Exhibit 99.1
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Given Imaging Second Quarter 2005 Earnings Results Conference Call
Moderator: Gavriel Meron
July 29, 2005
9:00 a.m. ET
Operator: Good morning and welcome, ladies and gentlemen, to the Given Imaging
Second Quarter Results conference call. 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 questions 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.
Good morning everyone and thank you for joining me for our second quarter 2005
call.
In the second quarter, worldwide sales reached $20.5 million, a 32.8%
increase over sales in the second quarter of 2004.
Net loss for the second quarter was ($364,000) or ($0.01) per share on a
diluted basis. This net loss included a special provision, net of tax
benefits, of $1.2 million for certain taxes related to our US subsidiary
and an adjustment of $0.6 million in the valuation allowance for US income
tax benefits available in future periods. Excluding these provisions, net
income for the second quarter was $1.4 million or $0.05 per share on a
diluted basis.
For the six month period ended June 30, 2005, sales were $42.5 million
reflecting a 51% increase over the same period in 2004.
Net income for the first six months of 2005 was $0.9 million or $0.03 per
share on a diluted basis. Excluding the provisions mentioned before, net
income was $2.7 million or $0.09 per share on a diluted basis.
Before we get into further details I would like to put things in a clear
perspective. True - we are a high growth company and we do set for
ourselves high bars for achievement - and we did not achieve the goals that
we targeted this quarter, but on the other hand we do have some significant
positive achievements in the quarter:
o PillCam SB reorders in the quarter grew 52% compared to the comparable
period last year.
o The sequential growth in revenue - excluding the promo and special
revenue in Q1 that amounted to $3.8 million was 13%.
o Total revenue in the six month period grew 51% compared to the
comparable prior period last year.
o Gross margins are up again to 75.4% in the quarter - similar to last
year, but this does include royalties to the Office of the Chief
Scientist, so effectively our gross margin is already at 76%.
o Our installed base worldwide has reached 2,600, with 1,540 of those in
the US.
o Reimbursed lives covered have reached 340 million worldwide, of which
180 million have coverage for expanded indications.
o Digestive Disease Week was a huge success and we received significant
exposure with both the PillCam ESO booth manned by InScope in addition
to our large booth and the repeated presentation of the ICCE consensus
for clinical use of PillCams.
o We have hired a new Chief Financial Officer - Yuval Yanai, who will be
joining us very soon. Yuval is a seasoned executive with many years
experience as a CFO of US traded public companies, with operational
experience in a medical device company - so he provides us with the
necessary financial strength in the management team.
o Following Nancy's resignation I have taken direct control of our
activities in the United States and the management of the relationship
with InScope to get that back on track and to be more effective in the
marketplace. We plan to hire a new President for our US subsidiary
with capabilities to further drive our growth and success in this -
our major market, and a search is currently underway.
So we are well positioned to continue to grow.
Going back to the financials, as I already mentioned in the
pre-announcement call, the shortfall in our sales compared to our
expectations was due primarily to a slower finish in both system and
PillCam sales during the quarter in the United States. Sales outside of the
U.S. were ahead of our expectations, specifically with stronger than
anticipated PillCam SB sales in Italy, France, in the UK, in Australia and
in China.
In the second quarter, utilization of PillCam SB in the United States
increased sequentially from 1.17 capsules per system per week to 1.23.
Though the total reorders grew 50% over last year, the utilization per
system has not shown similar growth. We are seeing more and more accounts
performing capsule endoscopy as part of their practice - and less
cross-referrals of gastroenterologists as the technology pervades into the
mainstream majority market. We are focused on deepening our hold in these
accounts by heightening awareness of the clinical advantages of utilizing
capsules for expanded indications, and increasing capsule utilization
across the board. It is encouraging to see that in one of the six regions
in the United States we have seen average PillCam SB capsule utilization
grow to an average of 1.5 capsules per system per week, and three other
regions are above 1.3. Since half of the installed base in the United
States is still at less than 1 per week, we have significant potential in
increasing that utilization.
We have drilled down to see what is and what is not working in driving
utilization and are training the joint InScope and Given sales forces next
week and the week after to best practices selling. This is the first time
that the two teams of territory sales managers will be meeting together for
joint training, with an agreed upon agenda to include the full
Given Diagnostic platform. This is a significant change that we have
decided upon together and we expect to reap the benefits of this in
September, in Q4 and beyond.
In the quarter we sold 159 workstations, similar to the 158 in the parallel
quarter last year, so we did not see the expected growth from the
additional sales people in the field. We refocused our sales team to
transition from hunters to harvesters, and this is not a simple transition
to implement. In parallel we had expected that the InScope reps would
provide more leads for our reps to close - and that did not happen. So we
are now going to train in the next two weeks the whole sales force to be
able to eloquently sell the platform and be able to talk both SB and ESO -
to fully present the value of the platform to all of our customers and
prospects.
