Nov 3, 2009
Executives
Joe Kiani - Chairman & Chief Executive Officer Mark de Raad - Executive Vice President of Finance & Chief Financial Officer
Analysts
Bill Quirk - Piper Jaffray Tao Levy - Deutsche Bank Sara Michelmore - Cowen and Company Matthew Dodds - Citigroup Peter Lawson - Thomas Weisel & Partner Joanne Wuensch - BMO Capital Markets Brian Weinstein - William Blair Spencer Nam - Summer Street
Operator
Good afternoon ladies and gentlemen, and welcome to the Masimo Corporation third quarter 2009 earnings conference call. After the speakers’ remarks, there will be a question-and-answer session.
(Operator instructions) I would now like to turn the call over to your host for today, Mr. Mark de Raad, Executive Vice President, Finance and Chief Financial Officer of Masimo.
Sir, you may begin your conference.
Mark de Raad
Thank you. I’d like to welcome you all to Masimo’s third fiscal quarter 2009 earnings release conference call.
Our press release was distributed about 30 minutes ago. If you have not seen the release and you would like to, a copy is posted on the Investor Relations page of our website at www.masimo.com.
Joining me today on the call is Joe Kiani, Masimo’s Chairman and Chief Executive Officer. In just a few moments, Joe and I will deliver remarks on our financial results for the 2009 third fiscal quarter and general comments regarding our business.
After we complete our prepared remarks, there will be a question-and-answer session in which we will answer as many questions as time permits. Before we begin, let me remind you that this call may contain forward-looking statements.
While these forward-looking statements reflect Masimo’s best current judgment, they are subject to risks and uncertainties that could cause our actual results to vary. Risk factors that could cause Masimo’s actual results to materially differ from our forecast are discussed in detail in our filings with the Securities and Exchange Commission.
With that, I would like to turn the call over to Joe Kiani, Chairman and CEO.
Joe Kiani
Thank you Mark, and thank you ladies and gentlemen for joining us today. Our third fiscal quarter product revenues increased 14% to $75.1 million up from $66.1 million in the same prior year quarter and up sequentially from $70 million in the immediately preceding second quarter 2009.
Despite the still challenging business environment for new product procurement we were able to ship 26,200 new Masimo SET and Masimo Rainbow SET monitors during the third quarter and our Rainbow revenues doubled to $6 million compared to $3 million in the third quarter of 2008. In our second quarter earnings call we expressed confidence that our third-quarter and fourth quarter product revenues will grow sequentially.
Nothing has happened to change our expectations for sequential growth in the fourth quarter. Despite a rough market, our business is growing.
In fact our direct business grew by 22% year-over-year due to strong demand for Masimo SET and Masimo Rainbow SET. These results underline both the power of our innovations and noninvasive monitoring which is helping our customers improve to save life and our business model.
Mark will now provide you with a more detailed summary of our third quarter 2009 financial results. After Mark’s review, I would like to share with you some important recent milestone events during the third quarter.
We will then be happy to answer your questions. Thank you.
Mark de Raad
Thank you Joe. And hello, good afternoon to everybody.
Earlier today we reported total fiscal 2009 third quarter revenues up $87.4 million, which consisted of product revenues of $75.1 million and royalty revenues of approximately $12.3 million. This represented a 12% year-over-year increase in total revenues and a 14% increase in year-over-year product revenue growth.
The beneficial impact of foreign exchange rates on third quarter of fiscal 2009 revenues as compared to the prior year quarter, was relatively insignificant at a $179,000. For the nine month period ended October 3, 2009 total revenues rose to $256.5 million, up 15% from $224 million, while total product revenues rose 17% to $219.7 million, up from $188 million in the same prior year period.
Also in the fiscal third quarter, excluding handheld monitors, we shipped 26,200 new Pulse Oximeters and Pulse CO-Oximeter monitors into the marketplace and based on these shipments we now estimate that our total worldwide installed base net of estimated retirements to be at least 621,00 drivers, up from 540,000 drives or about 15% just one year ago. We have recently completed an internal review of the useful field life of our products and based upon input from both our OEM and direct customers, we believe that the appropriate range of the true useful field life of our Pulse Oximeters and Pulse CO-Oximeter monitors is from 7 to 15 years.
As you recall, we’ve traditionally assumed a seven year life. As a result of this recently completed analysis beginning in the first quarter of 2010, we intend to change our useful field life assumption from 7 years to 10 years.
In the first quarter, we will provide a revised set of historical driver data reflecting the new 10 year life assumption. This change will have the impact of both increasing the number of drivers in the field and at the same time decreasing the average dollar per driver which is a measurement used by many of our analysts in their models.
We’re providing this notice now so that when we provide the revised driver data in Q1 2010 the rationale for the change will already be understood. The year-over-year growth in product revenues came primarily from Masimo’s SET revenues which rose to $69.1 million in the Q3 2009 quarter from $63.1 million in the Q3 2008 quarter.
