
One aspect of this that struck me at the analyst day looking at everything you're offering is that maybe the Masimo story is also evolving on this front from less about hardware, more about software, which has interesting implications for service, for costs, for margins.
Margin expansion.
So could you talk to us about that? Am I making this up? I mean, is your product mix going to shift more towards software? Is that higher margin? And how do we think about the impact on your margin evolution going forward?
Yeah. Yeah. In addition to moving to those higher ASP sensors, we think that this is going to be a great opportunity to expand margin as well because it is moving towards more of a SaaS model. So we'll generate more and more revenue per bed. We'll be able to leverage a lot of the costs that are out there as well as the installed base. So this is going to be a great opportunity for us to expand margins as well.
Turning to another key area of potential incremental growth, the Opioid SafetyNet. I know that you're working with the FDA to sort of finalize things, and I think you've talked about slightly confusingly late this year, early next year approval. Could it come sooner versus later? Where are you in that whole process? And maybe talk a little bit about briefly the opportunity as you see it.
Yeah. I mean, we're hoping to have the full FDA submission later this month. As part of the FDA opioid crisis challenge, they've been committed to a faster pathway for those eight companies out of the 250 that applied, and we're hoping that that'll be maybe 90 days or so in terms of the process or less, so it could be sometime early next year that we're hoping to get approval for it and get it out in the hands of the patients.
Yeah. And what kind of a label are you seeking? What kind of a label are you hoping for? And again, if you could frame our expectations about, for those who might not be familiar, what are the possible labels that could happen and what would they mean?
Yeah. So we're hoping for prescription labeling as well as over-the-counter. So as you think about prescription, it'd be more for chronic pain patients, post-surgical patients. And then on the OTC, we're looking for illicit users. So we're continuing to collect data, and that's why it's taken a while to get the submission ready. And it's because we've had it for the post-surgical patients because we have over 500 Patient SafetyNet installed in the US. And we've been collecting data on patients. So we have that, the opioid users and how it's impacting them, and that's in our clinical population right now. What we've had to go get is the pain clinic information as well as illicit users. So it's taken a little bit longer to get there, but that's where we're hoping to get those two labeling statuses.
That'll also determine how we go to market and commercialize as well.
Yeah. And in terms of the logistics, in whatever case, given these labels, are you ready to manufacture? Are you ready to distribute? Talk about the go-to-market aspect of getting up and running post an approval.
Yeah. I think it depends a lot on the pathway. I think what's going to be an easier pathway for us over the next year will be with prescription because we feel like we've got the clinical footprint that we can work with clinicians and physicians who are prescribing patients, and we've got that point of contact, so we've got the footprint there. The one challenging thing is going to be really reimbursement because today there's some limited use case coverage based on existing codes, but we want to apply for broader coverage, and we think that that'll take a couple of years before we can get to that broader coverage, maybe two or three years, so it's going to be a challenge to start out, but we've got the footprint for prescription.
We'll have to build the sales and marketing commercialization efforts around how can we optimize the sales channel for illicit users, which will be probably more media or it'll be website, social media. Retail pharmacies is where we go through that avenue as far as marketing.
We were lucky enough recently to host a meeting with Joe Kiani, Masimo Chairman, and I was really struck. I know Joe is a hard-driving taskmaster, at least on the investor relations side. But I was really struck by Joe's confidence in the outlook, growth, the plan. What's driving that confidence? Is it the products that you have in hand? Is it the opportunities? Help us better understand what I think we saw and heard.
Yeah. I think as we look over the long term, I think there's a lot of opportunity in just even our existing portfolio or our current portfolio in terms of SET, Rainbow, those advanced parameters I mentioned to go even deeper. And today, we look at that market as about a $4.5 billion market that we're still significantly under-penetrated in. So there's a lot of runway ahead to take share. And then if you look at the opportunities that when we laid out the 8%-10% long-term growth rate, there's multiple opportunities for upside. And as we think about those being hospital automation, opioid safety, so there's a lot of things right now that are tailwinds in the business that we're pretty excited about for the long term.
And we still think we're seeing strong results from Rainbow, but we think that that's a big opportunity that's ahead of us. And we think that there's going to be a lot of opportunity to penetrate and drive that market and develop that market over time.
Yeah. That makes sense. When we think about revenue growth, your guidance and you've been very disciplined about talking about 8%-10% top-line growth. But the last six quarters, it's hard for me not to notice you've exceeded 10%. Is that the new norm at Masimo given we're barely touching on the depth and complexity of your growth drivers? Could you be a double-digit grower? Is that the new norm? Or no, we should keep our brains in that 8%-10% slot that you hope to beat. How would you frame that?
