EXHIBIT 99.1
Given Imaging Conference Call
July 8, 2005
10:00 a.m. ET
Operator: Good morning and welcome, ladies and gentlemen, to the Given Imaging
Preliminary Second Quarter Results conference call. At this time I'd
like to inform you that all participants are in a listen-only mode.
Before I begin, I'd like to read the following regarding
forward-looking statements.
During the course of this conference call the company may make
projections or other forward-looking statements regarding future
events of the financial performance of Given Imaging. We wish to
caution you that such statements reflect only the company's current
expectations and that actual events or results may differ materially.
You are kindly referred to the risk factors and cautionary language
contained in the documents that the company files with the Securities
and Exchange Commission, including the company's annual report on Form
20-F filed March 25, 2005.
The company undertakes no obligation to update any projections or
forward-looking statements in the future. At the request of the
company, we will open the conference for question and answers after
the presentation. We'll now turn the call over to Gavriel Meron,
President and CEO of Given Imaging. Please go ahead.
Gavriel Meron: Thank you, Joe. Good morning, everyone, and thanks for joining
us today on our call, especially on this short notice. As you saw in
our press release this morning, we do expect our second quarter revenue
to be approximately $20.5 million, short of the low end of our guidance
for this quarter of $22 million.
Earnings are expected to be in the range of three to five cents a
share, also short of the low end of our guidance, which was six cents.
And this excludes the effect of a one-time provision for taxes, which
I will elaborate upon in a few minutes.
As we said in the press release, the shortfall in sales was due
primarily to the slower finish in both system and PillCam sales during
the quarter, and especially in the United States. Sales outside of the
U.S. were actually in line with and in some cases ahead of our
expectations. We are only a week out of the quarter and obviously have
not yet completed our analysis of these results, but I will still try
to provide you with our initial thoughts.
As you all know, during the first quarter of this year we did redirect
our sales force in the U.S. from focusing on the selling of new
systems, to increasing utilization. Before this change, their main
focus was on selling systems, what we call the hunting mode. We
changed their mode to a harvesting mode, meaning that they have to go
to their existing installed base - and we have about 1,400 customers
in the United States - to increase PillCam small bowel usage.
Utilization has been just over one patient per week on average as of
the end of the last quarter, and this is a fraction of the level of
utilization that we can or should achieve. You all have your models
and you know very well how a change in the utilization numbers can
make a significant effect upon the overall revenue and our earnings
numbers moving forward. So, increases in utilization will clearly also
have a positive ripple effect upon new work station placement moving
forward as well.
But increased utilization for a new product means changing habits and
changing perceptions among gastroenterologists. And many of the things
that we're doing are paradigm shifts, and this cannot occur overnight.
It means trying new ways to change customer behavior and our reps
investing more of their time with our customers.
We're trying different methods. Some of them are actually quite
successful in the field. We're working now on identifying the best
ones so that we can implement across the board. I will come back to
you with some more specific data about utilization and how we're
tackling that on that on our regular quarterly call on July 29th.
The bottom line, our PillCam small bowel sales did grow about 50
percent compared to the second quarter of last year. Now, that's not
bad, but we had expected to do far better than that. The second factor
that impacted sales this quarter was lower system sales. We'll get
into specific numbers only in the quarterly call.
But since our sales reps are now spending more time on increasing
utilization it does mean that they have less time to spend on selling
new systems and hunting. We did not expect this shift to impact total
system sales because of two main reasons. One, we had hired and
trained 10 additional reps at the beginning of the year, bringing our
total sales force, territory managers and regional managers to 45.
And, secondly, under our agreement with J&J's InScope division,
InScope was responsible for generating new system leads for us. The
objective is, of course, to align the two sales forces and get them to
work together as one unified sales force with a common mission, and
that is to expand the footprint as much as possible.
So, we should all have a common mission to expand the footprint as
much as possible so everyone can have a bigger field to harvest from.
With InScope's 80 sales reps we together total now more than 120 sales
reps. And that is one of the largest sales forces in the GI device
space.
But with all new endeavors, aligning the sales forces does take time.
We have not yet realized the anticipated benefits. We have had
in-depth discussions together about how to correct this moving forward
and we have made significant progress in improving our coordination.
We've
outlined clearer goals. We are investing efforts in training and
educating the combined sales forces to work as one coordinated team in
the field. And I am confident that this will reap significant benefits
moving forward.
Finally, as you know, reorders of PillCam ESO are linked very closely
to reimbursement. And to date we are still working with payers on this
issue. We continue to believe that ESO represents a huge opportunity,
and I do expect to see sales of PillCam ESO pick up in tandem with
reimbursement. And we shall be educating gastroenterologists to
understand the potential of the platform to drive additional business
to them and increase their practice efficiency and throughput.
The results of these three factors is a shortfall of about one and a
half million from the low end of our guidance range. We have still not
completed working through our full financial results, but we do expect
that earnings per share will be in the range of three to five cents
relative to the low end of our guidance range of six cents per share
before the additional factors that we'll talk about now.
And the other factor that I'm talking about that is impacting our
earnings this quarter is that we discovered that our U.S. subsidiary
had omitted to collect and remit sales tax to state authorities. As
you know, sales tax applies to the purchase, and the seller acts to
collect the tax on behalf of the state as an agent, so to speak. This
omission was a good faith error.
It seems that we did not collect sales tax, partly under a
misconception that all of our customers are exempt, since many of the
larger and initial customers actually were exempt. However, even
though we did not collect the sales tax we are liable for it to the
different states and jurisdictions. Our customers, however, are not
relieved of their obligations to pay sales and dues tax and in most
cases can be required to pay the tax at a later time either by us or
by the state or the jurisdiction.
