Hi, I'm Bill Quirk. I'm the Senior Diagnostics Analyst at Piper Jaffray. Welcome to the 9:30 A.M. Session. I have the great pleasure of introducing the Senior Vice President of Finance, Todd Koning, from Masimo. I'm going to hand the mic over to Todd for a few introductory comments, and then we'll roll into Q&A. Of course, if you have any questions, please feel free to ask them. Todd.
Thanks, Bill. So Todd Koning, and I'm our Senior Vice President of Finance at Masimo, and had the pleasure of working there for about a year and a half now. Masimo is a global leader in non-invasive monitoring of pulse oximetry and non-invasive monitoring of hemoglobin and a number of other things. We've had great success doing that, and really pleased to be here, Bill.
Fantastic. So first question is, the company's established some long-term parameters for financial performance, including long-term revenue guidance of 8% - 10%. You've been comfortably, shall we say, above that here for some time. So should we think about re-rating that to kind of a minimum of 10%, Todd, and upwards of 12%? How should we think about that over the next couple of years?
Yeah. So if you look at, I guess if you just look at our recent performance, 2018, we finished up at just short of 12% on a constant currency basis. This year, we're guiding to 12% reported, 13% constant currency growth on a $933 million revenue number. And our approach to guidance is really one to put numbers out there that are prudent and thoughtful, and numbers that we believe we can exceed or achieve and have a reasonable opportunity to exceed.
And so philosophically, that's where our guidance is. And I think when you look at our long-range plan, that long-range plan is really a seven-year plan. We finished up our 10-year plan in 2017 and kind of relaunched a new seven-year strategic and long-range plan starting in 2017 and kind of going through 2024.
As you said, that really has a revenue parameter growth of 8%- 10% on the top line, delivering 30% operating margins at a minimum of 100 basis points a year, and delivering EPS.
As a target.
As a target.
As a target.
Yep.
Right.
And delivering EPS growth at one and a half times the sales growth rate over that time horizon. And inside of that 8%-10% revenue growth, about 85% of our business is in the SET pulse oximetry market. That market's about $1.7 billion, growing at 3%-4%. We have kind of 40%-43% share in that market. We have a history of taking about one to two points of share per year in that market.
The second portion of our business, which is about 10% of our business, and that's growing at about 10%, that's Rainbow. And that market is about $1 billion in opportunity, although we are penetrating that market. So that is an unpenetrated market. That's a market that we have to create and have been creating. And our long-range plan contemplates our business there growing at about 10% a year.
Third, about 5% of our business is in the advanced parameters. Those advanced parameters are in three different markets. One is the capnography market, which is about a $500 million market, growing mid-teens. We have low single-digit share or mid-single-digit share.
The second is brain function monitoring, which is about a $125 million market, where we have single-digit share growing mid to high single digits. The regional oximetry market, where that market's about $125 million, growing at high single-digit rates as well. In aggregate, that part of our business has an $800 million market growing low to double digits, where we have mid-single-digit share. We expect that to grow at 20%.
And then so that all rolls up into the 8%-10%. We also have the Opioid Safety Net product, which is still at the FDA, but nevertheless expected to be on the market here in 2020. And excuse me, certainly be an incremental growth top-line contributor in 2021 and 2022. And so, Todd, should we really think about kind of the three elements of the core business that you outlined in that 8%-10%, and then potentially, depending on what reimbursement is and what the business model ultimately, or selling model, excuse me, ultimately becomes, that potentially being a kicker on top of that?
Yeah. So 8%-10%, as I described, really contemplates those three parts of our business. And we've talked about Hospital Automation. We've talked about Opioid. And obviously, M&A is also on the table as well for us. And really, that 8%-10% is for our core business, as we've described it today, in those three segments: Hospital Automation, Opioid, and incremental M&A would all be upside and tailwinds to that as they come to fruition.
Fair enough, and then just, I guess, pivoting kind of back to the core business and thinking about driver placements, which, of course, are for the benefit of the audience, the circuit boards, the kind of power, the consumables over the long-term placement. The overall driver placements has been growing pretty tremendously for a couple of different reasons over the last several years, be it the Philips relationship, kind of ongoing market share gains, the Zoll Department of Defense contract.
