Scales of justice weight Radoslav Zilinsky/Moment via Getty Images
The favorable January 17th court ruling for Masimo Corporation (NASDAQ:MASI) in its blood oxygen sensor IP battle with Apple Inc. (AAPL) has been a tailwind for MASI shares, which rose 12% since the ruling, and 2% on January 17th. The ruling effectively forced Apple to stop selling watches with oxygen measurement features in the U.S. until the appeals process of the ban is finally decided. In this article, we will discuss if Masimo has a sustainable advantage over Apple.
Masimo management is now projecting greater market share with the ban in place, and Street estimates have been rising over the past month. This reverses a downward earnings revisions trend since Masimo’s disappointing 2023 Q2 results that led to a -29% stock decline in the second half of 2023.
MASI Non-GAAP EPS Estimate Trends (S&P Capital IQ)
The timeline of the Masimo-Apple patent infringement saga effectively started back in January 2014 when a key research scientist, Marcelo Lamego, was hired by Apple before starting his own company – True Wearables – seven months later. In 2018, Masimo filed a complaint against True Wearables’ pulse oximeter (and four years later the court ruled in favor of Masimo). In January 2020, Masimo filed a suit against Apple for infringement of 12 patents. Nevertheless, Apple launched its Series 6 smartwatch with blood oxygen tracking in September 2020, in face of high COVID-related demand. Masimo then filed another infringement case concerning 5 patents against Apple with the US International Trade Commission {ITC} in June 2021, asking for an import ban on Apple watches with the blood oxygen sensor feature.
This back-and-forth legal battle has intensified over the last few years, including Apple countersuing Masimo in 2022, claiming that the Masimo W1 watch copied the Apple Watch. In October 2023, ITC ruled that the blood oxygen sensor in the Apple Watch infringed on Masimo’s patents. This led to an import ban of Apple’s infringing watch models in the US. Apple was granted a temporary stay on the import ban, allowing Apple to sell watches with the disputed blood oxygen sensor in the US during the December holiday season. However, on January 17, 2024, the Federal Appeals court terminated the temporary stay, re-instating the ban of Apple’s Series 9 and Ultra 2 watches with the blood oxygen sensor.
Apple counters that the final appeals decision has not yet been decided (although it could take a year or two to make it through the courts), and only 2 of the aforementioned 17 Masimo patents from past litigation were cited by the ITC. Also, there is still the outstanding 2022 countersuit against Masimo. This lawsuit accuses Masimo of infringing 6 patents covering smartwatch and health-monitoring technology, and 4 patents covering the design of Apple watches and chargers.
This ban does not have a significant impact on Apple’s total revenues. US Apple Series 9 and Ultra 2 watch revenues were estimated to be $5B in 2023, about 1.3% of Apple’s total 2023 revenues of $386B. Furthermore, Apple has already substituted the Series 9 and Ultra 2 watches with non-blood oxygen sensor versions for the US market.
The ongoing legal dispute, however, tarnishes Apple’s image, in my view. Masimo has publicized its David-versus-Goliath IP battle against one of the world’s largest companies, while simultaneously making claims of the superiority of its pulse oximetry technology. In a recent Bloomberg interview, Masimo’s CEO said, “Apple is masquerading what they are offering to consumers as a reliable, medical pulse oximeter, even though it is not”. In short, Masimo has become a thorn in Apple’s paw.
The bulk of Masimo’s patent claims are on a system level. The foundational IP of how the system physiologically functions is on the light detector level. It is noteworthy that the two Masimo patents (patents ‘502 and ‘648) that the ITC recognized in its October 2023 decision mainly validated its light photodiode claims. Specifically, the ITC found Apple in violation of section 337 only to claims 22 and 28 of the ’502 patent and claims 12, 24, and 30 of the ’648 patent. See GovInfo. The ITC then issued an order prohibiting the importation of “certain light-based physiological measurement devices and components thereof” that infringe upon claims 22 and 28 of the ’502 patent and claims 12, 24, and 30 of the ’648 patent.