This increase is primarily the result of our continuing expansion of Masimo’s SET technologies into new hospitals. Included in our Q3 2009 product revenues, was approximately $3.4 million in previously deferred revenue which we recognized as the result of the elimination of obligations to provide upgrades under two long term sensor agreements.
In comparison, in the same prior year quarter in 2008, we recognized approximately $2.6 million in deferred revenues related to the establishment of vendor specific objective evidence of a product tied to a long-term sensor agreement. During the third quarter of 2009 Rainbow revenues totaled $6 million up from $3 million in the comparable prior year quarter and from $4.5 million in the immediately preceding quarter.
The increase was due primarily to strong year-over-year demand for our Rainbow licensed parameters, especially SpCO and SpHb as well as increased Rainbow consumables. Third quarter 2009 product revenues generated from our direct business which includes sales through our just-in-time distributors totaled $60.1 million or 80% of total product revenues while OEM revenues totaled $15 million or 20% of total product revenues.
In the prior year period, direct sales were $52 million or 79% while OEM revenues totaled $14.1 million or 21%. We were encouraged by the sequential rebound in OEM revenues which resulted in 20% of Q3 2009 OEM revenues, up from 18% in the immediately preceding Q2 2009 quarter.
During the third quarter, our US product revenues totaled $57.4 million or 76% of total product revenues compared to $50.1 million or 76% in the prior year period. As a result, the international product revenues as a percent of total product revenue remained flat at approximately 24%.
Year-over-year third quarter OUS revenues grew by 11% although on a currency basis they grew only 9%. Our 2009 third quarter royalty revenue increased slightly to $12.3 million from $12 million in the prior year period.
Our 2009 third quarter product gross profit margins rose to 66.5% from 66.1% in the same prior year period. The year-over-year increase was due primarily to the beneficial impact of higher sensor and Rainbow revenues.
Adjusted for the impact of foreign exchange rates, our Q3 margins would have been 66.4%. Total gross profit margin including royalties for the 2009 third quarter declined to 71.2% from 71.3% in the same prior year period due to the mixed impact of higher royalties representing a lower percent of total revenues.
Our third quarter engineering expenses were $7.7 million, up approximately 28% compared to $6 million in the same prior year period. The year-over-year increase was due primarily to increases in payroll and payroll related cost associated with increased research and development staffing levels and engineering supplies expense.
Our 2009 third quarter selling, general and administration expenses rose to $33.5 million, up approximately 15% from $29.2 million in the prior year period. Higher expenses were due primarily to the combined result of $3 million increase in payroll, payroll related and stock based compensations cost associated with the increase in worldwide selling, general and administrative staffing.
Our 2009 third quarter effective tax rate increased to 37% from 36.6% in the same prior year and from 35% in the immediately preceding second quarter of 2009. This higher tax rate is due to our revised revenue and profitability forecasts, which now assume lower OUS revenues and profitability.
Based upon that reassessment we now believe that our year-to-date effective tax rate will increase from 33.9% to 35%. As a result of this change in forecast, we were required to adjust our Q3 effective tax rate sufficiently to adjust our year-to date tax rate to the new 35% rate for the year.
This cumulative year-to-date tax adjustment resulted in approximately 400,000 of additional Q3 2009 tax expense or slightly less than one penny per share. Weighted average shares outstanding for the third quarter of 2009 were 60,157,188 and 60,376,738 for the same prior year period.
In summary, the combination of our 14% year-over-year increase in product revenues, relatively flat royalty revenues, higher gross profit margins and increased operating expenses, and a slightly higher effective tax rate combined to generate a Q3 2009 operating profit of $20.8 million compared to $20.5 million in the same prior year period. As a result, our Q3 2009 earnings per share was $0.22, the same as in the prior year period.
Now, I would like to make just a few quick comments about our balance sheet. At October 3, 2009 total cash increased to $174.7 million up from $146.9 million at January 3, 2009.
This nine-month increase of $27.8 million was the result of generating $29.7 million in cash from operations despite making a special $11 million tax payment in Q1 2009 related to our international reorganization. During the nine-month period ended October 3, 2009, we also generated approximately $3.4 million in cash from the tax benefit and cash associated with the exercise of stock options and purchased approximately $4 million in capital equipment.
As I noted in our last call, the statement of cash flows which we are now including in our press release financial statements should provide you with any other non-cash expenditure information that you might require. At October 3, 2009 our day sales outstanding declined to 47 from 50 in the immediately preceding June quarter, but we are up from 40 at the end of the fiscal 2008.
Our inventory turns remained relatively flat at 3.2 as of October 3, 2009, compared to 3.3 as of January 3, 2009 and 3.2 in the immediately preceding quarter. Thank you for your time and now I’d like to turn the call back to Joe.
Joe Kiani
Thank you Mark. We are happy to report stronger third quarter results, which despite the still difficult economy represented a nice rebound from Q2 and in fact represented a record product revenue quarter for Masimo.