We found that many organized institutions when they are not charged
sales tax by their vendors actually accrue and remit sales and use tax
independently through the state. Other customers have been audited by
the state tax authorities and have also paid the required sales and
use tax directly to the states.
We intend to approach states with voluntary disclosure and, in
parallel, to request our customers to remit these taxes. However, as a
matter of caution, we expect to make a provision this quarter in the
amount of approximately $1.2 million for possible bad debts related to
collection of these taxes as well as interest and penalties that we
may be charged.
I believe that this provision should cover this risk sufficiently. Our
U.S. subsidiary has already implemented a system for invoicing all
customers with sales tax. So, moving forward, I do not expect to see
any impact on our revenue or profit growth.
It is also important to note that this omission was discovered as a
result of measures we recently took to strengthen our internal
controls in our U.S. subsidiary. These included, among other things,
the replacement of senior finance personnel with new staff, who
identified this issue, reported upon it to management and to our
independent auditors.
Last, but certainly not least important, is the resignation of Zvi
Ben-David, who has been our CFO almost since inception. After five
very intensive years, Zvi wants to rest and spend more time with his
family. Zvi is being replaced by Yuval Yanai, who will be joining
Given very soon.
Yuval is currently the senior vice president and CFO of Koor
Industries, which is one of the largest investment holding companies
in Israel, with investments in telecom, chemicals and defense
technologies. Koor itself is traded on the New York Stock Exchange,
and many of its portfolio companies are public companies.
Yuval, before this position at Koor, was the CFO of two other known
Israeli technology companies, NICE Systems, which is traded on the
NASDAQ and, prior to that, he was CFO of Elscint, which was traded on
the New York Stock Exchange. Elscint had made landmark contributions
to the radiology world in hot areas such as multi-slice CT and nuclear
imaging, and it grew from a startup to more than $300 million revenue
before being sold. Today parts of Elscint are held by G.E. Medical and
Philips.
And Given now is challenged in growing beyond the $80 million run rate
to grow to hundreds of millions of dollars of sales a year. So we are
becoming more complex and we do feel the need for additional
experience and management expertise around the table, particularly to
strengthen our financial management. So, I do look forward to
welcoming Yuval on board very soon as our new chief financial officer.
At this time I will turn the call back to the moderator for questions
and answers. Joe, please.
Operator: Thank you. If you would like to ask a question at this time, please
press the star key followed by the digit one on your touch-tone
telephone. If your speakerphone is on and you have your mute function
on, please turn that off so your signal will reach our equipment.
Again, that is star one for questions. We'll pause just a moment to
let everyone signal. We'll go first to Ed Shenkan of Wells Fargo.
Ed Shenkan: Good morning, Gabi. Thanks for taking my question.
Gavriel Meron: Hi, Ed.
Ed Shenkan: Hi. As far as the guidance, you said you're going to wait until
your conference call later in the month. Could you tell us what you're
expecting to learn between now and then and why you'd put it off
another 14 days or so?
Gavriel Meron: Yes. We are now in the process obviously of completing the
quarter. And the quarter just finished a few days ago. And we go
through a process every quarter of analyzing the quarter, reviewing it
with managers, and preparing our plans for the next two quarters, which
are related to what we're going to sell and what we're going to spend.
And spending and selling - spending for sure is very controllable. And
selling is controllable to a certain extent. And I hope to a
significant extent.
We have to go through that process before I feel comfortable saying
that something has changed and what has changed and coming out with
any statements relating to guidance. So, I think we'll have to defer
till the end of the month for that.
Ed Shenkan: OK. And as far as the breakdown in the quarter, could you give us
even any percentages of the revenues that were attributable to
capsules versus workstations or U.S. percentage of revenues versus
outside U.S., a band? Is there anything else you could give us that
you might feel comfortable with that would help us to understand
better how the quarter broke out?
Gavriel Meron: Yes. Ed, I think we're really going to have to wait for that, to
get all the financial numbers together and the analyses and present
them in a way that has been audited and is correct so that I will have
my CFO next to me. And he'll give you all the numbers and you'll get
them.
Ed Shenkan: OK.
Gavriel Meron: I really would prefer that we leave all of that aside at the
moment. It was important for us to get this information to the market,
which is the general information on where the company is, where we're
going, and what is unchanged and with a slight.
Operator: We'll go next to Ittai Kidron of CIBC World Markets.
Ittai Kidron: Hi, Gabi. I don't know if you want to keep on answering Ed's
question. But could you give us at least - if you look at the
shortfall relative to the low end of your guidance, around $1.5
million, roughly - was it more the workstations? Was it more the
capsules? Can you give us a little bit more color on that without
percentages, but from at least a thought standpoint? Where was most of
the dollars missing?
Gavriel Meron: We had a range of 22 to 24. The difference between the high end
and the low end was upside in PillCam ESO, which of course we know
didn't happen. And PillCam ESO was very slow. So, if we look at the -
if we take the variance that we had, the variance between the low end
of the range, Europe and the rest of the world were on target and
slightly ahead of the target.
In the U.S. we have three pieces. One was workstations. One was
PillCam small bowel. We didn't have as high utilization as we wanted
to see. We saw growth, but it wasn't as fast as we wanted it. It was
only 50 percent growth. And PillCam ESO was of course very low, as I
said, since there's still no reimbursement and as a result of that
very, very few orders. But beyond that in numbers, we will give the
numbers out in the call on July 28th.
Ittai Kidron: OK. How would you characterize the work that J&J has done since
the commercial launch of ESO? And what kind of traction or no traction
do you see they got in workstation sales? Is it to your satisfaction
or things could be better over there?
