It is my privilege and pleasure, great pleasure this afternoon, to welcome Masimo and specifically to welcome my good friend, Micah Young, Executive Vice President, Chief Financial Officer of Masimo. Micah's done an extraordinary job in the two or three years now, Micah, that you've been there. Time flies when you're working hard, and it is great to see you today and to dive into some of the topics that we heard about and learned about on your recent quarterly call. Micah, I apologize to everybody every time as we start these for bringing up COVID again. It's such an overwhelming issue every day. It seems like the numbers get worse and the situation more complicated, and I know for Masimo there's a complex set of puts and takes that COVID brings.
Can you talk about sort of the continuing evolution of this challenge for you and how we should think about this recent second or third wave impacting the company for the rest of the year and in terms of setting you up for 2021?
Yeah. So some of the puts and takes we're thinking about as we move into 2021, we haven't provided guidance for next year, but some of the kind of the high-level theme is that we're expecting to see improving growth rates from our single patient use sensors. If you recall this year, of course, with the deferral of elective procedures back in March and that kind of persisted and impacted our sensor volumes in the second quarter, they were down 8% in the second quarter worldwide. I think the U.S. was down about 13% in the second quarter. And then we saw a recovery back in the third quarter where our worldwide sensor volumes were up 6%. So a nice rebound, and it's been a steady rebound through the third quarter.
And we are implying in our guidance this year that we'll continue to see it recover as procedures are recovering. It'll be a steady recovery. And if you think about that for next year, we expect that to be an increasing sensor volumes for next year and higher growth rates on what will be easier comps in the second and third quarter of this year in 2020. And if you think about the growth rates, in addition to the surgical procedures recovering and our sensor volumes recovering, we also have a large and growing installed base of newly installed monitors this year. And that's been up about 17% increase in our installed base. So with what we've shipped out this year, we've shipped about 470,000 driver shipments in 2020. And that's more than around two times our normal run rate. We typically ship around 60,000 per quarter or 240,000.
So, that increase of 17% in our installed base, we're expecting that that's going to generate incremental sensor revenues in addition to the recovery in the sensor volumes on some of those easier comps in the second and third quarter. The comps in the first quarter for sensors next year will be a little bit compressed or tougher comps because we did have some additional sensor buying and stocking with some hospitals there in the first quarter, but second and third quarter, much easier comps compared to 2020. The other thing is that'll be offset to some extent by tougher comps related to the stronger demand that we've seen for our technology boards and instruments in 2020. As I mentioned before, we've seen record driver shipments this year and record growth in the installed base. And with that came very strong ordering for capital equipment.
We expect to see those shipments next year returning back to that 60,000 per quarter range and about 240,000 for the year. So that's kind of back to normal levels. If we see the sensors recovering back to normal levels as well as the capital equipment, that should also steadily improve our gross margins as we head into next year. As our product mix, which has been a pretty significant headwind for us in 2020, as that returns to normal next year, we've already guided this year. I believe our margins were about 64% in Q2, 64.5% in Q3. And then we've implied in our guidance about 65.8% in Q4. And we should see that steadily improve as we're seeing things normalize to get back to normal business patterns. That being said, we also have about 100 basis points this year or more of headwinds due to COVID-related costs.
We put a lot of safety measures in place within the manufacturing facilities throughout all of our facilities, really for social distancing, making sure we've got the right protective equipment for our employees, and we've also seen significant costs in terms of our supply chain with some of the freight costs increasing as some of the carriers are passing through some higher costs as well, so we kind of quantify that as about 100 basis point headwind we're seeing this year, and we think that that'll continue through next year, so even though we're going to see nice improvement on gross margins, we still will have that 100 basis point headwind next year, so those are some of the key themes as we're thinking about 2021.
Right. But obviously at some point, I guess it'll go away or be resolved, and just to, I didn't mean to jump into gross margins right away, but while we're talking about it, you very nicely laid out the second quarter, third quarter, fourth quarter progression for 2020 and emphasized the 60,000 per quarter run rate normalized, if you will, next year. All things equal, what kind of gross margin? I'm not really asking for a price, I'm sort of saying what is a normalized gross margin that that kind of run rate would imply? I appreciate there's still going to be puts and takes related to COVID costs, etc.
Yeah. Just at a high level, Rick, I think the way to think about it is we guided to about 68% this year, which is about 100 basis points coming into the year improvement over 2019. We were making nice improvements there, tracking well until the pandemic hit. And what we saw is the headwinds we're seeing, we're seeing probably over 200 basis points of headwinds due to the product mix. If you normalize for that, we would expect to be back up closer to that 68% next year. However, we've got also that 100 basis points of headwinds that will still persist next year related to COVID. So maybe 68% comes down closer to 67%.