I’m also happy about our ability to double our Rainbow revenues in the third quarter of 2009 versus Q3, 2008. As we look forward, we continue to believe that we will again be able to grow sequentially in our final quarter of 2009.
Our perspective is based upon seeing one or more active customer base as customers are reengaging on projects, which they put on hold in the first half of 2009 as they try to manage through a very difficult economic period of time for hospitals. Two, an indication that more hospitals are beginning to move towards continuous monitoring of their patients in the general ward, and three more customers wishing to implement Rainbow especially SpHb and SpCO, which is noninvasive continuous hemoglobin and noninvasive continuous carboxyhemoglobin monitoring as they are seeing the clinical and lifesaving impact of these breakthrough noninvasive measurements.
I’d like to now give you a few topical highlights. First I’ll start off with the clinical study update.
Several new studies were presented at this year’s American Society of Anesthesiologists meeting. I will highlight a few of them for you.
The first was accuracy of Noninvasive Hemoglobin Measurement by Pulse CO-Oximetry in hemodilution subjects. A clinical study led by Dr.
Martin Allard at Loma Linda University in Loma Linda California compared SpHb measurements to 165 invasive laboratory measurements in 20 healthy adult patients undergoing hemodilution. Masimo SpHb had a bias of 0.15 gram per deciliter and precision of 0.92 gram per deciliter.
Leading researchers to conclude that SpHb measurement accuracy was unaffected by profusion index levels and offers an acceptable alternative to invasive hemoglobin tests in many clinical scenarios. Another study, validation of a new noninvasive hemoglobin algorithm in patients undergoing liver transplantation which was a clinical study led by Dr.
Klaus Thorpe at the Mayo Clinic, Jacksonville, Florida compared SpHb measurements to 55 invasive laboratory measurements in five patients undergoing liver transplantation and found significant agreement between the two methods. The study showed that SpHb using the new Masimo Resposable Sensor had a bias of 0.2 gram per deciliter and precision of 0.8 gram per deciliter.
Research has concluded that the accuracy of noninvasive SpHb measurements obtained by the Pulse CO-Oximeter with new Resposable Sensors was high. Additionally, two studies presented at the ASA highlights the importance of understanding the variation in invasive arterial and venous hemoglobin measurements.
A study of 471 paired invasive hemoglobin measurements from 33 patients on two different invasive laboratory devices one by Beckman Coulter hematology analyzer and other Nova Biomedical CO-Oximeter showed a bias of negative 0.97 gram per deciliter and a precision of 0.58 gram per deciliter. The authors noted that the different devices using different principles of operation can produce consistent differences in the absolute value of measurement.
Another study comparing hemoglobin measurement in 107 subjects from time-matched arterial and venous blood samples on the same invasive laboratory device found average differences as high as 0.5 gram per deciliter and noted that arterial and venous hemoglobin values from the same individual are not interchangeable. Other third quarter product and customer highlights.
First, I am proud to say Medtronics Physio control who is one of our first OEM partners to launch a Rainbow in the US, had robust sales of Rainbow parameters sold within their new LP15 defibrillator. Nearly 70% of the LP15 were shipped and are being ordered with SpCO or SpCO and SpMet are the first Rainbow parameters Medtronic is offering to their customers.
In Q3, we submitted for FDA clearance the Pronto 7 or new spot check SpHb measurement device. Depending on the timing of FDA clearance of Pronto 7, we expect to begin limited market release of Pronto 7 in the first half of 2010, with a new physician office sales force.
We launched enhanced Masimo patient safety net system to help hospitals reduce preventable deaths on the general floor and are seeing relatively strong growth. We believe Masimo patient SafetyNet growth is due to more and more customers recognizing the urgent need for general floor monitoring and value of Masimo’s Low Pulse alarming Pulse-Oximeters and Patient SafetyNet system as outlined in the Dartmouth-Hitchcock study and even more encouraging is the fact that the early adopters are becoming repeat customers.
Speaking of PSN, I’d like to now give you some update on acoustic respiration monitoring. We have made good progress with the development of another revolutionary new product which we call ARM.
To remind you, in second quarter 2009, we submitted ARM for FDA clearance. We’ve recently begun beta side testing of ARM and depending on the successful results of our beta test and timing of FDA clearance of ARM, we hope to begin limited market release either before the end of this year or early next year and commercially launch ARM in the second half of 2010 if not earlier.
Recently, we announced in a press release the Ninth Circuit District Court of Appeals decision which affirmed that Covidien engaged in anti competitive tactics and based on what the Ninth Circuit has written, we believe it should curtail Covidien sole source market share based pricing and bundling, when mixed with either sole source or market share based pricing. The prior court-ordered damaged figures was $14.5 million treble to $43.5 million and included attorney fees.
At the same time we would like to remind you that this engagement was contingency based and that our legal counsel will receive 50% of the net proceeds which should be over $25 million half and half. Some takeaways from this Ninth Circuit decision, we believe Covidien as a result of this ruling should curtail these illegal acts against Masimo.
