Masimo Corporation’s ( MASI - Analyst Report ) long-established contract for its pulse oximetry system with North Virginia based Inova Health Systems was renewed recently. Masimo renewed the contract with one of the largest not-for-profit health care system in Washington D.C. metro area, binding through five years.

Masimo’s pulse oximetry technology and related devices will be adopted by the five hospitals within the Inova Health System, including the well regarded Inova Fairfax Hospital. The contract annexes the company’s handheld Rad-57 Pulse CO-Oximeter with the measurement capabilities of its Rainbow SET. This will enable clinicians to actively gauge blood oxygen saturation, even under adverse conditions.

Inova currently uses Masimo’s Radical 7 bedside monitors. These monitors can be easily upgraded to include measurement capabilities of Masiomo’s Rainbow SET. Inova expects to save time and money via the technology upgrade. This reiterates Masimo’s belief that the adoption of its technology is economical as hospitals in the U.S. can save up to $5 billion by optimum utilization of the company’s technology.

Masimo enjoys a first-mover advantage for some of its offerings. The company’s SET, the leading pulse oximetry technology worldwide, along with the Rainbow SET offering underpins its revenue growth. According to the company, its mainstay SET pulse oximetry will continue to grow in the years ahead whereas the Rainbow pulse oximetry will accelerate its top-line as hospitals continue to adopt Masimo’s technologies.

Masimo is a leader in the pulse oximetry monitoring equipment industry. The company’s prospects are encouraging, given the sizeable global market opportunity, adoption of pulse oximetry in non-critical areas of the hospital and growing barriers to entry due to additional non-invasive parameters.

Shipments have been growing at a steady rate fueled by new contracts. However, the renewal of the royalty agreement with Covidien ( COV - Analyst Report ) provides little or no benefit due to lower rates. Further, competition is intense and Masimo partly depends upon its OEM partners for sales. Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).