Gotcha. Yeah, that makes sense. I appreciate that extra color. And back to the impact of COVID and second wave, I must say every time I see any report about anything, I'm hearing about incremental pushback delays on elective procedures again, particularly in the areas hardest hit, particularly in the heartland of the U.S., Upper Midwest, etc. Are you seeing that? And when you, I don't know if the perimeter of the United States is recovering exactly, but when you think about your global business, does that incremental headwind of delay, whatever it is, does that get offset by strength elsewhere? How are we thinking about it in the long term?
Yeah, I think I do believe that hospitals are better prepared for a second wave. If you go back to earlier this year in the first wave and the surge, a lot of hospitals were really trying to ramp up and increase their ICU bed capacity. And we saw a lot of that happen and take place in Q2 and a little bit in Q3. And we feel like they're much better prepared now for a second wave. That being said, we could see some additional incremental demand for those additional hospitals that may not have been prepared for that initial surge as well as the second wave.
So that would be kind of a tailwind opportunity here that could offset any pullback in sensor volumes if elective procedures slow a bit in certain pockets or regions, either whether it's in Europe because we're seeing some surge there or in the U.S. But we do believe that because hospitals are better prepared, they're going to be able to manage better and kind of sustain elective procedures in a better way than they did back in the second quarter of this year because they have better safety measures in place. And I think they can manage the COVID population in addition to maintaining their procedural volumes. But that being said, in the hard-hit areas, you may see a little bit of pullback there.
Right. We've talked about the general ward as a major opportunity. Joe's talked about it for a long time. Does COVID represent that final tipping point in terms of adoption? And just in the simplest terms, where are we today post the COVID ramp-up with general ward penetration? And is this going to be a tailwind for you all for the foreseeable future?
Yeah. Yeah, Rick, I think what we saw, a great example, was back in the second quarter. When we saw the surge as hospitals were preparing and increasing that bed capacity for ICUs in the short term, we got pretty good visibility into our direct business. Even though that represents only 25% of the drivers that we ship, this other 75% goes into our technology boards that go into OEM multi-parameter monitors and goes into their inventory and then they sell it. But if you go back to kind of our direct business, what we saw in the second quarter was not only strong demand for our own Masimo brand equipment, but we also saw strong demand for Root with vital signs. And we saw Root sales in terms of unit sales up about five times what their normal run rate is on a quarter.
That's encouraging because those customers are likely to not only increase capacity in the short run, but adopt monitoring on the general floor over time. I think another data point is our Patient SafetyNet installations. We had a record quarter of Patient SafetyNet installations. Our monitor beds, and if you think about Patient SafetyNet, it's where you can monitor up to 200 patients centrally or from a central nursing station. Those can be on the general floor. Our increase in monitor beds was about 10% in the quarter in terms of installations. That typically takes four quarters or more to get to that kind of installed base increase. So that was a big indicator that we believe that we're kind of at that inflection point where we think we will see more adoption of continuous monitoring on the general floor.
That's exciting to hear. I want to focus, if I could, on some of your new product opportunities and as well the potential for M&A, or further M&A, I should say. Masimo SafetyNet is the one I always find intriguing. As of the third quarter you had, I think 140 accounts, if I remember correctly, and maybe some 2,000 customers evaluating. It's sort of a silly question, but just directly, how many of those 2,000 customers is it reasonable to evaluate? And I assume that pipeline will grow. Is it reasonable to think about converting? And how do we take step one, step two? How do we take this step into what's that all mean for revenues? I don't even know how to take that final step.
Yeah. Absolutely. And if you think about it, Rick, we were in the process of working with the FDA on Opioid SafetyNet. And we took the majority of the elements of that platform. And we were able to reposition that with the FDA to help with COVID patients and help hospitals better manage COVID patients. So if you think about it, we already had the Radius PPG device. It's a wearable SET sensor device. And that was already out there and approved by the FDA, but we were still trying to get Opioid SafetyNet approved. And we're still in that process, but we were able to reposition it, get that out there. And what hospitals found was there's two use case models. There's one where they can use it in the hospital. It's a tetherless device that monitors with SET pulse oximetry.
They can put the patient in the room and move the equipment outside the room and monitor them from a distance. And that helped them manage those patients and reduce transmission risk of the disease. The other use case is being able to take those patients with Masimo SafetyNet, where they can use the wearable pulse oximetry sensor in combination with a smartphone device and be able to do monitoring at home and then transmit that back into the hospital or the clinician. And that allowed hospitals to basically manage the patients who are less severely ill with COVID or any other illness in the home and then bring them back in when they become more severely ill. Sorry. And that really freed up bed capacity, helped hospitals free up bed capacity and better manage that patient population. So that's been a benefit.