Two, Masimo does not seek out litigation, however we are also not willing to accept violations of our intellectual property or what we believe to be unfair and illegal monopolistic practices. And three, with our legal victories in the PAN infringement and antitrust sues and settlements including with Delcore, Shaklee and Respironics, we believe our business practices and legal challenges are on a firm foundation and we remain committed to protecting our business and legal interests to the fullest extend.
So I would like to just leave you with some closing thoughts before we go to the question-and-answer session. Despite the current challenging economic environment, we remain optimistic about our ability to continue to expand our worldwide customer base utilizing Masimo’s gold standard Pulse-Oximetry technology and excited about the important role that Rainbow measurement such as SpHb, that will have on our future.
Not to mention the impact that all our new parameters will have in improving patient care. As we have noted in the past, while we can’t speak about all of them now, our product pipeline remains full and we expect to be introducing more exciting products over the next five years starting with ARM and Pronto 7 in 2010.
We were are also optimistic that once the uncertainty around the healthcare reform is over and the overall economy continues to recover, some of the issues that have weighed on our growth such as our OEM partners business will be resolved. However, we are very concerned over the recent proposals which suggests that an excise tax on medical device manufacturers maybe part of the final healthcare Reform Act.
Although we can’t anticipate what may or may not occur, we believe that any such excise tax will simply result in higher healthcare costs as these taxes or either passed onto customers or stifle innovation. I also would like to remind you of the fact that we continue to place normal levels over 25,000 new pulse-oximetrys and Pulse CO-Oximetrys in the third quarter, which some analysts have said is 40% of the Pulse-Oximetry shipments in the US.
And yet, our revenues continue to represent approximately 25% of the total $1.1 billion Pulse-Oximetry market place and as a result we remain very confident regarding our ability to continue to grow our revenues into our increasing share of the worldwide Pulse-Oximetry market. We expect Rainbow to have a great impact on patient care in a broad way.
We hope that by the time our Pulse-Oximetry business will start to slow down Rainbow will ramp up to the steep part of the S curve. We will continue to focus on our mission of improving patient care and reducing cost of care by taking noninvasive monitoring to new sites and applications and we will continue to run our business for the long term growth and with our great innovation engine we will continue to solve more clinical problems and make Masimo a great company.
I would like to now return the call back to our moderator and begin to take any questions you may have. Thank you.
Operator
(Operator Instructions). And your first question comes from Bill Quirk with Piper Jaffray.
Bill Quirk - Piper Jaffray
Thanks good afternoon guys.
Joe Kiani
Hi Bill.
Mark de Raad
Hi Bill.
Bill Quirk - Piper Jaffray
First off, could we get a hemoglobin account update? Last quarter I think I recall you gave us both the current account numbers as well as indicated that there were approximately 500 accounts that had requested a proposal, any update on either one of those metrics guys?
Joe Kiani
Yes, we will Bill. But I think we have gotten you guys just some granularity that we are regretting now.
Don’t forget, we have a business to run and competitors to potentially deal with. But I will one more time give you an update, and I hope may be in the future and we can just look at the overall growth of Rainbow and not get into these fine details.
But, to answer your question there are now 145 hospitals with SpHb and this is up from 68 worldwide hospitals that we had end of Q2. And the 500 float activity I mentioned last quarter has now grown quite strongly and this is the last time I have to give it I will let you about that it’s about 800 now.
Bill Quirk - Piper Jaffray
Outstanding. Second question from me is, if we think about your comments Joe around expecting 4Q to be up sequentially, because obviously you didn’t update your formal guidance, should we read the no update on guidance to essentially mean that you are reiterating the targets that you gave us during the second quarter conference call?
Joe Kiani
Yes, that’s correct. And if things continue to be in the way we think it will probably towards the higher end of the guidance.
Bill Quirk - Piper Jaffray
Okay. Very good.
And then, if I can just sneak one last one in here, thinking about the Pronto 7 introduction, can you just give us an update how much have you built out on that sales force now, how much more should we expect and obviously which we would be thinking about in terms of the SG&A impact. Thank you.
Joe Kiani
Sure. We have built a sales force close to 20 people for the physician’s offices, and right now they are mostly doing training and in the hospital environment and we hope to turn our attention to the physician’s offices fully beginning of next year.
As far as guidance on revenues and earnings, we’ll provide that at the end of this fiscal year next year.
Bill Quirk - Piper Jaffray
So, is the 20 the right number to think about next year Joe or should we be thinking about that going to 40?
Joe Kiani
The sales rep?
Bill Quirk - Piper Jaffray
Yes.
Joe Kiani
It should go to 40.
Bill Quirk - Piper Jaffray
Okay, thank you.
Joe Kiani
Thank you.
Operator
And your next question comes from Tao Levy with Deutsche Bank.
Tao Levy - Deutsche Bank
Hi, guys its Tao with Deutsche Bank.
Joe Kiani
Hi Tao.
Mark de Raad
Hi Tao.