Having said that, they have flattened out a little bit here sequentially over the last couple of quarters. And so should investors be concerned about that at all, given that that ultimately helps kind of drive your 12 months forward and beyond sensor placements?
Yeah. So when I look at our drivers and our driver growth, we did 60,700 here in the third quarter, 2.7% growth year over year. On a year-to-date basis, that's about 8% growth. And that's compared to a 2018 number of 14% growth. And as you identified, that 2018 number is a strong growth rate historically due to both Zoll and the Philips relationship. So going into 2019, we knew that from a comp basis, it would be difficult.
Absolute numbers would be quite strong, as you pointed out. If we did 60,000 in the fourth quarter, we'd be 244,000, 245,000 this year. So we kind of came into this year guiding to a 60,000 a quarter run rate on drivers. If you take a step back and you look at the pre-Philips, and you say, I think 2010 to 2012, we were at about 30,000 drivers a quarter.
2013 to 2016, we were about 40,000. 2017 to 2018, about 50,000 drivers per quarter. And if you look at the CAGR pre-Philips, we were at that 5%-6% CAGR rate. And post-Philips, we're at 9%-10% CAGR rate. So when you kind of strip out that step up in 2018, and so we feel really good about where we're at.
All of that to say that if you looked at the last 10 years of our driver placements and you called that the installed base, you'd see that we have about 1.8 million drivers in the installed base. That installed base is growing about 7%-8% per year and would continue to do so if we stuck with that 60,000 per quarter going into the future, because you're placing 60 and replacing 30s.
And so we feel good about Driver growth rate and Driver placements to drive the Installed base growth in that mid- to high-single-digit rate. Additionally, excuse me, we're seeing accelerated revenue. We're seeing accelerated revenue per Driver growth as well.
So as we're seeing our mix shift to the higher price sensors, in particular, Rainbow, as Rainbow's growing 10% faster than our overall growth rate, and advanced parameters are growing 20% faster than our overall growth rate, we're seeing our revenue per Driver growth accelerate to that 5%-6%. And so I think the other thing is that as we look at Hospital Automation, as we look at our new capnography product line, we think those are all tailwinds to Driver placements in the future.
So the takeaway on that is that it's a little maybe shortsighted to look simply at the aggregate driver growth because we need to consider things like sensor mix.
Correct. Correct.
Understood. And then you highlighted Philips on a couple of occasions. You've had a multi-year relationship now, albeit still early, but nevertheless kind of a couple of years into the relationship. So where is your market share in Philips? I think historically, before you had the arrangement, it was in at about the 10% or so, if I remember correctly. Where are we now relative to, say, a Dräger, right, where you've had a long-standing relationship with them or Nihon Kohden, for example, same idea?
So if you look at the multi-parameter monitor market in its totality, about half of that market is with Philips, and the other half is with Philips, Dräger, GE, Mindray, those companies. In the non-Philips portion, we've historically had about 50%-60% market share in that space. And in the Philips, as you said, we've had about 10%-15% market share.
And our relationship with Philips that we really changed coming out of 2016 is really now a partnership with them has been very, very positive for both companies. And I think the question that investors have been asking is, how is that relationship working? And that's the question you're asking. How is it going? And ultimately, we look at a couple of things.
One, the first indicator was our driver growth, which was a strong indicator that they were building inventory and getting ready to place equipment with our sockets in them into hospitals. And now really 18-24 months on from signing the deal and to really getting the products integrated into our systems at the end of 2017, we're seeing more and more contracts for sensors associated with Philips placements.
And so where we're at today with the relationship, we feel very good about that partnership and about the economic benefits both parties are seeing due to it. And so ultimately, we believe that we can get our Philips share or our share in the Philips installed base to be at parity with our other market players.
Is that a 10-year just because of the life cycle of the system? We should be thinking about that as kind of 10%- 15% to 50%- 60% over a decade. Is it fairly linear along that time horizon, or?
I think it is definitely a long-term play because only a portion of the market comes up in any given year. And if we consistently win about one out of every two opportunities, that share will be fairly linear and will take certainly a number of years as you laid out.