Reorders of PillCam ESO are linked closely to reimbursement and to date we
are still working with payers on this issue. However, there is potential
for movement in reorders since more than 600 accounts in the United States
currently have DR2 and RAPID 3 and have purchased tenpacs of ESO. Many of
them have used 6 to 8 of the initial tenpac and have been disappointed by
the lack of reimbursement and stopped using. We anticipate that as soon as
reimbursement announcements are made, then those gastroenterologists will
restart using and reorder PillCam ESO. 600 accounts ordering one tenpac
adds $2.7 million to revenue.
We believe that ESO represents a huge opportunity, and I 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 Given Platform to
drive additive business and increase their practice efficiency and
throughput. So we will be focused on driving reimbursement together with
J&J, and have been cautious in our guided numbers for the rest of the year,
understanding that growth in PillCam ESO reorders will be dependent on
reimbursement announcements.
As we discussed in the call earlier this month, a significant factor that
impacted our earnings for this quarter is that we discovered that our U.S.
subsidiary had omitted to collect and remit sales tax to state authorities.
This omission was a good faith error and 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. We have
approached states with voluntary disclosure and in parallel have requested
our customers to remit these taxes. As a matter of caution we made a
special 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. We are currently approaching
our customers and apologizing to them that we had not collected in a timely
way, and are requesting that they remit to us sales tax due - without
interest charges or penalties.
Our U.S. subsidiary has already implemented a system for invoicing all
customers for sales taxes, and I do not expect to see any additional impact
on our revenue or profit growth from this event.
Over the last several months, we strengthened the management team at our
U.S. operations with the appointment of a new director of Human Resources,
a new director of operations who joined us from Abbot Laboratories, as well
as a new controller who joined us from Cardinal Health.
We again had a strong presence at Digestive Disease Week which took place
in May. This year, in addition to the abstracts on capsule endoscopy
presented by physicians from around the world, there were 15 podium
presentations and entire tracks focused only on capsule endoscopy. The
clinical studies presented focused more on newer applications such as
celiac disease, chronic liver disease, cirrhotic patients, small bowel
tumors and suspected Crohn's disease and less on bleeding. There were also
5 "meet the professor" lunch programs devoted to the study of capsule
endoscopy.
In addition for the first time we also hosted our own "meet the professor"
lectures at our booth, which was well accepted and attracted a lot of
interest. InScope also received a significant number of leads at their
booth, and they had a lot of interest and flow of people there.
Elements from the ICCE, the International Conference on Capsule Endoscopy
meeting, the ICCE consensus that was finalized in Miami earlier this year
were incorporated into many of the lectures at several of the capsule
endoscopy
scientific sessions. The ICCE consensus has been approved to be published
in the journal "Endoscopy" in mid-September. And the consensus topics
include IBD, inflammatory bowel disease, bleeding, celiac disease, Pillcam
ESO, retention, preps & prokinetics, and does cover a very wide clinical
array of issues.
At DDW, we also started enrolling candidate sites for initial clinical
trials of PillCam(TM) COLON which is designed to work on the Given
Diagnostic platform. This was met with huge interest from physicians. We
anticipate launching PillCam COLON in Europe in late 2006 and in the U.S.
in 2007.
We have experienced some delay in the completion of clinical trials for the
new patency capsule, as we encountered some technological development
problems that have now been resolved. We expect to complete the trials and
submit to FDA for clearance in Q4 this year. This product will enable us to
transition from the suspected Crohn's market - where we have already
achieved reimbursement wins - to the known Crohn's market where there is a
valid concern of potential strictures.
Before we open the call for questions, I'd like to comment on our third
quarter and full year 2005 guidance. In the third quarter we expect sales
of $18.5 million to $21 million, with earnings between $0.01 and $0.04
cents per share. As you know, the third quarter is typically the slowest
quarter of the year due to the fact that fewer procedures are performed
with physicians and patients taking their summer vacations.
The guided EPS for the third quarter also reflects an increase in the level
of our ongoing investments in new product development, and expanding our
organization in Japan in preparation for approval by the Ministry of Health
in Japan later this year.
In Q4, we are taking into consideration that ESO may still take some time
to come up to speed and therefore have adjusted our guidance to sales
between $23 million to $26.5 million with earnings per share of $0.11 to
$0.19. So annual guidance is now adjusted to $84 - 90 million in revenue
and earnings per share of 20 to 31 cents per share excluding the special
provisions of this quarter. Before I open the call for questions let me
read to you the supplementary data, for analysis:
U.S. ROW Worldwide
Q2/05 Q2/04 Q2/05 Q2/04 Q2/05 Q2/04
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Sales (million) $14.1 $10.9 $6.4 $4.6 $20.5 $15.5
PillCam SB 23,950 16,000 9,300 6,480 33,250 22,480
PillCam SB Reorders(1) 22,890 14,860 8,770 6,040 31,660 20,900
Rapid(R) Workstations 106 114 53 44 159 158
DataRecorders 170 205 95 67 265 272
(1.0, 1.5, 2.0)
Installed Base 1,537 1,057 1,054 868 2,591 1,925
(at quarter end)
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Q2/05 Q2/04
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U.S. PillCam SB Weekly 1.23 1.21
Utilization
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PillCam SB capsules of total 75% 67%
revenues
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Moderator, you can open the call for questions now.
