Good afternoon, everyone. Thanks for joining us at the 20th Annual Needham Healthcare Conference. I'm Mike Matson, Senior Research Analyst on the MedTech and Diagnostics team here. With me is Masimo's Vice President of Corporate Development and Investor Relations, Eli Kammerman. This will be a fireside chat, so we're going to go straight into the questions. Feel free to submit questions of your own through the box on the top right of your screen, and I'll do my best to fit them into the conversation. So I want to start out with some kind of general questions and some on kind of the pandemic and current environment. So just given where things currently stand with the vaccine rollout and COVID-19 infection rates, what's your latest thinking about the procedure volume recovery this year? Are things better or worse than you expected kind of coming into the year? Thanks. Yes. Well, first, Mike, thanks a lot for hosting Masimo at your conference this year. We greatly appreciate the opportunity to interact with your clients. Going into our perspective on procedure volumes, in the third and fourth quarters, we thought things would be moving along a little better at this point, early in the fourth quarter, that is. And then as that second wave of COVID materialized in November and December, it was clear that things were stagnating with the recovery stalling out. So at this stage, we do think we have a pretty good handle on procedure volumes in real time and where they're headed. In the fourth quarter, we were looking at 80%-85% of normal volumes, in our view. We think that volume level has persisted into the first quarter of this year, especially in the months of January and February. And then in March, things started to ease up a little bit. So it's looking likely that we ended the first quarter in a better position than we started it. Our expectation now is that we see a tick up in volumes in the second quarter that follows on from what was going on in March. And in the second quarter, we get back into that 90%-95% level. But we don't have a full recovery until we're well into the third quarter. And our expectation now is that we end the year at 100% of normal volume. So it's going to be a gradual ratcheting back up in our perspective. Yeah. Okay. That's helpful. And then your sensor sales grew more slowly in 2020, but they did seem to perform better than the trends we saw with actual elective procedures. And I know elective procedures is a big part of where they're used. So is there, I guess, one, what drove that differential between your sensor growth and the procedure growth in the broader kind of elective procedures? And then the second part of the question would be, should we be worried that maybe hospitals kind of stocked up on some of these sensors and just worried that they were going to run out? And maybe if things let up, then they start to kind of use up, there's some destocking occurs or something like that? What we saw last year was some pretty heavy initial stocking in the first quarter because hospitals were afraid of running out of disposable sensors the same way they ran out of masks and gowns. So we had a nice spike of sensor sales in the second quarter that was in the range of 17%-19%. Then things really stalled out. In the second quarter, we actually saw a year-over-year decline in disposable sensor sales. Then things rebounded to somewhat below trend line. We grew sensor sales at 6% in the third quarter, and then there was a modest tick up from there in the fourth. So our take now is that hospitals have established a very consistent level of inventories. One of the reasons we saw sensor growth at all last year is because of the COVID patient admissions where every one of those patients would be monitored with a pulse oximeter sensor. So there was some offset there on the decrease in elective surgery procedures. And then, of course, there's the continuing surgeries for urgent procedures. Elective procedures make up about 75% of all procedures. The urgent procedures continued on. Last year, we saw overall sensor growth for the full year of about 6%, which is meaningfully below our trend line growth in the recent past of 9%-10%. And this year, we've got easy comps on sensors as a result, but difficult comps on equipment. So what we're expecting to see is a gradual ratcheting up of that growth rate as things get back to normal. Our overall revenue growth forecast this year in our guidance is for 5% growth. That includes 3% growth organically. But that's a very tough comparison against last year. We're looking at 22% revenue growth last year. So we advise people to look at a two-year CAGR for assessing our overall growth. And if you do that, you see it works out to about 13% with those two years combined. But elective surgeries are definitely coming back, and we think that that will help to push us back towards trend line this year. Was there also a difference? I thought there was also a difference between the sensor growth in the U.S. versus the U.S. and with Europe. I thought there was. Was there kind of a move toward more adoption of the single-use sensors because of the COVID pandemic, or? There definitely was a switch over from mostly reusables to mostly disposables because of the high visibility of COVID and the desire by clinicians to reduce infectious disease transmission risk, both to themselves as well as to other patients. So that helped, especially in the first quarter when