Gavriel Meron: The traction that we've seen from our activities with J&J, the
InScope sales force has had a very difficult time because they haven't
had reimbursement. They've been trying to sell a product that isn't
reimbursed, where the clinical data is not yet published. So, they
have a lot of, of course, difficulty in seeing results.
In addition to that - and you asked specifically about the
workstations - the J&J sales force had not been trained widely to be a
platform sales force and more of a utilization sales force, which is
more natural to their inclination. Following the, I would say, three
months results, not the six month results - following the three months
results, during the last quarter we've had lengthy discussions about
what that means and what needs to be done to change.
And we've agreed on changing plans and changing activity that will
actually train the whole sales force in a similar way to sell not only
the platform as a platform for small bowel PillCam and ESO PillCam and
further down the road, of course, a colon capsule, but in addition to
that, of course, the utilization by the InScope sales force for ESO
and the utilization for small bowel by our sales force. So, the
difference will be to actually proactively train to sell the platform,
not only to just mention it when they go into the customer.
Ittai Kidron: So, do you see a risk with having J&J people out there being
now mostly responsible for workstation sales, I guess, at this point?
And with your own sales force focusing more on the capsule, given that
the J&J people are not as used to selling workstations, do you see a
risk here that in the near term there will be this transition period
where workstation sales might be, say, challenged because of this?
Gavriel Meron: No. Maybe I wasn't clear about that. We're not delegating the
bringing of the lead of workstations to J&J anymore. And that is the
way it started off and that is where it was in the first quarter and
most of the second quarter.
Ittai Kidron: OK.
Gavriel Meron: But, moving forward into the next part of the year what we've
agreed upon is that we should have one positioning for the customer,
whether it is a J&J salesperson or whether it is an
InScope salesperson or a Given salesperson. When you go to a new
customer and you talk about the platform the talk track should be the
same.
When you go to an existing customer and talk about utilization, the
talk track may be different and then it will be more focused by them
on ESO and more focused by us on utilization. But, again, the issue is
going to a new customer and presenting a full and complete platform.
And that kind of makes sense. It's very logical. We tried a different
track and that obviously didn't work. This is a track that presents
one face, one story to the customer. And is there a risk in that?
There is, but we're not delegating that. We're actually enlisting each
other to do a better job together.
Ittai Kidron: OK. And so, lastly on this point, would you say that - is there
a risk - is there - will there - is there a change to the commission
structure between you and J&J because of this ...
Gavriel Meron: No.
Ittai Kidron: ... number one? And, two ...
Gavriel Meron: The answer is no, number one
Ittai Kidron: OK. And will there be a change in headcount at J&J or with your
own internal sales force because of that?
Gavriel Meron: No. We have 40 salespeople, TMs, and they have about 80 TMs.
There's no need to increase beyond 120. I think we're probably now
already the largest sales group in medical devices for
gastroenterologists. And I think that is a sweet spot to be in. And
there is no change
in the commercial arrangements between the companies. There has been a
change on the - in the commercial arrangements of our companies with
our sales force.
Ittai Kidron: You mean the way the sales force is compensated?
Gavriel Meron: Right.
Ittai Kidron: OK.
Gavriel Meron: Those sales forces now will be compensated slightly differently,
not more money but with the potential of course to make more money as
they become more successful, but with the potential to see money
coming from all the elements of the platform, and, again, to reflect
what we said so everyone will get something on the workstations.
Our sales force will, of course, get a major portion of their
commissions coming from the small bowel, but some commissions coming
from ESO. And, vice-versa, the InScope group will be getting on the
workstations plus a major portion, of course, on PillCam ESO and a
small portion based on the small bowel.
So, now they will not only talk the platform but they will have an
interest in the platform. In fact, together that sales force these 120
sales force, I think the only larger medical device group may be
Boston Scientific. So, we're really - we're bigger already than
Olympus, Pentax, Fujinon. This gives us a lot of power in the street.
And, as I said, I think, on the call, this is a process where it's a
process of learning. We're doing something completely new. I don't
think this has ever been done before. And I'm not talking about
ingesting capsules. I'm talking about getting two different companies
to work together with their sales forces in the field.
What I will say that has been very positive is the way we've been
working together, hammering things out together, being very frank and
open and honest, trying to think together what the best way to serve
our customers is. And we all as a team came to the conclusion to serve
the customers best is to present the platform in the same way by all
the sales force.
Ittai Kidron: Very good. OK. Thanks, good luck, and congratulations on
Yuval's nomination. He's definitely a worthy candidate.
Gavriel Meron: Thanks, Ittai.
Ittai Kidron: Thanks.
Operator: We'll go next to Timothy Lee of Merrill Lynch.
Timothy Lee: Gabi Good morning. Just two questions here. Just, one, a semantics
issue. Just looking at your press release saying lower than
anticipated closing of new systems. So, does that mean the actual lead
activity is there and this is just a timing issue, or are these - are
the leads - the sales leads aren't there as well?
Gavriel Meron: It's a good catch. And the thing is this. At the end of the day
on the last day of the quarter we had a long list of leads that we
hoped more would close, and they didn't. Now, if they will close
tomorrow or the day after I'm not sure, but they were definitely in
the leads. So, that is different. And - if you understand what I mean.
So, we have - we definitely have the pipeline and we do expect to
close them. I can't give you a date on when they're going to be
closed, but when we were looking at the end of the quarter we had
anticipated a higher closing rate of the leads that were out there.
So, again, we do have a large group of salesmen out there that have
not had much experience in actually closing device deals. And that may
also have affected the level of the leads that we had, which maybe
will take a bit longer than before.
Timothy Lee: So, just to make sure I'm clear on this, the interest from the
customers isn't really below your expectation. It's just a matter of
actually closing the sales?