And hospitals are seeing that innovation, especially right now during the pandemic, how we can help. And they're also thinking of more use case models as well in the future. And some of the things that we have definitely mentioned and talked about is expanding it to other disease states. So COVID is, I don't think you're going to see a material amount of volumes to our overall revenues just from COVID patients because that's going to ebb and flow with the number of cases. But longer term, as we continue to expand the platform, not just with Opioid SafetyNet, but also to manage other long-term chronic disease states such as COPD or CHF, that's where this application becomes a much broader application from going from the hospital into the home and taking more advantage of the telehealth capability that we have as a company.
So I think that the adoption, we're hopeful that all 2,000 of those customers over time are going to see the innovation and convert. And people who are seeing that innovation are also interested in a lot of the other things that we can do, such as hospital automation, because they're seeing the cutting edge there and they're wanting to learn more about Masimo.
So really, it could be a door opener for maybe the broader portfolio you're saying.
That's right.
I'm putting words in your mouth, Michael, but so you're saying just translating this early success for an analyst into dollars, it's hard to frame it, really. I'm not trying to give you an out. I'd like you to, it means X, Y, Z.
Yeah. I mean, Opioid SafetyNet, we've talked about that. That we think is a $4 billion to even potentially double that market opportunity for us. The opportunity to expand into other disease states and go broader in telehealth, we think is just as big of an opportunity there. It's just going to take some time, and I think for Opioid SafetyNet, reimbursement is going to be a critical pathway for telehealth and being able to expand disease states. We don't necessarily have to have a formal labeling status there because we believe that we can monitor with those similar parameters that we're doing in the hospital. So that can be something that could get pretty early on adoption.
Gotcha. And I was going to ask anyway, Opioid SafetyNet specifically, any update, any incremental color, any more thoughts on timing of final approval? And I don't even know, should we imagine that the political change and handing off the baton, if it gets handed in Washington, is making it more complicated now?
Yeah. I think the way we're looking at it is we were hoping for approval earlier this year. And then, of course, COVID hit. And of course, we were able to reposition some products ourselves, but the FDA was clearly focused more around emergency use authorizations and those types of things. But we have been continuously working with the FDA, and they've been great to work with. And I think they're trying to, they're asking the right questions. We initially submitted data for patients in the hospital. If you think about the Dartmouth-Hitchcock study and some of those types of studies, there's a wealth of data we have in the hospital setting for managing patients who are on opioids. What we don't have yet, and what we're trying to gather is basically data on patients that are outside of the hospital setting.
If you go back to our investor day, we talked about going after, kind of initially starting with the market of going after patients who are prescribed opioids post-surgery, so as they're discharged from the hospital, this device would go with them, or patients who are long-term chronic pain patients, and then third was the illicit use patients, and so we're trying to gain data there that's outside the hospital setting, and it's just a matter of time. We're collecting that data, and we're hoping to submit soon, and our fingers are crossed. We're hoping maybe first half of next year we could see this roll out.
I'm going to ask you sort of an off-the-wall question a little bit. I mean, a year ago on a call like this, the first question would have been, how are things going with Philips? I feel like people have stopped asking. And as I was rereading the transcript, I thought, you know what, how are things going with Philips? Any update there? And has COVID or anything that's going on gotten that relationship or connection off track in any way or enhanced it?
No, I think it's been a very successful partnership. It was a partnership that probably had tension years ago, and now it's more of one of collaboration, and I think we're making great progress both outside the U.S. and even with things that we're doing here in the U.S. We had one of our strongest contracting years for Rainbow back in 2019, and that Rainbow technology is something that we're trying to market and promote alongside our OEMs, and particularly Philips.
Going well. Good. Micah, the balance sheet remains in stellar shape. You have a lot of financial flexibility. You've done a couple of deals. How are you thinking about capital allocation over the next year? Do you feel like you're likely to be more active, less active? Is the M&A pipeline full? What's going on?
Yeah. So I mean, you've seen this year. Over the course of the past 6 to 12 months, we've acquired, completed two acquisitions already. We've had licensing deals. And we've also, here recently, we have a pending acquisition. I can't get into a lot of details there. It still has to close. So we've been very active from an M&A standpoint. What I can tell you is that's one of our main priorities. We're looking to really strengthen the business in a couple of areas. Number one is hospital automation. That's why we looked at Connected Care and we acquired that business from NantHealth. It gave us a very strong commercial footprint, a good implementation team for hospital automation, and it also gave us access to 400 customers for that area of our business.
And if you think about TNI, which is the high-flow nasal therapy, oxygen therapy, that business was an opportunity for us to enter kind of the respiratory space, but also a product that can be used in both the hospital as well as the home. So when we look at our strategy around acquisitions, a lot of our focus is going to be hospital automation. Is there anything we can do to augment that business? Hospital to home and telehealth. Those are some of the things that we're looking to really strengthen and give us and add to our capabilities. But we also have a very robust pipeline of R&D internally. We've been investing over 10% of our revenues in R&D. And you're starting to see a cadence of new product launches. We've been on a pace of nearly one per quarter over the past two years.