Ultimately, though, we think that opportunity is to take our share from 10% to, if you call it 40%, that could be 50%, that could be 40 basis points on the $1.7 billion market. So that's a very significant opportunity. So that's 20 percentage points of the full $1.7 billion market. That's $350 million of opportunity that we have available to us to get our Philips share up to parity with the rest of the market.
Understood. Questions from the audience? Okay, so 2019 is a special year for Masimo, right, special anniversary. And Joe, CEO, has talked about introducing a new product each month throughout the year. And we're obviously coming up to the end of that year. Is there kind of? It's always great to see a tremendous amount of new product innovation and organic R&D coming out of the company. At some point, though, do you worry that the sales force is maybe getting stretched too thin given kind of all the new products that they're now detailing?
I think, one, our sales force is highly capable and well-trained. And so I think on that basis, that's a good starting point. The second is that our sales force, especially when you look in the U.S., is in virtually every hospital that's out there. And so we can add resource to that sales organization to the extent that we need to.
We can either split territories or we can add technical specialists kind of depending on what is necessary in those territories. And we can do that in a way that I think ensures that we don't, I think, split the sales rep's time in too many different directions, but can really provide superior customer service and really focus on our customers in the way that they need to be serviced and focused on. That helps us drive our revenue in the best and most profitable way, ultimately.
Okay. And then apologies, Todd. I want to flip back to Philips for just a moment, if I may. You talked about earlier, you mentioned that the relationship has been very fruitful for both companies. And given that Masimo has a long-standing relationship with virtually every other OEM out there from a patient monitoring standpoint, has there been any pushback from some of those other partners saying, "Hey, you're kind of working hand in hand with Philips now.
You guys have both committed resources to furthering that partnership and effectively helping them incrementally win share"? And so the Drägers and the Nihon Kohdens and the Mindrays and such, have you faced any pushback from them on the nature of the Philips deal?
One of the really nice things about the deal with Philips is that it's non-exclusive. And so if you go back to the history of Masimo and the fact that we were able to integrate our technology, I think it was with GE at the very beginning. And as they began to win share, then other OEMs did the work to integrate our technology into their offering as well.
And really, I think that's the hope and the opportunity here is that as Philips becomes more competitive, that we have the opportunity to really integrate our rainbow technology into the other OEMs as well.
Understood. Question on capital availability at the hospital level. We've heard a little bit, not a lot, but a little bit, particularly coming out of the third quarter about kind of different pockets of capital tightness across different sectors. Are you seeing anything like this at the hospital level, by chance?
Yeah, we're not really. I mean, I think at the end of the day, we can structure our business to essentially utilize whatever funds are available in the hospital. So if capital funds are tight, we can structure the economics so that it doesn't pull from capital dollars but pulls from operating dollars. If they have capital availability, we can structure it that way. So we can be flexible to structure our economics in a way that makes sense for both parties.
Okay, but to be clear, it doesn't sound like you're necessarily [crosstalk] seeing an option for you, but you don't have to take that option at present.
Correct.
Okay. Understood. And then pivoting a little bit to Opioid Safety Net. On the most recent third quarter call, you talked about, I think it was, if I remember correctly, I think one of the three modules had been submitted. Are all three of those submitted to FDA right now?
I'm happy to say they have. They have been submitted. So we're real pleased with that. And as you said, the remaining two modules, those were submitted, and it's with FDA now.
Okay. And then how should we think about the timetable around milestones in terms of the kind of go-to-market strategy, right? The companies talked about having some optionality depending on labeling and everything else that comes along. But from an investor standpoint, how should we be thinking about that timetable?
And then if we think about kind of the initial contribution, obviously if this kind of stretches into 2020, we're looking at obviously a potentially much more significant contribution in 2021 than, say, 2020. So help us kind of lay the groundwork for that product.
So we really think that positive economics for us happen when we get reimbursement. And that's really a post-2020 event. Hopefully, it's a 2021 event. And ultimately, as we get approval sometime in 2020, hopefully from FDA, we'll then know if it's Rx or over-the-counter. To the extent that we have over-the-counter options and opportunities and we can do self-pay, we can approach the market in that way. And ultimately, we're really kind of thinking about three different patient populations.