we saw that strong surge in single-patient use sensors. That pattern has persisted throughout 2020. And at this point, it looks like it's sticking, but it's still too early to say that it's going to be permanent. With COVID still remaining in the headlines, the visibility is still there on infectious disease risk. And that's probably why they're sticking with the use of disposables primarily. But as COVID continues to fade, it's likely that there's going to be a reconsideration of that switchover decision because of the primary reasons that reusables were implemented in the first place in Europe, which is concerns about landfill waste as well as the budget pressures for government-run healthcare systems. Okay. And then a key factor that's going to dictate your growth, revenue growth in 2021, in our view, is the degree to which hospitals continue to utilize the extra monitors that they purchased in 2020 for the pandemic. What are your latest thoughts on this topic? And why wouldn't the hospitals just kind of take the newer monitors and just maybe replace some of the older monitors that they had in the parts of the hospitals where they had them previously, as opposed to keeping these in the general ward or other areas where they hadn't previously had monitors? Yeah, sure. What we're seeing now is the monitors we sold as part of that spike in the installed base expansion are staying in place next to the beds that they were put next to. Last year, hospitals wanted to expand their ICU capacity, but you can't really put extra beds into the ICU because it's a limited amount of square footage. So they created ICU beds by putting monitors next to beds that never had them there before. Those monitors are staying in place as those beds get pushed back into the general circulation for all types of hospital cases instead of being reserved just for COVID patients, and now that those monitors are in place, we do fully expect them to be used on some patients some of the time. It's unlikely they'll be used for all patients, but there are certain patients who are very well suited for continuous monitoring, even in the low acuity areas. The first type are any patients with a cardiopulmonary problem, whether it be surgical or medical, things like coronary artery disease, chronic lung disease, COPD, heart or lung surgery. Those are various categories where the patient would be well suited to be monitored for low blood oxygen levels. The other category is any patient getting opioids postoperatively for pain control because drugs like IV morphine or IV fentanyl or even the oral opioids all carry a risk of causing respiratory depression, and if a patient gets respiratory depression, the slower, shallower breathing leads to low blood oxygen levels, and if those patients are not being monitored, they can slip away and die without anybody noticing. We have a very strong use case for post-op patients getting opioids in the hospital. Finally, what we've actually observed in looking at our revenue recording is that the top 30 purchasers of Masimo brand monitors last year are ordering sensors at a considerably higher volume than other customers. We know that sensor orders are coming in to go with all that extra equipment. The reason why we don't think that hospitals will swap out all those new monitors with the older ones that they haven't replaced yet is because, for the most part, a lot of that new equipment we sold for the contingent COVID beds last year does not have ECG monitoring capability. ECG is a standard parameter to measure in the OR and also in the ICU. However, a lot of hospitals went the lower-cost route and bought Masimo brand monitors that can measure pulse rate, but not the electrical activity of the heart. So they do get pulse rate. They get blood oxygen. But those monitors aren't suited for placement in the OR or in the classic ICU because they don't have ECG capability. Okay. It sounds like you think that these new monitors, they're staying kind of where they were put originally. They are getting utilized, maybe not at the same kind of rate of utilization of the other monitors that have been there previously. It's kind of a middle ground. It's not like they're not getting put away and not used or replacing older ones, but they're not being used at the same capacity, the same rate of utilization as the prior ones, so to speak. Right. Yeah. Okay. All right. And then moving on, I want to talk a little bit about kind of the oximetry part of the business. So looking at SET, since the Philips partnership began, you've been able to gain share there as your technology was integrated into their monitoring systems. Do you think Masimo, this has kind of gotten lost in the shuffle last year with everything that was going on with COVID, but do you think this is still a growth driver for that core oximetry business? Yeah, definitely. We expect to continue to see Philips be a source of new sensor orders for us. Our sales force is very closely in touch with the Philips field reps. So when they're selling new hardware, we know about it right away. And we're able to go in and influence the hospital to choose Masimo brand pulse oximetry technology as the selection for those monitors rather than a competing brand. We continue to see good new contracts come in related to those Philips hardware sales. And we think things are going to get even better this year now that elective surgeries are coming back on track. The fact that