Gavriel Meron: I would say both, closing the sales and beginning to evaluate
perhaps correctly how close you are to closing.
Timothy Lee: Got it. OK. And then just a second question. Just in terms of kind
of your sales flow is it natural to assume that the last two weeks of
the quarter you get 10, 15 percent of your sales and we should expect
that to be kind of the natural pattern here on any given quarter?
Gavriel Meron: In every given quarter what you see is it's quite easy to track
PillCam small bowel and its growth. It's not that erratic. Though if
you now have 120 salespeople out there, then you could have 120 people
at the end of the quarter closing one [inaudible], right. And that
would give you kind of tens of thousands of dollars. But the real jump
at the end of the quarter has been always the workstations.
And so, there had been an expectation for workstations at a higher
level than we actually executed and closed. And, of course, PillCam
ESO where there hadn't been - there have been very little, I would
say, reorders during the quarter. That actually could jump very
significantly all of a sudden when the cycle reorders comes because we
have more than 700 accounts who are ESO-enabled.
That means they have RAPID 3, they have DR2 and they have PillCam ESO.
And as soon as they finish the 10-pack and they replenish that's 700
10-packs that could be sold. That could be - you can't know when
that's going to happen. And we don't have any sustained reordering
that we can say, OK, this is the rate of reordering. And so,
therefore, there's a - that's another, what, $300,000 that could come
in physically in the last few days of the quarter.
So, we did have, I would say, a strange quarter from that point of
view, but at the end of the quarter there definitely was a possibility
of a significant upside to bring us into the range. But that didn't
happen. A lot did happen, but we didn't get as far as we hoped we will
get.
Timothy Lee: OK. Looking forward to the call at the end of the month for some
additional details then. Thank you.
Gavriel Meron: Thanks, Tim.
Operator: We go next to Amit Hazan of SunTrust.
Amit Hazan: Hi. Good afternoon, guys. Just a couple questions. On the
PillCam ESO, just again with regard to reimbursement, just more
curious on your -as you were setting your expectations for the quarter
did you expect to have reimbursement in place this quarter for the
ESO?
Gavriel Meron: Reimbursement in place? There are two types of reimbursement,
and let me just review that. There's reimbursement that we're talking
about getting a CPT code, which means submitting to CMS sometime
towards the end of this year, getting approval from CMS the end of
next year effective January 1, the year after, 2007. That is what I
will call getting reimbursement.
But under - besides that in the parallel track in the similar way to
what we did when we came out initially with the PillCam small bowel,
we went to payers one by one to convince them to start
insuring and covering PillCam small bowel activity. And this is the
activity that has been ongoing for PillCam ESO since we got FDA
clearance. Now - which was in November, December last year. And that
activity takes time.
If we just look back at PillCam small bowel, we received FDA clearance
in August of 2001. And I think for three quarters we had no policies.
But then they started coming in. And once they start coming in one
brings the other and one gives the other more confidence and it starts
moving. And as you get these policies coming out, which are regional
policies usually, multi-state, four or five states each time, you can
see movement of sales and reorders in those states.
And that is what we do expect to happen. We had hoped that some of
that will happen earlier because PillCam ESO wasn't a totally new
product compared to PillCam small bowel. But even so, this has taken
pretty much about the same time as it's taken us with the small bowel.
And we do expect to see - and there are in the pipeline some policies
that should be announced moving forward.
Amit Hazan: OK. I guess I'm just trying to understand - I mean, it sounds like
you're making a very strong correlation between ESO sales and
reimbursement. And just kind of trying to get maybe anecdotally if
that's what you're hearing from your customers as they're doing these
evaluations and again as we're looking into the back half of this year
before your call when you give us guidance how we look at ESO sales
before reimbursement comes in. So, if you can give any color there.
Gavriel Meron: Just a comment to that, again, we have 700 customers who have
PillCam ESO on their shelf and have been using PillCam ESO at a very
slow rate. And the capability for them to use it at a higher rate is
really a function of reimbursement. And it can move very quickly.
That's what's unique and very different to where we were with the
PillCam small bowel.
So, when we move the PillCam small bowel we found it very difficult to
sell before reimbursement. Here we have a situation we have customers
who are given diagnostic system savvy. They know how to work with the
system. They work with the system.
They have PillCam ESO. They understand the value of it. They may not
appreciate it yet as much as we'd like them to appreciate it. That's
for sure. But they're not going to get reimbursed for it now, so
there's nothing driving them to do that.
But once they do get reimbursed we will be using - and J&J InScope
will be using everything they have to drive utilization through the
sales force through other marketing activities and, of course, through
the referral patterns that the Johnson sales force can also help
generate. So, we're in a very different place from the potential of
moving as soon as reimbursement does come out. So, you're right, I am
connecting that very much one with the other.
Amit Hazan: OK. Just two quick other questions. First, unless I missed it, I
didn't hear much about recorders here in the U.S. Should we assume
that those were OK, or did you see any because of the big promotion
you've had over the last two quarters, the first quarter and the
fourth quarter. Was there any slip there or were those still at about
1.8 per workstation?
Gavriel Meron: We'll get into the details of the numbers at the - in two week's
time when we have the call and we get into the numbers. But we did
after DDW come out with a promotion and we reduced the price of the
recorders to under $5,000 to encourage people to buy recorders, as
many as they need. And when we say that the system revenues of or less
than we anticipated, then the systems, of course, does include the
recorders - we don't divide that in this call.
Amit Hazan: OK. All right. And just lastly on the tax charge, you say one-time
in nature. I just want to make sure that that means going forward here
we can continue to model as we had been almost no U.S. taxes. Is that
correct?