I mean, we incentivize the company internally to grow double digits and to perform at the levels we're performing today. That being said, you know the philosophy on guidance is we view guidance as we want to make sure that we're putting out guidance and projections that we're highly confident in not only achieving but exceeding as well. 8%-10%, that's over a long time horizon. That's kind of why we've set those goals. As you've seen the last two years, we've guided at the high end of that range and delivered one to two points better than that.
Yeah. Mike, I know that since coming to Masimo, has it been two years, three years?
Two years.
You've been intensely focused on cost and managing gross margins to operating margins very intensely, and gross margins in the long-range plan, I think you're targeting 70%. That's over 300 basis points of margin expansion. That's not a trivial thing at this point. Again, beyond mix and talk to us about the drivers of these expanded gross margins and the leverage potential on the operating margin line.
Yeah. One of the biggest success stories for us has been design for manufacturability. We look at what our sensors, our boards, our equipment should cost. We look at that over a longer-term horizon and try to design to get to that point in terms of where we want to be on cost. Those projects have really done very well the past two years and are going to give us a lot of runway in years ahead. That's probably one of the bigger areas of improvement for us out of the 300 basis points. The other one is, as we mentioned earlier, continuing to drive more towards those advanced, more sophisticated multi-parameter sensors that carry a higher price premium. That shift in mix should help us to leverage our installed base and also shift and convert customers to higher margin premium-based products.
So that's going to be another big opportunity for us. And then just manufacturing scale. As we achieve scale and higher volumes, that's going to give us the ability to leverage, and that's another big driver. And if you go back to some of the mixed benefits from the converting customers to our RD sensor line, which is a higher quality sensor but lower cost. And that's been a benefit from one of those design for manufacturing projects that we undertook years ago.
Over the last couple of years, at various moments, people have been very excited, occasionally not in a good way, about M&A and your ability to use your balance sheet. But again, I feel like you're absolutely visibly taking a very disciplined approach to M&A. How do we think about the balance sheet, how you're thinking about it strategically now, and when you're thinking about cash use going forward, what are your priorities as you think about today?
Yeah. I mean, it really hasn't changed. I mean, we want to continue to invest back in innovation into the company for organic growth. But we are continuing to look at opportunities to leverage our strengths for acquisitions, whether it be leveraging our clinical footprint or high-volume manufacturing capabilities. So we look at it from a strategic lens, and then we also look at it from a financial lens and try to make sure that we're looking at opportunities that are going to be accretive to our long-term revenue growth and our operating margin expansion. And then, of course, share repurchases. We have about 4.8 million shares left in our share repurchase program, and we set those up through 10b5-1 that has structured pricing and volumes. So it's coming through nicely.
I don't think it's us.
Yeah, so it hasn't really changed much.
Yeah. Interestingly, I think people have accepted that the Philips partnership and relationship is going well. I feel like there's been a diminishing number of urgent questions about it. I think we have a mic swap out here. I'll wait for that to happen. Again, at a high level, just in remaining minutes, where are we in that relationship? And is it, in fact, on plan? And are your separate but related sales of Masimo products after the boards are installed? Are you on track where you hope to be?
Yeah. I think if you look at Rainbow, that product line was on track for us, doing very well. We're seeing good progress there. Also expanding into new markets and geographies. We've expanded. I think now we're in seven countries now. So that's been a great advancement for us. But if you look at the advanced parameters, we had hoped to have those launch earlier. So that's been a little disappointing there. But we did complete the integration work with O3 cerebral oximetry as well as NomoLine capnography last quarter. So we'll be launching that hopefully early next year and then SedLine later next year. But everything else, it's still very early innings because we're still very early in the contracting cycle, even on Rainbow, even though we've started integrating those boards and shipping those drivers out late 2017. So still early innings. There's a long tailwind of opportunity there.
And we think that because Philips is 50% of the multi-parameter monitoring market and we have low share relative to what our other 70 OEM partners have, if you look at most of our OEM partners, they're 50% or better in terms of the share of our sensors in their accounts. So we look at this and this is going to be about a 20% opportunity to increase our market share over time.
Excellent. Unfortunately, we have to stop there. Thank you so much, Mike. We really appreciate it.
All right. Thank you, Rick. Thanks so much.
All right. Thanks.