we've got a co-promotion on Rainbow itself with Philips is a big help. And Philips is incentivized by a number of factors. One, they gain a competitive advantage over other monitor makers that have not integrated Rainbow yet. Number two, they can promote better patient outcomes from optimizing fluid management and transfusion decisions. And number three, there's also a financial incentive for Philips because they get to share in the license fees for the Rainbow parameters. So all those factors together are helping to drive the promotion and adoption of Rainbow. And of course, any hospital that selects the option of having Rainbow also defaults to Masimo brand pulse oximetry technology since those capabilities are all contained on the same circuit board. Yeah. Okay. So I guess, I don't know if you can quantify this, but how much success have you had penetrating the Philips base with Rainbow, I guess, as opposed to obviously just SET? Well, you're right. I can't quantify that. We've got very strict confidentiality terms. What I can say is we've only penetrated about 10%-12% of the overall Rainbow market opportunity as we see it. We see it as at least $1 billion for a combination of PVI and hemoglobin monitoring together. So there's still a lot of runway to go there. And Philips will be a factor that helps us ratchet up that penetration. But our expectation is that Rainbow continues to gain traction out in the field with the accumulation of data that supports it. There's more and more data coming out to show optimized fluid management, especially under the protocols that are being widely adopted now, known as ERAS, enhanced recovery after surgery, as well as GDT, goal-directed therapy. Our technologies there play a very significant role in optimizing fluid management so that patients undergoing surgery don't become overperfused nor underperfused. They can optimize cardiac output. And with Philips, we've got great synergy. We continue to see lots of ground for cooperation there. Besides integrating Rainbow, they also agreed to integrate three other Masimo technologies: our capnography technology, our brain function monitoring technology, and our organ oximetry technology. So there's a lot of ways that we can work together. And we think they're going to be an excellent tailwind for us going forward. Yeah. Okay. And it seemed like this is by our math, but the Philips deal, they kind of been adding a couple of points to your revenue growth. I don't know if you guys have ever quantified that, but I mean, does that seem reasonable? And do you kind of expect that to your overall revenue growth, do you expect that to continue? When we first signed the deal with them back in 2016, about six months later at our investor day, we did ratchet up our long-term growth forecast by one percentage point. Your base case assumption is that they're adding 1% to our growth. That is likely to creep up over time, but I can't give you any more finer detail than that. The main consideration is that as our penetration into the Philips installed base continues to grow, the associated sensor sales ratchet up. At the same time, we get more and more customers who we can convert to Rainbow. Those Rainbow sensors, sorry about that, have a significantly higher price point than our SET oximetry sensors. Okay. And so when customers switch to Rainbow, they don't have to use all the measurements, correct? That's right. You mentioned PVI and hemoglobin. Are those the most common ones? Yes, they are. Yeah, and does it matter to you guys how many of the measurements they're using? Because once they switch to, as long as they're using at least one, you're getting the more expensive sensor sale out of that, correct? Yeah. We are getting the more expensive sensor sale out of it. The number of parameters matters just in terms of the one-time license fee payments that come out. And those, of course, are high-margin revenues for us. So the hospital doesn't have to activate all the measurements. They can do some subset of those. The most popular ones, as you mentioned, are PVI and hemoglobin. Also on that list is carbon monoxide, which is useful both in and out of the hospital. In the hospital, it's useful for looking at the generation of CO as a side effect of some anesthetic gases. So those are the three main Rainbow measurements. And what we see is activations and deployments rising as more and more people become aware of the improved outcomes that are achievable with Rainbow measurements. With a combination of PVI and hemoglobin, there was a very large study done in France at Limoges Hospital showing about a 30% improvement in mortality at 30 days and 90 days post-surgery. That's the kind of outcome improvement that really helps to sway clinical opinion. Yeah. Okay. All right. And then you mentioned the other kind of non-oximetry measurements. I wanted to spend a little time on those. So can you just give us a quick overview of NomoLine, SedLine, and O3, and the kind of market sizes there and the pricing on the sensors? If you're able to disclose that. Because I think they're priced a lot higher than your oximetry sensors. Yeah. That varies. So if you're looking at capnography, brain function monitoring, and organ oximetry, those are all relatively mature markets, but the growth rates do vary across them. In aggregate, those markets have a realized value today of about $800 million. And we're just scratching the surface there in terms of our