Claims 22 and 28 of the ’502 Masimo patent and claims 12, 24, and 30 of the ’648 Masimo patent describe a user-worn device having light-emitting devices {LEDS} and photodiodes. This begs the question, what if Apple discovered a light-emitting device that does not use photodiodes as constructed today. Apple could then bypass Masimo’s IP roadblock, and operate in the free and clear.
The answer to Apple’s quandary may be ActLight. This company has developed a unique dynamic photo detector {DPD} light sensing technology that generates an accurate digital output signal without amplification with very low operating voltage. This is fundamentally different from today’s less accurate, bulky, power-hungry constant-voltage photodiodes used by Masimo and others in the industry.
ActLight
ActLight has over 30 granted patents and a large number of filed patents covering DPD technology and different applications. ActLight’s founder is the inventor of DPD technology, and ActLight has recently become the sole owner of all granted and filed DPD patents worldwide.
Specific to the Masimo’s patent, ActLight’s DPD is not a photodiode. It differs from a photodiode by construction, operating conditions, and the measured parameters. ActLight’s unique DPD has a P+NPN+ device structure (not a P+IN+ device structure), has forward-based operating conditions (not reversed based), and is a time-triggered measuring system (not photo current based).
ActLight
Page 89, 2nd paragraph of Masimo patent US010945648 B2 (i.e., ‘648) states:
“In an embodiment, the front-end may comprise switched capacitor circuits that are configured to convert the output of sensor’s detectors into a digital signal.”
As the fund manager of the Quan Technology Fund that is an investor in ActLight[1], I questioned ActLight’s CEO on how does its DPD technology get around this broad “detector” claim? The ActLight CEO responded “DPD technology does not require any capacitor and the output signal is already digital”, removing the last doubt from my mind.
Based on the facts above, I believe that a device such as the Apple Watch that uses DPDs instead of photodiodes could likely avoid an infringement with Masimo patents. Moreover, the high performance (high signal-to-noise ratio), minimal voltage, low cost, small size, tunability, and direct digital output creates enormous advantages to the state-of-the-art photodiodes being used by Apple, Masimo and the industry today.
The icing on the cake is that ActLight’s DPD technology is licensed to a major Apple semiconductor supplier for heart rate monitoring that has been thoroughly tested, and is ready for volume production in April. Furthermore, a similarly designed peripheral oxygen saturation (SpO2) prototype was successfully tested at 110 dB. I witnessed the demo firsthand against the market leader’s state-of-the-art blood oxygen sensor; ActLight’s sensor was exponentially smaller, drew much less power, and with quicker reaction time to changes if needed (see side-by-side photos below).
ActLight
Thus, Apple can easily incorporate ActLight’s DPD into its future smartwatch designs, and not only avoid Masimo’s patent claims, but come out with a device that could very significantly harm Masimo.
This key sensor technology is the foundation (including IP) to Massimo’s healthcare monitoring devices, which accounted for 66% of revenues and 78% of operating profit in the last-reported fiscal year (the remainder of revenues and operating profit come from audio products via the acquisition of Viper Holdings in early 2022). If Masimo loses its competitive and technical advantage in this healthcare market, the repercussions would be dramatic. This is what would be at stake if Apple and ActLight joined forces.
My conclusion is that Masimo’s core healthcare monitoring device business faces some long-term challenges. For 2024, the reinstatement of the US ban on certain Apple watches may provide some additional revenue. But beyond 2024, Masimo appears to have some major issues to deal with. First, the appeals process is not finished, and Masimo’s current US market protection may not last forever. Second, is the larger existential threat posed by ActLight. If Apple partners with ActLight, I would not want to be a holder of Masimo shares.
[1] Quan Technology Fund is a crossover fund that invests in private companies such as ActLight, as well as public technology companies.