Tao Levy - Deutsche Bank
Hey. Since, Joe, this is the last time you’re going to providing some of the granularity, I figure out that I would ask on hemoglobin.
So, the sequential increase in the number of hospitals close to 80 quarter-over-quarter, how many of those came from that 500 test program that you had announced a few months ago?
Joe Kiani
The minority came from that. Basically we have three different ways that we are providing hemoglobin to our customers, either a straight purchase where they get the sensors at a discount or we do this 90-day program where they get the hemoglobin monitor for free for a period of time in return for higher priced sensors, and the third is part of our hospital wide conversions when we provide some amount of hemoglobin to our customers.
But the minority are in the 90-day program, the majority are actually, as far as the number of hospitals, are purchasing the software license, the parameter.
Tao Levy - Deutsche Bank
And it is still roughly out of the ones who purchased it around five installations per hospital?
Joe Kiani
Roughly, yes.
Tao Levy - Deutsche Bank
Okay. And, maybe if you can comment on the new hospitals that came on board with hemoglobin, were they all prior Masimo Pulse Ox customers or did you pick up the Novo accounts, not only picked up the Pulse Ox but also a Rainbow?
Joe Kiani
They were both, I don’t know exact percentage. But, for example, we announced mice ph] which is a very prestigious university hospital in Germany, that was a brand new customer.
We are currently not doing Pulse Oximetry with them and they decided to put hemoglobin in every OR, ICU and I believe ED bed. Then there were customers like Children’s Hospital of Oakland who had been a Masimo customer that had decided to use Pulse CO-Oximetry and hemoglobin throughout the hospital.
So just sitting here I would guess that it’s probably half and half.
Tao Levy - Deutsche Bank
Okay, great. And if I can sneak one last one.
Mark you had mentioned sequential or maybe Joe in revenues, it’s kind of the expectations. Should we kind of think of gross margins also improving sequentially just because of the higher volumes?
Mark de Raad
I would suggest Tao that the range that we are in right down, as you know our guidance for the whole year was at 66%, we’ve achieved a little bit better than that in the last couple of quarters. So I would stay within that general gross margin percent range, I don’t think we should be looking for anything dramatically higher in the next quarter.
Tao Levy - Deutsche Bank
Okay, thanks.
Operator
Your next question comes from Sara Michelmore with Cowen and Company.
Sara Michelmore - Cowen and Company
Thanks for taking my question. Just looking for a little more color if you could on some of the OEM partner trends.
It does sound like some of the inventory loosen up in the quarter and I am just curious what your visibility was in terms of what was going inbound to those OEM folks, thanks.
Joe Kiani
Mark, would you like me to answer that. Yeah, basically our OEMs do not generally like to carry inventory.
So our estimate has always this been when we shift products to them that they are just in time and they manufactured them and send them out to their customers, we from time to time do have some also lessons related purchases which I believe this quarter was very minimal. So, really nothing has changed the way that OEMs have been purchasing.
I think you may be referring to the discussions we have had before with the just in time distributors in terms of inventory management and how in Q1 they may have put too much inventory on their shelves, is that right Sara?
Sara Michelmore - Cowen and Company
Yeah, basically I’m referring to the part of the business that is not direct. So everything I guess.
Joe Kiani
Yeah. Well, with OEMs we don’t see any difference, if there is some we’re blind to it.
But with just in time distributors either the Cardinals and Owens and Minor, it looks like their inventory is continuing to come down. So we don’t think there is any inventory related sales.
In fact with our business it wouldn’t matter because we only report sell through revenues not what they do in their inventory.
Sara Michelmore - Cowen and Company
Okay. Any trends though on the sell through side that are helpful in terms of just trying to mould this going forward?
Mark de Raad
Sara, as Joe alluded to at the end of the June quarter we talked about through our distributor channel the fact that they had in general brought their inventory levels down to much more historically normal levels. In the September quarter, we actually saw in most cases that continuing and in some cases we actually saw even lower inventory levels suggesting the distributors continue to do whatever they can to mange their inventories as effectively as possible.
So, if anything, the inventory levels held by our distributors at the end of September were at a lower level than they were at the end of June.
Sara Michelmore - Cowen and Company
Okay, that’s helpful. And maybe a little bit of a longer term question.
We’re getting closer to the March 2011 kind of time point which for being conservative here is when the Covidien royalty would roll off. I assume you don’t have any better visibility on that today than you did the last time you updated.
So if you could just comment on that, and just talk a little bit about all of these staffing increases you are making and lot of the investments that you are making this year and probably next, things like Pronto 7, physician office, sales force et cetera, how should we just kind of think about your ability to kind of make those investments in the context of having this royalty potentially come off in March 2011? Thanks.
Joe Kiani
Sara, I have to first say yes, we don’t have anymore visibility than we have had in the past regarding what Covidien may or may not do. We suggest that our shareholders, investors take the conservative view point that those royalties will stop and that Masimo will be forced to sue for intellectual property.
So there will be some additional expenses as well. We hope those things won’t happen, but I think that’s how you have to model it.