market presence. So there is a lot of upside there for us. With capnography, that's the biggest portion of that $800 million. That's roughly $600 million, $500-$600 million. That market, we estimate, is growing at 10%-15%. So that's the biggest factor in the overall growth rate. Then the brain function monitoring for depth of consciousness under anesthesia has a realized market today of $150 million, give or take. And the organ oximetry market also has a realized market today of about $150 million. Those two are growing in the neighborhood of 5%-7%. So in aggregate, that $800 million market is growing at about 9%-10%. And that is a nice tailwind for us as we gain share in all three of those categories. The price points there, the hardware typically has a price point of somewhere in the neighborhood of $3,000. And the hardware for SedLine and O3 is in the form of a smart cable where the circuit board is in line with the cable and remains outside of the monitor box. The capnography module is its own self-contained box. The disposables that go with that hardware have various price points. For capnography, we've got our NomoLine cartridge in line with the cannula tube that carries the exhale breath from the nose or mouth out to the instrument. That NomoLine cartridge is a differentiating feature that only Masimo has. It absorbs the condensate that comes out of the breath so the tube doesn't get clogged with water, preventing the gas from reaching the sensor. We're selling that for something in the neighborhood of $9-$12, which is pretty close to where commodity-type cannulas are sold. On the SedLine brain function monitoring sensors, those are EEG electroencephalogram sensors that read brain waves. We're selling those in the neighborhood of $7-$10. And then finally, the most expensive of the three, the O3 cerebral oximetry sensors that go on the forehead and can be used in some other parts of the body, potentially. Those sell for somewhere between $75 and $100. So those are different price points. Right now, all three of those products together are accounting for somewhere in the neighborhood of 5%-7% of our total revenues. Okay. All right. And then per our conversation on Philips, I mean, are all these now fully integrated into their system and available on their monitors? Rainbow is and has been for almost two years now. With O3 and capnography, those integrations are finished. Those products should be available imminently, if they're not already, as an option with Philips monitors. The last one to be done will be SedLine. That's our brain function monitor. That integration should be finished and available around mid-year this year. Okay. And are there similar, you mentioned the incentives that Philips gets for Rainbow. So are there similar incentives for getting customers using these measurements as well, or? No. There's no license fees associated with those. Okay. All right. And then I just wanted to ask one. You just announced this Radius PCG product. So it's a wireless capnography system, I think. So can you maybe just comment on that and what impact that could have on the business? And is that something that's proprietary? Does anyone else have anything similar? That's the evolution of the EMMA capnometer that was a handheld device for use in the field by paramedics and first responders. So it has its own built-in display screen. Now what we've done with that device is added a Bluetooth transmitter to it. So that capnometer can now send the end-tidal CO2 or exhale carbon dioxide reading to a remote using Bluetooth. It makes it more user-friendly because it doesn't have to be attached to the monitor itself. So it makes it a little more portable. And if patients are being moved around here and there, it makes it easier for that purpose. It's not likely to be truly material to the capnography business here for a while since it's so new. But the thing that is very material to our capnography business is the new line of disposables, the NomoLine cannula that we started selling about a year and a half ago. That addresses about half of the overall capnography market, and there, we've got the potential to exploit the entire installed base of capnography devices out there in the field, regardless of brand, which is unlike the situation with our pulse oximetry sensors. Consequently, we see a great deal of upside with the disposables for capnography. Okay, and so just back to what you were saying earlier, so that's the one with the self-contained cartridge that you're getting $9-$12 for, and the cartridge that captures the moisture is what kind of differentiates you there, or? Yes. That's right. Yeah. Okay, and so that's why you think you could maybe with customers that have a competitor's capnography box, you can sell your sensors there because you have something kind of differentiated. That's right. Okay. All right, and then moving on to, I want to touch on Opioid SafetyNet. So what's the latest with regard to the FDA clearance? I think you said it was expected this year, if I remember correctly, the calendar year. Yeah. Opioid SafetyNet continues to remain under review with the FDA. They're looking at various aspects of the data we presented showing detection of respiratory depression in an out-of-hospital setting. And that's really the main value of the product combined with its ability to issue local and remote alarms. So we do expect that product to be approved sometime this year. If it's not, it would