Activist Investors And Healthcare Innovation Don't Mix

Authored by Jerry Rogers via RealClearPolicy,

The U.S. healthcare system may have its share of flaws, but fortunately leading the world in healthcare ingenuity and innovation is not one of them. U.S. inventors and inventions have revolutionized the healthcare industry through a combination of brilliant minds, sheer grit, and a substantial amount of investment into research, which yields new treatments, drugs, and medical devices that benefit American patients and millions of others all around the world.

Scrappy, innovative companies are a major factor in America’s global lead in cutting edge healthcare. U.S. companies of all sizes in the pharmaceutical, medical device, and other related industries compete vigorously against each other to attract investment and produce the latest and greatest products and technologies to expand care, improve outcomes, and lower costs.

But untimely disruptions to these companies and the virtuous cycle of innovation can throw them off their missions and impact the entire market. One such distracting disruption is unfolding at Masimo, a medical technology device company that manufactures patient monitoring technology.

Masimo is under an activist investor attack by Politan Capital Management, a hedge fund founded three years ago by Quentin Koffey. Last year, Politan successfully challenged Masimo management and won two seats to the company board. This year the stakes are much higher. Politan is back for two more seats – enough to give the hedge fund total control of Masimo’s board, despite the fact that Politan has no experience running a medical tech company.

Proxy fights are more typically over a seat or two that grant influence, but not total control. Politan’s quest for an outright majority of Masimo’s board makes this proxy fight peculiar and one that should be followed closely by everyone who cares about the future of healthcare innovation.

Multiple, in-depth studies have found that proxy fights harm target companies. An analysis by Boston Consulting Group found most companies “lose between 4% and 25% of TSR [total shareholder return] within a year of an activist attack.”

Activist Insight found that companies where management’s candidates won performed better over a longer period, rising “by an average 8% after a year, compared to a 2% gain for companies where activists won at least one seat.”

But perhaps more important than the hit to share price is the most consequential impact: lost innovation. Masimo’s CEO, founder, and chairman, Joe Kiani, is up for reelection to the board. Kiani has said he will leave the company as CEO if shareholders vote him off the board in favor of Politan’s replacement.

It’s fair to say that Masimo’s future is tied to Kiani’s fate. Kiani has led the company from a startup to a publicly traded leader in patient monitoring and pulse oximetry that annually serves more than 200 million people. Fast Company recognized Masimo as one of the ten most innovative companies in 2024 across all sectors. Losing Kiani would be a massive hit to the company. (Here’s my conversation with Joe Kiani on the 'Business of America' Podcast).

But Kiani wouldn’t be the only loss if the hedge fund succeeds. Its COO, Bilal Muhsin, notified the board that he would resign if Kiani is forced out. Nearly 300 engineers in Masimo’s healthcare division also expressed public support for Kiani, warning that losing him would jeopardize the company’s future and that they, too, may depart if Politan assumes control.

The loss of Masimo’s executive leadership as well as its talented employee base would generate a massive disruption, effectively halting future innovations to the detriment of patients and shareholders. It’s very difficult to imagine a scenario where handing over board control to a hedge fund manager with no industry experience would result in any outcome other than major, perhaps irrecoverable, setbacks.

That avoidable outcome would be unfortunate for one of the most innovative companies in the U.S.  healthcare sector. It might also foretell other takeover attempts of companies that would rather focus on their missions than activist investors.

U.S. companies are adept at innovating. We may soon learn if those same companies can continue to do so without its leadership and best inventors.

Jerry Rogers is editor at RealClearPolicy and RealClearHealth. He hosts 'The Jerry Rogers Show' on WBAL NewsRadio 1090/FM 101.5 and the Federal Newswire's ‘The Business of America’. Follow him on Twitter @JerryRogersShow.