One is kind of this illicit population, which is the potential. Another is the post-surgical population. So think knees, hips, invasive cardiac, maybe 15 million patients in that pool. And then the other population would be chronic pain users. So a lot of research out there would suggest 3% of the U.S. population uses an opioid to manage chronic pain. So there's another 9 million- 10 million.
So you kind of get a 25 million patient pool there in terms of the Rx opportunity. And as you kind of look at that and you figure one to two prescriptions per patient, you kind of get to that 40 million prescriptions per year basis. And I think that's really the opportunity that we have. So we're hopeful that we will be able to see some commercial activity in 2020. That'll largely be through a self-pay mechanism. And I think it's 2021 and beyond where we begin to see reimbursement opportunities to come to fruition.
Think about some of the additional new products or new product pipeline, excuse me. ORI, Oxygen Reserve Index, has been, I think, touted by the company and it's approved in Europe, not yet approved in the U.S. It's been kind of this long odyssey at FDA. Can you help set up the framework here for effectively kind of what's taking FDA so long, right? Is it just kind of continuously coming back to you with questions? Are they asking for additional clinical studies? Kind of what's the nature of the whole thing?
So we've been working really closely with FDA on this, and it's been a very collaborative relationship there. I think ultimately it's an index, which is a little bit different than a typical approval mechanism. And they've just been looking for more data. So we've been collecting that data, providing that data, and kind of iterating that process with them. And I just can say that we're working closely with them, and we're hopeful for a positive outcome.
Have they proposed needing a new full clinical trial, or has this been incremental data around the edges?
Just more incremental data.
Okay. Okay. And then you touched on it earlier, but another exciting recent product launch has been Hospital Automation. And certainly, based on your comments and Joe and Micah's comments, it does sound like you're seeing some nice traction. How should we think about the revenue contribution to the company, given that it's a slightly different business model in terms of a SaaS model versus kind of what you've done historically?
Yeah. So I think as we launched hospital automation and on the second quarter call, we talked about seven opportunities that have come to fruition and really in pilots with those customers, which has been a very positive outcome for us and good experience. Really what we expect is we expect that as we sell this offering and we sell it to a customer, we would have a price per bed per year model and contract over multi-years.
And so as you said, software as a service model where you're getting a revenue stream over a period of time on an installed base. And so really we think and believe that this hospital automation opportunity will look and feel kind of economically much like our existing business where we build an installed base of connected beds and have a revenue stream on a per bed basis.
Is the very nature of the product, does that create a much longer selling cycle per se than some of the core business?
Yeah, because it is an enterprise kind of sized solution, if you will. It does create a need in the hospital and at the customer to have kind of a multifaceted approach to selling. And you got to have cross-functional teams. And we find ourselves more and more often speaking to the C-suite across multiple functions to explain and to really describe and show the value of our offering. And ultimately, that does take a little bit of time. But so far, I think we've seen a fair amount of success and have a good pipeline.
Then just thinking about, I guess, that initial pool of opportunity or the initial interested parties, are these existing long-standing Masimo customers that are using Rainbow and have been using SET for a long time, or is there potentially a tool here to help you open up additional market share for the core business relative to what you're seeing presently?
So that's what's pretty exciting is that it's both, actually. So obviously, I think people who have roots in place, people who have our products and know us well and trust us, that's an obvious place to go. But we've also seen this as a way to really win opportunities competitively. And so with a fairly small population of experience so far, I think I'm positively encouraged by the opportunity that Hospital Automation presents.
All right. Additional questions for the group? Okay. If not, takeaway message on Masimo for everyone here in the room.
That's great. I think one of the things that's unique about Masimo is that, and you touched on it, Bill, is that this installed base concept that we have both in our existing business and hospital automation. Going into any given year, because our contracts are five to seven years long, we have a fairly steady view of a decent view going into a year of what the revenues are like coming up.
That gives us an ability to plan and execute in a little more planful way versus other competitors. I think it also makes our business a bit more sticky as well. Ultimately, the business is fairly leverageable. As we go on our path to 30% operating margins, we feel good about that.
I think ultimately the strength of the business, the predictability of the business is strong and unique relative to other assets in the space.
Excellent. Todd, thanks so much for joining us today.
Thanks, Bill. Appreciate it.