Activist Investors and Healthcare Innovation: A Complicated Relationship

Despite its issues, the U.S. healthcare system is a world leader in healthcare innovation. This is largely due to the brilliant minds, determination, and significant investment in research that has led to the development of new treatments, drugs, and medical devices. These advancements benefit not only American patients but millions of others worldwide.

The Role of Innovative Companies

Small, innovative companies play a significant role in maintaining America’s global lead in cutting-edge healthcare. U.S. companies, regardless of their size, in the pharmaceutical, medical device, and other related industries compete fiercely to attract investment and produce the latest products and technologies. These innovations aim to expand care, improve outcomes, and lower costs.

Disruptions to Innovation

However, untimely disruptions can throw these companies off their mission and impact the entire market. One such disruption is currently unfolding at Masimo, a medical technology device company that manufactures patient monitoring technology. Masimo is under attack by activist investor Politan Capital Management, a hedge fund founded three years ago by Quentin Koffey.

Last year, Politan successfully challenged Masimo management and won two seats on the company board. This year, Politan is back for two more seats – enough to give the hedge fund total control of Masimo’s board, despite Politan's lack of experience in running a medical tech company.

The Impact of Proxy Fights

Proxy fights usually involve 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 unusual and one that should be closely watched by those concerned about the future of healthcare innovation.

Several 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.”

The Consequences of Lost Innovation

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 stated he will leave the company as CEO if shareholders vote him off the board in favor of Politan’s replacement.

Masimo’s future is closely 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 serves more than 200 million people annually. Fast Company recognized Masimo as one of the ten most innovative companies in 2024 across all sectors. Losing Kiani would be a significant blow to the company.

However, Kiani wouldn’t be the only loss if the hedge fund succeeds. Its COO, Bilal Muhsin, has notified the board that he would resign if Kiani is forced out. Nearly 300 engineers in Masimo’s healthcare division have 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 and its talented employee base would cause a massive disruption, effectively halting future innovations to the detriment of patients and shareholders. It’s hard 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, potentially irrecoverable, setbacks.

The Potential Implications

This 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 skilled at innovating. We may soon learn if these same companies can continue to do so without its leadership and best inventors.

Bottom Line

The relationship between activist investors and healthcare innovation is complex and fraught with potential pitfalls. While investors may seek to maximize returns, this can sometimes come at the cost of innovation and progress, as seen in the case of Masimo. It raises the question: can companies continue to innovate without their key leaders and inventors? We invite you to share your thoughts on this matter and encourage you to share this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.