Gavriel Meron: That's correct. This isn't corporate tax that comes out of our
earnings. This is sales tax that we should have and we are now as of
every invoice coming out adding on where it is relevant, where we
don't have an exemption certificate and where it's not a reseller.
According to the specific sales tax rules in the different
jurisdictions, some jurisdictions the capsule - the PillCams are
actually exempt.
Some of the workstations are not exempt. We have to go through each -
each invoice will have the correct sales tax on it, as it should have
been up till now. And we will collect and remit to the states. That
has absolutely no effect on P&L moving forward or on the sales revenue
top line or bottom line. And so, your models from that point of view
should be intact.
Amit Hazan: OK. Perfect. Thanks very much.
Gavriel Meron: Thanks.
Operator: We'll go next to Peter Bye of Smith Barney.
Gavriel Meron: Hi, Peter.
Peter Bye: Hey, Gabi. Thanks. Just there seems to be a lot of focus on the
diagnostic side and just sort of the disconnect between the sales
forces, but honestly there was a shortfall across the board here. You
have an extra 10 salespeople this year, either solely concentrated on
SB.
I mean, there was a shortfall there too. Given what you claim is
certainly underutilization, what's going on there? You've got extra
bodies knocking on the door that much more to drive other indications.
And that doesn't seem to be taking off either.
Gavriel Meron: Yes. The 50 percent growth is not that nothing happened.
Something definitely has happened if we've grown 50 percent. What I'm
saying is our expectation was higher and we are in unchartered waters.
And what we are doing, and this is what I also mentioned in the call
before, we've tried something new.
We've taken a group of sales force and we've trained them to be
harvesters rather than hunters. And we've done very - a lot of very
different things. We've tried a lot of different things to see what
actually is effective to move utilization. From my point of view, I
want to see utilization move from one to two to three to four to five.
Peter Bye: Right.
Gavriel Meron: And what we're seeing, of course, is incremental movement, from
1.17, 1.2, 1.3, something like that. But I can tell you that there are
territories and territory managers that have succeeded in increasing
it by far more, by doing very smart things in the field. And what
we're now doing is analyzing what works, what works less, what doesn't
work, what practices we shouldn't do, what practices we should do, and
to make a significant impact on utilization moving forward.
So, the bad news is that we have been trying different things and some
of them have not been working. And maybe a lot of them have not been
working. But we have been doing things as well, but some of them have
been working extraordinarily well.
And that gives me a lot of confidence moving forward that if we copy
those and we extract the good practices and then spread them around
the whole sales force we should be able to have a significant impact
on utilization moving forward. And that, of course, is very
significant.
Peter Bye: Can you give us some empirical evidence of what's working and what's
not working?
Gavriel Meron: Yes. I'll do that in great detail in the call.
Peter Bye: But just strategies, techniques. What's the pushback?
Gavriel Meron: I know. And let us get that in an orderly manner and get that
moving forward.
Peter Bye: And then on the clinical front, has reimbursement on ESO made you
rethink on how you might want to design the clinical trial for PillCam
colon to include cost savings into it with the total submission and
the package in so you could sort of almost dual track CMS and FDA? Any
thoughts there?
Gavriel Meron: I am not sure I understand your question, Peter.
Peter Bye: Well, to - you've got issues on reimbursement with your latest new
product, a time lag of almost two years from introduction when you
look at a CPT code in '07. And have you thought about maybe designing
a trial to obtain the evidence on the cost front, wherever it might
be, the benefits from an economic standpoint to perhaps get
reimbursement sooner for your next generation product or your next
focal point, which is the colon, so you don't have a similar gap like
you do here with ESO?
Gavriel Meron: The thing is this. If we hit, for example, from what you have
said, then we would not have been in the market with PillCam ESO today
and we would have been doing the trials. We are doing the trials in
parallel. And I think that the right strategy moving forward is to go
in parallel. So, you do want to get an indication approved.
You do want to get it out there. You want to start fighting the fight
with the pairs to get insurance coverage one by one in parallel. You
do the clinical trials. And there are very large numbers of
clinical trials in the pipeline instigated by InScope. And when they
will be out, of course, they will be very powerful and will be very
supportive of the reimbursement activity. But they take time. And they
cannot start before you do FDA clearance.
So, FDA clearance was in November and, as you're right, you probably
do need a year of clinical trials to bring in to the stage that you
can have some outcome studies and so on that will then go into peer
review, but that is a process that we did. And if you remember in our
presentations, we always show the peer review publications and how
they grow over time. That takes time to build.
I really don't think it's a question whether you should be in the
market before you do that in parallel or not. So, the answer is yes.
You go into the market in parallel, knowing that it's going to take a
while, getting the clinical data, the publications in parallel to
getting insurers in place, in parallel to starting setting to early
adopters and so on. This is an effort that goes in parallel and should
be expected to continue to work that way.
So, it's not a question of waiting to go to market until you have all
the data. As soon as you have data that is sufficient to allow you to
get into market, I believe you should go to market and in parallel to
that start the clinical trials, the longest clinical trials that give
you outcome studies. The Thomas Jefferson University for suspected
Crohn's study only came out in January of 2005. We launched in August
2001. And so, as you move into market, of course, it does take time.
Peter Bye: One of the, I guess, explicit programs you had thought would drive
some utilization - obviously things take time - was cutting the cost
of the recorder so that capacity utilization and existing accounts
that they had more recorders. So, is that one of the strategies you
said has worked or too early to tell?
Gavriel Meron: Well, there are accounts for sure that have bought DR2s in a way
that would enable them to increase significantly the utilization, and
they have. And that is part of it. But that will not drive
the average gastroenterologist who is not doing one a week to buy a
DR2. They're nowhere near there. So, there's something else that has
to be done to bring them to a higher level that it becomes relevant
for them to buy another DR2 to increase their capacity.