Then as far as with sales force investment, expansion and same with R&D, we decided years ago when we first won our intellectual property lawsuit and we also realized that we’re going to be doing an agreement with Covidien, which where we gave him a covenant not to sue for the current product in return for ongoing royalties that maybe the best thing to do with those moneys is to invest ahead of time than normally we would have and maybe we got our idea one day flying out of Orange County from those who have flown out of Orange County, basically you put foot to the metal and when you get over to night houses in Newport Beach you turn back, and hope you won’t make too much sound, the plane continues going. So, basically we’ve been increasing our expenses roughly at about $30 million a year pace year after year with the anticipation that in 2011 we will back off from increasing our expenses that much, but we will have benefited from reaching critical mass in both sales personnel as well as research and development personnel so that we can continue to grow our business the way we would like.
In my expectation it might take a couple of years if not longer before we’ll feel the need to invest again under the norm which for Masimo has been to invest after absolutely need to invest in growth so that we can be prudent in the way we do our business, which all set and done should hopefully make 2011 smoother than otherwise but we should really set us for wonderful 2011 and 2013 and so forth as we start to read from the investments we made without this; maybe artificial is the wrong word but this accelerated growth that we have been doing up and until that date.
Sara Michelmore - Cowen and Company
Okay. That answers my question Joe.
Thank you so much for flushing that out.
Joe Kiani
You are welcome.
Operator
And your next question comes from Matthew Dodds with Citigroup.
Matthew Dodds - Citigroup
Thanks. Couple of questions.
Joe when you talk about I guess Mark the useful driver life, I don’t want to jump to gun too much here, but when you talk about 7 to 15 years versus 7, counting wise are we talking the middle point there of 11 or is it still close through the 7. And then on that side just kind of looking historically at what we’ve estimated the driver retirements to be.
I don’t think we’re talking about an increase of that 600,000 plus over say 50,000 in total when you do make this change, are we?
Mark de Raad
Let me answer your first question first that the range that we received, and that is a range, it was a low of 7 to a high of 15. We also looked essentially at the median of where most of this data was coming in at, which suggests that 10 to 11 years is the right range for us and that’s why we selected 10.
So that’s the basis upon which we’re going from 7 to 10. In terms of what to expect as a result of that change, I think directionally I haven’t looked at the numbers recently, but I think directionally the kind of range that you threw out in terms of gross number of drivers is probably about right, I think we might even be a little bit higher than that in terms of where we think the adjustment for this change will come in.
So, for example, if we were in the low 600,000 range right now we expect that when all the numbers are completed that that number will probably be in the high 600 range when we make this transition in the first quarter. So that’s sort of the order of magnitude of change that you should expect.
Conversely, as I said in the comments the impact of that will obviously be to reduce the amount of dollars per driver simply because there are going to be more drivers in the calculation.
Matthew Dodds - Citigroup
Okay. Thanks Mark.
That’s helpful. And then one another quick housekeeping number, can you give the RAD 57 number for the quarter?
Mark de Raad
Well we haven’t, as you know, this all year we’ve focused on one Rainbow revenue numbers. So we’re not going to change that right now.
We can’t say in terms of RAD-57 that it was another reasonably strong quarter for us. We’ve had essentially three very decent quarters in RAD-57 sales this year.
They continue to be impacted of course because of the impacts that we continue to face in state and local government budget environments. So on a year-over-year basis, we haven’t seen the kind of growth that maybe we would have expected at the start of the year, and that of course was factored into reset of guidance in our last earnings call.
But in terms of just sequential RAD-57 revenues for the last three quarters it’s actually been a very decent number for us.
Joe Kiani
And I’d just like to add also keep in mind with Medtronic’s Physio Control launching their defibrillator and a lot of our customers like having the RAD 57 measurements which is carbon monoxide, methemoglobin, pulse oximetry inside the same monitor defibrillator. So, if you look at the combined LP 15 CO MET shipments with the RAD-57 it’s been a very, very strong year for us.
Matthew Dodds - Citigroup
I think going forward it’s better to combine to two in terms of the commentary correct?
Joe Kiani
Well, we’re not sure what to do here, but because some people thinking of the with OEM business, something we hear think of EMS business, so we are still grappling with that and I think, one day when the numbers start getting really big we’re going to break out the different measurements, but I think right now while we get there we just prefer to report all of it as Rainbow revenue.
Matthew Dodds - Citigroup
Thanks Joe. Thanks Mark.
Joe Kiani
Thank you Matt.
Operator
And your next question comes from Peter Lawson with Thomas Weisel & Partner. Peter Lawson
Peter Lawson - Thomas Weisel & Partner
I wonder if you could give us further details on that pretty strong jump in Rainbow revenues. What were the components there by parameter or U.S versus non-U.S or were there any bulk orders in there or any revenues that were delayed from the first half?
Joe Kiani
No delays Peter, but I can tell you that it was strong all the way through. Carbon monoxide, hemoglobin, and of course it helps to have Medtronic Physio Control jump in with their monitors and much better than expected percentage of their defribs going out with their parameters.