be a surprise to us. We've submitted the data the FDA requested. And the question now is, can they get comfortable with the performance of the product to do what it's intended to do, which is to flag respiratory depression in the home setting or in the rehab center setting so that people don't die in their sleep without anybody noticing? Is this something where you'll be launching it shortly after the clearance comes, or is there going to be some kind of flag there in terms of other work that needs to be done before you can launch it? We can launch it immediately after clearance. The question is whether reimbursement will be in place by then. Right now, we've got a good signal for reimbursement from the MCIT, Medicare Coverage of Innovative Technology program, that is likely to be implemented by CMS, although it was delayed and put on hold for additional comments. Even though we've got a positive signal for the issuance of reimbursement, we still don't know what the level of reimbursement will be because we don't have agreement on the proposed price for the kit yet. We have to get that agreement. And secondly, we also would benefit from having dedicated reimbursement codes for it, which we don't have now. And that means that the product would be filed with other types of monitoring or miscellaneous codes, which tends to snag the process a little bit here and there. So even though we could launch it immediately after approval and are likely to do so, it's an open question whether or not Medicare reimbursement will be in place at that point because of those two open items. And then the issuance of private payer reimbursement will likely take months after the product is approved with the private payers following along the precedent set by Medicare. Okay. So you think the Medicare, the MCIT thing is important from the, because I was going to ask how many of these patients are really Medicare age, but it sounds like Medicare is still really important because you expect the private payers to kind of follow what Medicare is. Yeah, but it is very significant because we see about 40% of the targeted patients in the Medicare population, and that's 40% of 25 million total. We see 15 million patients coming from the post-op setting who will likely be taking opioid pills at home in their recovery, then another 10 million chronic pain patients who are taking opioids for an extended period for things like low back pain. Yeah. Okay. And would you, if let's say that this MCIT thing goes away or gets canceled and there's no kind of immediate pathway to reimbursement, I mean, would you consider launching it as an out-of-pocket device? Yeah. We definitely would consider that. In fact, we were planning to do that anyway before the MCIT program came along. We still would file for Medicare reimbursement coverage, but under the old system, it would probably take one to two years to obtain that, and then, of course, the private payers would come on even later, but yeah, self-pay is absolutely an option that we have considered and continue to consider, but there's likely a limited number of people who would be willing to pay for the product out of pocket. Yeah. Yeah. Okay. All right. And I want to move on to hospital automation. So the hospital automation business seems to have a lot of potential. But I guess I'm still a little confused about the business model. How do you actually get paid, and what are you providing? So I know there's hardware component. There's software, I think. And so there's both elements. And then, but I don't understand the pricing model, I guess, from a software perspective. I assume it's some kind of annual licensing. Is it like a cloud model or SaaS model where you're charging a subscription annually or something like that, or? Yeah. The preferred model that we're pursuing is, in fact, a SaaS model. So we bundle together the hardware and the software elements to make an integrated suite, and then our intent is to charge an annual subscription fee for the whole package. The subscription fee would likely range between $1,000 per bed per year up to $5,000 per bed per year, depending upon the setting for the bed, which determines the likely number of software modules that will be used, and the critical care setting, that's where you'd see the high-end subscription fee because there's more software modules used, things like UniView and Halo Index, and then at the low end, it would be in the low acuity setting, like the general floor, where you'd see modules like Patient SafetyNet and Replica. So consequently, it really is going to be a mixed picture there with regard to the magnitude of the subscription fees. But we're in very early days with regard to hospital automation. We ended the year with about 75 subscription customers, which was a nice step up from where we started the year at around 25. On top of that, we made an acquisition in the hospital automation business last year, buying a business unit from NantHealth called Connected Care. That brought along about 400 customers with it and added about one percentage point to our revenues last year. Now that the distractions from COVID are fading away, we expect the hospital automation to really gain some serious traction this year. We've got a great suite of products there that provide a lot of power in terms of capturing and managing the information that gets generated by all the devices and getting that into the electronic medical record. When