Peter Bye: Do you think - when do you think you'll know what that strategy is
to reach an inflection point in driving adoption? You had the
consensus statements come out in February and adopted by the DDW here.
I mean, just given your experience is it a year? Is it a couple more
quarters?
Gavriel Meron: Well, consensus is going to be published, I think, in August in
"Endoscopy" in the peer review publication. And before it's published
it's still, I would say, in some peoples' eyes maybe anecdotal. The
publication of it in a peer review gives it really the stamp of
authority, and we can then leverage on it far more than we have been
able up till now.
We obviously have a very detailed plan of activity. And it's not that
we're going to start doing one now. It's just that we're constantly
reviewing it and constantly reviewing on a quarterly basis. And now
we're going to actually just before our quarterly reviews for the
previous quarter to drill down and analyze in-depth what is working,
what isn't, what should we change, what we need to do.
And probably most of that is not something we're going to share
because of potential competitive reasons, but I'm sure that I'll be
able to share more after we go through these [inaudible] and - we'll
share carefully in the earnings call some information on that that
will help you more than I can help you now.
Peter Bye: Just one last thing on guidance. I guess when you gave it 95 to
105 is that the same thing as the 22 to 24, sort of the upper end
range was supposed to be if ESO took off and the lower range if not?
Gavriel Meron: Yes. The - our upper end was a taking off of the ESO, yes.
Peter Bye: And the lower end is essentially no ESO?
Gavriel Meron: No ESO, I don't think, was an option. And we are filling ESO ...
Peter Bye: Limited.
Gavriel Meron: ... Q4. I wouldn't say that the lower range is no ESO. I'll
give you all the details in a couple of weeks.
Peter Bye: I look forward to it. Thanks, Gabi.
Gavriel Meron: OK.
Operator: We'll go next to Anthony Vendetti of Maxim Group.
Anthony Vendetti: Thanks. I just have a couple questions. In terms of the
taxes when did you come to the realization that there needed to be
sales taxes paid?
Gavriel Meron: Well, the issue of sales tax is something that, of course, is
not new in the United States. The understanding that there are sales
tax and that there are exemptions was something that I think floated
around at the company, knowing that it was exempt. And this was kind
of general knowledge, which of course was incorrect.
So, recently this was found by our - after we made changes in the
financial group there at Inc. And the question then was, OK, so what
is the story, because there are many that are exempt. It's a pretty
complicated thing to do to review all the invoices to date - state by
state, actually zip
code by zip code because zip codes have different sales taxes and
there are different laws state laws as well and different exemption.
So, this had to be reviewed very carefully to understand where we are
and what needs to be done. What I can tell you is that as of now
invoices are issued with sales tax and our U.S. subsidiary is now
compliant with that. And so, this issue should be behind us.
Anthony Vendetti: OK. So, going forward every zip code has the appropriate
invoice with the appropriate sales tax?
Gavriel Meron: Right. There's some software that allows you to actually go
through that. It's updated regularly by people who are experts in the
field.
Anthony Vendetti: OK. And could you give us an update a little bit on how the
reimbursement for PillCam ESO is progressing in terms of the U.S. and
Japan?
Gavriel Meron: OK. One second. You threw in Japan.
Anthony Vendetti: Well, marketing approval - reimbursement in the U.S. and
marketing approval in Japan. Give us an update.
Gavriel Meron: PillCam ESO reimbursement is - activity is being made with
payers on a one-by-one basis, and with different levels of success.
The responses have been quite good, but we still have not seen the
policies being issued. There is an expectation, we have a pipeline of
policies that we expect to be issued for PillCam ESO.
And beyond that I don't think I can give you details of which policies
and so on. As they come out we will be announcing them because, of
course, there's great interest in that, until we get to some critical
mass where we will announce only quarterly, as we now announce PillCam
small bowel.
So, we will be announcing July 28th the additional policies that were
approved for PillCam small bowel in the quarter, as we do now on a
quarterly basis. So, with PillCam ESO we won't - I don't think we'll
be holding that information. So, as it comes out we will announce it.
In Japan we are in discussions with (inaudible), the authority there
that approves the entry of medical devices into Japan. We've pretty
much very progressed in the process and we still do hope to get
approval this year from Japan to start selling into the Japan market.
Anthony Vendetti: And reimbursement there could take, after getting market
approval, another six to 12 months? Is that about right?
Gavriel Meron: Yes. From the point of approval to getting into the country,
yes, that's correct.
Anthony Vendetti: OK. And can you talk about the discounts in terms of when
you expect them to end or the program that you have now is going to
continue indefinitely?
Gavriel Meron: Well, at the moment there aren't any discounts on the
workstation or on the - on PillCams. We actually reduced the price of
the Data Recorder to just under $5,000.
Anthony Vendetti: Right.
Gavriel Meron: So, it's not a discount.
Anthony Vendetti: It's a permanent ...
Gavriel Meron: Yes. It used to be, if you remember - maybe you don't remember
it. The price of DR2s used to be $5,500. We increased it to $8,350
when we came out with DR2, and now we decided to bring it back to just
under $5,000. So, that shouldn't be a barrier anywhere for increasing
purchases of DR2 as utilization increase.
Obviously we haven't seen that huge increase in utilization yet to
make that very effective, but in those accounts that we do see
increased utilization we have seen accounts with that happening, this
additional DR2 is a definite benefit for them and attractive for them
to increase utilization. That should not be a barrier. Basically what
we're looking at and seeing, OK, where are there barriers and let's
move them out of the way. And so, that was one of them.
Anthony Vendetti: OK. And your new CFO Yuval, when is he starting?
Gavriel Meron: Sorry, the new CFO?