So I hope that helps.
Peter Lawson - Thomas Weisel & Partner
Was there any stocking orders from Medtronic?
Joe Kiani
No, no. These Rainbow parameter sales that we are enjoying and the percentages I gave you are basically software, in fact, well, I will leave at that.
But, no, there was no stocking.
Peter Lawson - Thomas Weisel & Partner
Okay. And then I wonder if you could talk about the traction of the Resposable product?
Joe Kiani
I guess it’s too early to tell, but I have to tell people who like to sensor yet when we talk to our customers who have been using our hemoglobin monitors, they are happy to see that there are lower cost sensors out there, but not everyone of them is jumping on it, just I couldn’t wait to have a price reduction that I get with Resposables. So, we still believe Resposables will probably become the lion share of the sensor purchases, but let’s just say, I guess old habits die hard, the people who started with the disposables, the one piece are still for the majority of them buying that.
New customers are buying resposables?
Peter Lawson - Thomas Weisel & Partner
And I wonder if you could just give, just finally an update on Europe, the traction you are getting there and any commentary upon driver growth out in Europe?
Joe Kiani
Yes, I can give you some. Europe, it seems that our market share has not been as strong as it is in the US.
I was just there and, overall I’m talking about, all around with Masimo revenues. But when I look at Rainbow, of the 145 hospitals I mentioned that have gone with hemoglobin, 91 of them are outside the US, 57 in the US and majority of that is Europe, because, for example, countries like Japan we are still waiting for approval.
So, the strategy of the thought that we like to have a direct sales force for countries in Europe that if you would just propose Oximetry wouldn’t have put a sales force together for seems to be at least early on correct, and that about 60% of this new Rainbow revenue of hemoglobin is coming from Europe 40% from the US or international 60%, 40% US. And that’s kind of what the norm should be where it’s typically with Pulse Oximetry it’s been the other way around to actually a bigger extreme.
Peter Lawson - Thomas Weisel & Partner
You had a similar strength in 2Q for ex-U.S versus U.S for hemoglobin?
Joe Kiani
I don’t have the data. I don’t know I am sorry Peter.
Peter Lawson - Thomas Weisel & Partner
Thank you so much.
Operator
And your next question comes from Joanne Wuensch with BMO Capital Markets.
Joe Kiani
Hello Joanne.
Joanne Wuensch - BMO Capital Markets
Hi how are you?
Joe Kiani
Good how are you?
Joanne Wuensch - BMO Capital Markets
Fine, thank you. You are getting a nice number of cash on your balance sheet, can you discuss uses of it?
Joe Kiani
Well, for now, we are feeling good about growing our cash, and I think ultimately why we believe we can be the company we want to be with organic growth from our own product roadmap, we are also going to be looking at acquisitions and at least for a short while we don’t see our stock as a cheap way of buying companies that we would like to use the cash to potentially buy companies. So, we would like to grow the cash and hopefully buy either technology companies that we find interesting or buy product revenue stage companies with the cash.
Joanne Wuensch - BMO Capital Markets
Could you remind us what the Acoustic Respiratory Monitoring opportunity the size of that market could be?
Joe Kiani
Yes. We believe based on the anesthesia patients safety foundation recommendation of monitoring oxygenation and ventilation on patients, who are on any kind of pain medications that could affect respiration, we believe that market could be unit wise as big as the current Pulse Oximetry units wise of sales.
So if the ASPs were even the same as Pulse Oximetry we think ARM could be as big as Pulse Oximetry. And then, of course to our surgeries that are done with out ventilation or incubation, those are called mach surgeries, and in those kind of cases we see a need for a product like ARM.
Because currently capnography works very well on patients that are incubated but is not regarded highly on non-incubated patient. So we think a product like ARM that’s easy use gives hopefully the same if not better accuracy and reliability as capnography should do very well on the general floor.
Joanne Wuensch - BMO Capital Markets
And then, just a final question. You mentioned that hemoglobin is not approved yet in Japan.
Could you please remind us of the commercial path way for that product there. Thank you
Joe Kiani
Sure Joanne. We filed our application for approval for hemoglobin over a year ago in Japan.
So, typically, it takes about 18 months to get approval. We hope this will be typical.
So assuming that happens hopefully in the second half of 2010, we expect to be able to sell hemoglobin freely in Japan. Right now, we do have some customers in Japan that want the hemoglobin badly enough that are doing applications directly to Ministry of Health for 1Z, 2Z orders for their hospitals and that’s not a lot of orders but it just shows to us that there is a pent up demand there.
So, hopefully second half of 2010 will be free to sell in Japan.
Joanne Wuensch - BMO Capital Markets
Thanks very much.
Joe Kiani
Thank you Joanne.
Operator
Your next question comes from Brian Weinstein with William Blair.
Brian Weinstein - William Blair
Good afternoon. On the new Pronto product, the Pronto 7, there is a lot of different places that you could take that.