you say you have 75 customers, does that mean 75 kind of separate hospitals, or could that include one customer be a system with multiple hospitals, or? Yeah. In some cases, it is multi-hospital systems, but the numbers are pretty close together. A lot of the deployments have been partial in terms of the number of modules. It really depends on the setting. In the low acuity setting, we're getting good deployments of Patient SafetyNet as well as UniView 60, a new product we just launched, and then in the critical care setting, especially ORs, we're seeing deployments with UniView and sometimes with Halo Index, but those are more rare. The main objective of these hospitals is to see whether or not it's improving their workflow, which we think we have a very strong case for, as well as improving outcomes. It really allows the hospitals to maximize the value of their EMR software because now they're getting continuous data feeds into that software rather than these discrete types of data pickups. And so it makes it a little bit easier to track the recovery of somebody as well as to detect problems and errors that may have occurred. Yeah. Okay. And so do you feel like most of these customers, the 75, I mean, are these kind of pilots where they're trying it in a facility to kind of see how it works, and they'll scale it up if they feel like it's a good ROI and better care? Yeah. That's correct. Generally, what we see is partial coverage of the OR rooms in a hospital or partial coverage of the number of ICU beds. Typically, there's six to 10 ORs in a hospital, 10 to 20 ICU beds. So we'll capture a portion of those, and if the hospital is satisfied with the implementation and the operation, they'll expand it to the full unit. Okay. All right. I want to ask a couple on some of your recent acquisitions. So starting with TNI Medical. So TNI offers its softFlow high-flow system. Can you give us a quick overview of this market opportunity? And one question I had was it seems like it's more of a hospital product, but what would have to happen to get that into the home care setting? Yeah. We're excited about TNI. It's our first therapeutic product at Masimo. It's designed to treat patients in respiratory depression, sorry, respiratory distress. And the way it works is it gets more oxygen into the lungs more quickly. Simultaneously, it flushes out excess carbon dioxide that may have built up into the lungs. So it's very useful for treating patients with lung conditions like pneumonia or COPD, respiratory distress related to COVID. And we bought this company, TNI, knowing that they'd achieved good success in Germany but have been underinvested in for years. So they haven't seen a lot of marketing and promotion outside of Germany. That's where Masimo comes in. We just announced the launch of the product in the U.S. about a month ago. And we're excited about generating adoption of that product because it is very user-friendly. It doesn't require a connection to the wall for its air supply. It can draw air simply out of the room, and it can also be supplemented with oxygen from an oxygen tank. With TNI, we see great potential in the hospital where similar products have been marketed for years, but we also see potential in the home setting for people with chronic lung disease like COPD. The product is being sold for home use in Germany, and we think that that's likely to occur here as a second-stage strategy, but to start with, we are promoting it to our hospital customers, and it's got great synergy with our diagnostic and monitoring technology. One of the ways you can figure out if a person needs high-flow therapy is by looking at their blood oxygen levels as well as their end-tidal CO2 levels. Okay. I did get a question sent to me. I wanted to ask this. I don't know if you're going to be able to answer it, but I guess someone was noting that there's been a job opening that you guys have listed for a VP, GM, Opioid SafetyNet position. They're asking about what your hiring intentions are for that business. We've already hired a group of people to concentrate on reimbursement. We're going to have a separate group of people working on marketing and promotion because it's a fairly complicated pathway to drive adoption of that. There's going to be three different audiences that we're targeting for marketing and promotion. Firstly, surgeons who prescribe opioids to their patients post-operatively. Second, pain specialists, often people who run pain clinics. Those are typically anesthesiologists with a subspecialty. They could recommend the product for those patients who are on opioids for weeks or months at a time. Thirdly, rehab centers where people go for addiction treatment. Different marketing pathways that will require personnel to staff those. Then, of course, you've got other associated needs like operations, manufacturing, supply chain management. There's a number of functions there that need to take place. Those are the things that will determine the exact distribution strategy for the product, whether it's going to come from hospitals, drug stores, or DME providers, or pain clinics, or some combination of those. Yeah. Okay. That's helpful. I think we're basically out of time. So I'm going to have to stop there. Didn't get quite through all my questions, but that's a good problem, I guess. All right. Thanks, Eli. Appreciate it. Great catching up with you, Mike. No problem. Thanks. Okay. Okay. Bye. So long. Bye.