Anthony Vendetti: Yes.
Gavriel Meron: He'll probably be starting working in a few week's time and
phasing out of Koor and phasing in - probably in September he'll be
fully phased in.
Anthony Vendetti: And how was he - was that through an executive search or is
that someone that you knew?
Gavriel Meron: Well, Yuval Yanai is very well known in the Israeli investor
community and I think also in the U.S. community, since he has been a
CFO of public companies for the past, I think, 20 years. His
reputation is widely known. And we didn't need a search firm to help
us find him.
Anthony Vendetti: OK. All right. Thanks.
Operator: We have time for two other questions. We'll go next to Lee Brown of
Merrill Lynch.
Lee Brown: Hi. How are you?
Gavriel Meron: Hi.
Lee Brown: Just a quick question in terms of the SB. I just want to clarify.
Did you say the U.S. SB revenue run rate was up 50 percent, or was it
a worldwide figure?
Gavriel Meron: It's a worldwide figure.
Lee Brown: OK. And then in terms of the system sales you said that the U.S.
systems were especially disappointing. Were the unit - was the unit
volume down year over year from the prior year quarter, or was - and,
likewise, was the revenue down from the prior year quarter?
Gavriel Meron: We'll do all the analyses again on the 28th because there has
been a change in prices, as I mentioned, of the DR2. And we really
need to analyze properly the final numbers of workstations and DR2s
and the price effect and the quantity effect.
I prefer not to answer that right now, but when I say I was
disappointed I was disappointed compared to what we expected to happen
at the end of the day on June 30th, where we did have a very long list
of leads that we had hoped to close far more than we actually did
close. So - and also that we had budgeted for that we included in our
expectations.
Lee Brown: Fair enough. And then lastly in terms of the pricing, which was
announced on May 19th at your investor meeting, when did that pricing
change for the second workstation going down to just
shy of $5,000 and the DR2 going to just shy of $5,000? When was that
actually put into effect? Was it post the analyst ...
Gavriel Meron: Immediately.
Lee Brown: What?
Gavriel Meron: It was basically at that time. It was at that time. And this is
also - because this is why the analysis has to be really sharp,
because there were, of course, accounts that took this opportunity of
adding another workstation to their account. So, in total numbers of
workstations how do you count them?
We will count them as workstations, of course, in revenue. You're not
going to see the multiplication for starter kits. And so, it does
obviously raise some analysis issues, which we're going to have to
deal with. And a week from the end of the quarter is too early for us
to be able to intelligently analyze that.
Lee Brown: But would it be safe to say that the majority of sales were made
towards the back end of the quarter and, therefore, on a weighted
average the pricing would be closer to the lower amount versus the
previous price?
Gavriel Meron: For sure, yes.
Lee Brown: OK. Thank you very much.
Gavriel Meron: Thank you.
Operator: We'll go back to Ed Shenkan of Wells Fargo. And we'll have time for
one other question after that.
Ed Shenkan: Hi, Gabi. Thanks for the follow-up question. The change that
you're making with the sales force as far as priorities, letting
InScope get a commission now on the small bowel capsules, can you just
explain how that might work?
Because certainly if they're now motivated for small bowel that's
going to help you guys immensely. And will you have - as an existing
customer only have one salesperson then, either the InScope or your
rep driving all products if they already have a system in place?
Gavriel Meron: Yes. Ed, just to clarify, there's no change in the commercial
relations between InScope and Given Imaging. So, it's not that we're
paying InScope a commission on small bowel PillCams, because that's
kind of what you said. And maybe you didn't mean that, but that's what
it sounded like.
What actually is happening is that our - we all know what we've
budgeted to pay our sales force. And the question is how do you
promote their behavior in a way that you want that to happen. And so,
what both of us have decided is that a certain portion of the pie of
commissions that were budgeted will be reserved to relate to how
effective in the region PillCam small bowel has been and PillCam ESO,
of course weighted very differently between the two different sales
forces.
We are two different companies and we have to retain our integrity as
being two different companies and with different interests. But on the
issue of a platform, the Given Imaging platform selling PillCam small
bowel for all the indications of the consensus and selling PillCam ESO
for all the expected indications, this is something that we're going
to train all the 120 salesmen to.
And they will all be selling that and they will be making money when
they succeed in doing those sales. And I think this is the critical
part of how we expect to see this play out. And this is very different
to where we were, say, in the last six months. And this is a unique
way of operation.
Ed Shenkan: And will an existing doctor that has a workstation - will he have
the InScope rep and the Given rep both calling on him to drive
utilization of both products?
Gavriel Meron: Once you have a customer then of course our - the Given rep will
go there to drive small bowel and will talk ESO when they come there.
And the InScope rep will go there talking ESO and also talking small
bowel. But don't forget that both companies will have additional
products and will be promoting their additional products as well, even
though for the moment that's not the case.
But we have to be ready and plan for that because that's what the
agenda is. InScope will not only be selling in the future Given
Diagnostic Imaging systems and PillCam ESO. They do have a pipeline of
their own. We also will have a pipeline of our own. There will be
divergence there.
If we look at the next six months, the next six months for sure we
will all be talking platform, PillCam small bowel, PillCam ESO. This
is the advantage of having a Given system, being able to use the same
system and benefit the diagnostic tests and information that both
PillCam ESO and PillCam small bowel can provide.
Ed Shenkan: Are you more optimistic on the small bowel capsule growth now than
you might have been three months ago, knowing that InScope is going to
maybe devote a little more resources towards small bowel capsule
utilization?
Gavriel Meron: I'm optimistic about all the elements of our growth, whether it
be PillCam small bowel or PillCam ESO, and the platform itself, I
think, that having the 120 people trained and educating the
field and the customers for the value of the platform and with its
products moving forward is something that is of significant value. And
I do expect to see that have an effect.