OBGYN, pediatrics, family docs, oncology, blood collection centers and others, can you kind of talk how you’re going to address that with an initial sales force of 20 going to 40, where are you going to actually focus first and how you’re going to make the determination on where you’re going to focus?
Mark de Raad
Sure. You are correct that there is a lot of opportunity we calculate it’s about 200,000 physician’s offices that could be, in the U.S alone that could be good targets for Pronto 7, and clearly we wouldn’t expect with 20 or 40 even sales people to reach them appropriately.
However, we think it’s important we start selling that product ourselves to make sure we understand all of the idiosyncrasies of selling such a product, and at the right time we anticipate brining on board most likely on an exclusive basis one of the large physician’s office distribution groups such as PSS or Henry Shine or McKesson, and we are in dialogue with them, there is interest on both sides and we are going to have the challenge of choosing one. But, again, we probably would not do it at the beginning we would wait until we feel like we understand how to best do this on a large scale.
Brian Weinstein - William Blair
Then on the accuracy of the product. I think you had mentioned at a dinner we had with you that you wanted to get it down to I think it was 0.7, is this were we should expect the product to be when it gets FDA approve?
Joe Kiani
Well, I’m trying to think about what our accuracy claims were when we submitted it. I think just to let you know, to keep things simple we are seeking FDA clearance for accuracy of one gram per deciliter which is not different than where our current continuous nonevasive margin product is today which is one gram at one standard deviation.
But the goal is to have it perform better than that even if we don’t make that claim, so that the overall experience of the user is more adjusted to what they expect than rather what you specified. What I’m saying by that is when you say accuracy this is one gram per deciliter at one standard deviation that means it’s two at two standard deviation and three at three standard deviation.
So that means somebody could be off by three plus or minus when they are doing a spot check. So the goal we have had is to try to make that be hopefully closer to one no matter, not no matter, let’s say even at two or three standard deviation, so that again the user experience is better to what they expect rather than what we tell them.
Brian Weinstein - William Blair
Okay, thanks.
Joe Kiani
Thank you Brian.
Operator
Your next question comes from Spencer Nam - Summer Street
Spencer Nam - Summer Street
Thanks for taking my question. Just a couple of quick questions here.
Among those 140 some odd hospitals where the SpHb is already in I’m curious whether you could share with us the usage pattern or the behavior of users with respect to SpHb, is it concentrated amongst few hospitals that have more experience or are we seeing a lot of interest from the new customers who adopted recently?
Mark de Raad
You are giving me the sacred question for an entrepreneur. So, I am trying to hold myself back.
We are excited about the hemoglobin, because we are seeing its being used in a lot of great places. For example, now I’m going to get into anecdotal data.
As I talk to our customers they are using it in an operating room for better management of blood transfusion, and they are using the intensive care unit for basically detecting bleeding before it happens. One of the surgeons that we are working with told us, over time he put it on 10 patients, and he believed one out of those 10 patients lives were saved because of our device and it detected internal bleeding 30 minutes before they would have normally detected it.
So, we are hearing news from OB/GYN especially outside the US where they are saying its help again to detect the mom bleeding during delivery much sooner and as a result has helped reduce death, mortality. So, to answer your question, the 145 hospitals that have hemoglobin there is nothing particular about them then there is no I guess sensitivity, I mean people are using it in mainly the OR and ICU and some even in the ED or trauma.
Spencer Nam - Summer Street
It’s helpful. And then, looking forward, you mentioned that there is a good pent up demand in Japan right now in some cases, I’m wondering if how you describe the US market in terms of demand.
Are you seeing lot of hospitals being interested in hemoglobin test or is it still a very much you guys trying to push this out to hospitals and have them take a shot at it, if you will?
Joe Kiani
We are seeing the latter. Maybe I should make sure I understand.
We are seeing strong demand in the as well, and in Europe. For example, at the American Society of anesthesiologist meeting this last October in New Orleans, I was impressed by how excited the clinicians were about hemoglobin.
Some you remember we launched it at the ASA last year in Orlando, Florida, and that was kind of the first time people were becoming aware of it. At this conference people were coming to our booth and wanting to learn more, wanting to have it in their hospital.
We, from what I have been told by our marketing people, we had the most robust lead generation ever and mostly it’s around hemoglobin. So, I think the message is out there, people appreciate the value of noninvasive hemoglobin, they are coming up with some really unique ideas of what else they could do with it, besides just continuous monitoring of hemoglobin.
But, I think it’s looking very positive.
Spencer Nam - Summer Street
Great, thanks very much
Joe Kiani
Thank you.
Operator
And there are no further question. Mr.
Kiani do you have any closing remarks?
Joe Kiani
No, but I just want to thank you all for joining us. I appreciate your questions and your interest in our company.
Look forward to our next earnings call which will be hopefully in February, we are going to try to do it sooner. So have a wonderful holiday season, thank you.
Operator
This concludes today’s conference call. You may now disconnect.