So I think that M&A is number one. We're not earning much on our cash. Rates are near zero. So I think the best return on the investment is through acquisitions.
And I'm glad you brought up new products because I was going to ask you as well. Another aspect of 2021, obviously, will be new product launches. You have been incredibly consistent and excellent in launching. Again, without announcing it, what should we be anticipating in 2021? I mean, are these incremental or major leaps forwards? Are they growth accelerators or just enhancing the portfolio and the ecosystem? What can you say to us now about what to expect?
Yeah. I think, well, first of all, Opioid SafetyNet would be an opportunity that would be a growth, an enhancement of growth. And it's digital. It's going to be either it takes off or it doesn't. But that's going to be something that could be a very strong growth new product for us. If you look at the common themes, Rick, the themes are kind of that hospital to home and more in the telehealth type space and also wearables. I mean, we've been, if you look at Radius T, which is measuring continuous, it's a continuous body temperature measurement, measures core body temperature. And that's through a wearable device, a patch that goes on the body. And then if you think about with Radius PPG that we came out with and with Centroid, where it really monitors body positioning and it can reduce pressure ulcers or bedsores.
And bedsores impact over two and a half million people per year in the U.S., and there's 60,000 deaths a year as a result of it. And it's defined as a never event by CMS. So those are things that are valuable to hospital systems. And I'm really excited about those products like Centroid and Radius T. And we're just in the early stages of launching those. So those will start to contribute revenue over time. And I think back to the key theme is we'll be rolling out products that are kind of around those areas as we're thinking about hospital and going into the home.
Talk about the competitive environment a little bit. It's always hard to talk about Masimo competitively because, yes, you do have one very large competitor. But the reality is that we had another company at the Stifel Healthcare Conference earlier today talking about connected care and monitoring. Everybody's doing it. Everybody's interested. Everybody seems to be sort of grabbing, I don't know if it's grabbing a piece of Masimo's business, but talking in language that I would have associated historically with Masimo. Is that a concern or is the opportunity so vast, plenty of room for all? Are you incrementally more concerned or how should we think about it?
Honestly, I think it's flattering. If you look at kind of, we started in terms of hospital automation, we started that project 15 years ago. Joe's talked about when they started Root and planning for Root, Patient SafetyNet, all those elements in UniView. That's been something that clinicians and care teams have been asking for for years. And they've come to us because the solutions haven't been out there, kind of the enterprise-wide or system-wide solutions. And I think what we have to offer is a few things. One, we can connect everything with Root. So we can connect everything through the hospital. There are some competitors in that space that compete head-to-head on connectivity. But that's just one element. But we bring together the connectivity aspect, the ability to take that data and flow it through our Iris Gateway server.
And that basically we can distribute that data in real time to any endpoint in the hospital. And that's where it's valuable. It doesn't go in the EMR and it becomes episodic information that's delayed. We can actually make decisions off that data. We can support the decisions of clinicians. And I think that that's a value that we bring is that real-time data flow. We can take it to a central nursing station where they can monitor all these patients. We can take it to a smartphone where we can escalate alarms and alerts to clinicians. You do have some competitors that are directly competing there in that space. But they all have elements. If you tried to match the offering we have, the full suite, it would take multiple vendors to get there, and it would take multiple servers and a lot of cost.
We can offer a very economical solution that can save hospitals money, and it can improve workflows. Hopefully, as we continue to develop advanced outcome decision support, we can help clinicians improve patient care in a big way.
No question about it, and just you've sort of touched on it, but you're, if I'm remembering correctly, something like 85 OEM customers. Any change in their behavior in general, Michael, in this environment? Are they pulling in their horns in any kind of way, more cautious because of uncertain capital or economy or COVID? Any change in behavior in that part of your business?
I think there's some OEMs that may have gotten ahead of their skis a little bit in pockets. But again, as we look at next year, we kind of see a stable capital environment. And I think that the stability is really too around pulse oximetry because this is needed in a time where you're battling a respiratory disease like COVID. And I also think that the monitoring equipment and the monitoring space in terms of capital is probably a lower expense item than if you think about imaging equipment and other things like that. So that's kind of how we're viewing it right now. And we're working through our planning process for next year, and we'll find out a lot more by the time we come out with guidance on our fourth quarter call.
But that's how we're looking at it, is pulse oximetry is going to be a priority, or we expect it to be a priority, as well as it's a lower cost item in that capital budget.
No, I think that makes a lot of sense. We're basically out of time. Michael, thank you as always for being here, for your generous commentary. We really appreciate it. And we'll call it there. Thanks again.
All right. Thank you, Rick. Stay safe and healthy.
All right. Take care.
You too.
Thanks.
Bye.