Ed Shenkan: OK. Thanks, Gabi. That's a good note to end on.
Gavriel Meron: Thanks, Ed.
Operator: We'll take our final question from Michael Freedman, Sawgrass
Capital.
Michael Freedman: Thanks for taking the question. Gabi, just to clarify - and I
guess it's the point that a few people have asked about. I know the
system sales tend to be back end loaded in the quarter. But is that
the same for the PillCam sales themselves, or since they're reorders
do they tend to be more linearly even during the quarter?
Gavriel Meron: OK. Thanks for asking that. The PillCam small bowel sales are
pretty much linear, I mean linear moving up and growing day-to-day.
So, this - it's a daily event. You watch the PillCams coming in all
through the day. In Q1, I think, $500,000 of PillCam small bowel was
sold through the Internet. So, we're seeing it's not a daily event.
It's every minute you can see things coming in.
So, of course, that is something more traceable and you don't expect
to have a surprise at the end of the quarter. And the normal selling
of PillCam small bowel is not something that will have a significant
effect on the spike at the end of the quarter. However - and, of
course, the workstations is very different. The workstations there's a
lot of pressure by a salesman at the end of the quarter to achieve
their quotas, to close the deals.
Michael Freedman: Right.
Gavriel Meron: ... and the expectation by the purchasing agents waiting out
toward the end of the quarter, maybe being able to get something out
of the salesman who's under pressure. So, it's something that
unfortunately all of us who have been in devices really hate and want
to change, but I haven't ever seen it actually being changed anywhere.
And that will change as a proportion of our revenue coming from
workstations gets less, and that of course has a lesser effect. So,
that is why also that the reduced performance compared to guidance is
not a huge number, 20.5 compared to the low end of 22. And that is
because a very high proportion of our sales are already coming out of
the recurring revenue. And the recurring revenue is, of course, much
easier to plan for.
The PillCam ESO is strange. And this is where I would like to explain.
We do have 80 InScope reps running around trying to sell PillCam ESO
capsules. And we do have more than 700 customers who already have
PillCam ESO and are utilizing it.
And since they are utilizing it, even though it may be at a very slow
rate, at some point in time - and if they theoretically all use at the
same, at some point in time there'll be 700 people ordering a 10-pack.
And so, that's 7,000 capsules and that's $3.5 million. So, you see
what I'm saying? And so ...
Michael Freedman: Yes.
Gavriel Meron: ... there is out there a $3.5 million order that's ready to
come, and we don't know exactly when it's going to come. So, at the
end of the quarter, this specific quarter, there was a potential for
millions of dollars to come in towards any day at the end of the
quarter and any day moving forward, by the way, when they start
reordering, and they will start reordering when they utilize more
regularly.
And that will happen with announcements for reimbursement policies.
And since those reimbursement policies we expect to see happening, it
is in the pipeline and can happen imminently, then as they do come out
we can expect to see some significant reorders in a spike rather than
in a daily event.
Michael Freedman: Well, OK, thank you, because that was kind of the question
behind my question. I mean, obviously I and some other investors lived
through the disappointing delay in issuance of original CPT codes for
the small bowel and the disappointing delay in traction on expanded
coverage, and all of them came through.
So, I'm prepared to wait however long it takes for the ESO, as long as
I'm comfortable that the SB business is still intact and moving
forward and there's no problem with the SB business. And I think
that's kind of the question that a lot of people have been trying to
tease out of you.
Gavriel Meron: OK. So, 50 percent growth is growing. It's growing very nicely.
And we want it to grow more.
Michael Freedman: Right. Right.
Gavriel Meron: And we're doing everything we can to drill down and find the
things that work and get them to work to have further and not
incremental growth. And that's our challenge and that's what we're
doing.
Michael Freedman: OK. Thanks. Just one other clarification. You had talked
about the permanent CPT code for ESO. Was there a possibility of
getting a temporary CPT code sooner besides the individual payer
reimbursements?
Gavriel Meron: Yes, there is that possibility, and that, of course, is
something that we're also working on. But - and, again, as soon as
that happens we'll be able to announcement. That has not happened yet.
Michael Freedman: OK. But that is something that could happen on a much sooner
timeline than the ...
Gavriel Meron: Sure.
Michael Freedman: 2007. OK.
Gavriel Meron: Absolutely.
Michael Freedman: Thanks, Gabi.
Gavriel Meron: Thanks.
Operator: This does conclude our question-and-answer session. Mr. Meron, I'll
turn the conference back over to you for any additional or closing
comments.
Gavriel Meron: OK. Thank you all for joining this call. And I just want to
reiterate that our potential for growth is solid. We are in the
transition phase of an $80 million run rate revenue company, reaching
for the hundreds of millions of revenue that we want to see. And that
is our challenge. And I'd like again to say that I'm pleased to Yuval
join the team and bring his experience to the table to support this
effort too.
The fundamentals of the quarter, focusing our Given and InScope sales
forces to work as one team and leveraging on that strength in the
market, the powerful clinical data that we seeded at ICCE and that was
presented at DDW and the consensus that will be published in the peer
review journal Endoscopy in a few weeks, all of these will have a
positive effect on our performance, on our sales, on our earnings,
though it is too early for me to quantify this effect.
And we'll talk about guidance, of course, on the 28th. We do
appreciate the continued support of our shareholders. And I do look
forward to updating you further with our detailed financial results
and guidance on our release on July 28th and on the earnings call on
July 29th. So, thank you again, all of you. Bye.
Operator: And this does conclude our conference. Thank you for your
participation. You may disconnect at this time.
END