Operator: Thank you. The question-and-answer session will be conducted
electronically. If you would like to ask a question, please do so by
pressing the star key followed by the digit one on your telephone. If
you're using a speakerphone, please make sure your mute function is turned
off to allow your signal to reach our equipment. We will proceed in the
order that you signal us, and we'll take as many questions as time permits.
Once again, please press star one on your touch-tone telephone, to ask a
question, and we'll pause for just a moment to assemble our roster.
And we'll go first to Ittai Kidron from CIBC World Markets.
Ittai Kidron: Hi, Gabi , a couple of questions from me. First on the operating
expenses, what should we look in the way of sustainable level for operating
expenses seen in the next quarters ahead of us?
Gavriel Meron: Good morning, Ittai. Operating expenses, as I mentioned have been
ramped up, as you can see in the Q, we're about 50 percent higher than we
were last year. And I think we should be able to see some growth in Q3, and
Q4, not significant growth, [inaudible]. And if we look at next year, the
addition for the operating expenses should be the expected cost of clinical
trials for PillCam COLON, which I can't give you a number for the moment,
because we haven't decided on the sample size. But it will be a significant
sample size, but I would think that that would add maybe one or $2 million
there.
Ittai Kidron: For the year, or in each quarter?
Gavriel Meron: No, for the year.
Ittai Kidron: OK. Is there - do you have any visibility into the royalties, or
is that something you can - you expect to get on a consistent basis? Or is
it some of a surprise each quarter?
Gavriel Meron: The royalties for the chief scientist?
Ittai Kidron: Yes.
Gavriel Meron: Royalties is a payment that we make as a function of sales of the
products that are covered by the royalties, and that would be DR2, the
workstations, and the PillCam ESO.
Ittai Kidron: Got it. And lastly, could you please repeat the split of the small
bowel capsule shipments and the recorders between US and international just
for this quarter?
Gavriel Meron: Well the PillCam SB, what is your question, I'll go back to the
table?
Ittai Kidron: How many capsules were shipped in the US and the rest of the world
each quarter?
Gavriel Meron: OK. PillCam SB US this quarter 23,950, and the rest of the world
9,300.
Ittai Kidron: OK. And recorders?
Gavriel Meron: Recorders 170, and rest of the world 95.
Ittai Kidron: Very good. Good luck, guys.
Gavriel Meron: Thank you.
Operator: We'll go next to Tim Lee from Merrill Lynch.
Tim Lee: Good morning.
Gavriel Meron: Good morning, Tim.
Tim Lee: Just in terms of the small bowel capsule utilization, given some of
your efforts in terms of the shifting compensation structure and the like.
What number can that get to this year? And then if we're looking at another
eight, you know, call it end of next year, I mean what type of -
internally, what type of number are you guys hoping to hit?
Gavriel Meron: Yes, we haven't guided to targeted utilization numbers. What
we've given is a range of dollar revenue top line. And workstations, we
expect to see an increase in sales of workstations. If you look at what we
did last year, we now- we will have for the balance of the year, many more
sales people dealing with the platform. The platform, also of course has a
higher value, so that because it has the small bowel plus the ESO with the
COLON on its way. So we do expect to see a stronger Q4 and - in
workstations. And a growth in utilization, but we haven't given out
actually the numbers.
From the point of view of what our surveys have shown where utilization can
go, from the point of view from the number of patients that they're seeing,
that have reimbursement coverage, that we know that that number is close to
five, four to five a week. But clearly, the guided numbers don't take into
consideration that we will achieve that in such a short period of time. So
we do expect to see growth, the level of growth of course will have an
effect on the range of our final numbers.
Tim Lee: Just, then if I can just follow up, I think you said that one region
has 1.5 capsules per week, and three are doing 1.3 a week. What are those
regions doing differently from some of your other areas that aren't putting
up numbers as briskly.
Gavriel Meron: Yes, Tim, the details of what they're doing differently, is of
course, I see that as competitive information. And - but they are going to
be trained next week and the week after, the full team which is the InScope
sales team and the Given sales team are
going to be trained for those good practices, which we prefer not to share
with potential competitors. But we definitely have looked into that, and
have seen differentials.
Tim Lee: OK. Fair enough, thank you.
Operator: We'll go next to Peter Bye from Smith Barney.
Peter Bye: Thanks, Gabi. Just wondering what you might consider the biggest
obstacle for you on adoption here? I mean again - just like back in early
July, the focus still seems to be on, you know, change of disease and no
reimbursement there. But you're still getting dropoffs across the board. Is
it still - is it reimbursement for Crohn's? You know, where do you see
these things being used in other indications, perhaps, in some of the areas
that are gaining traction. And, you know, how do you make that change
throughout the country?
Gavriel Meron: I'm not sure I 100 percent understood the question. If you
could...
Peter Bye: Well what's the biggest obstacle you're facing here? Is it
reimbursement for Crohn's? I mean beyond ESO, you know, leave that off the
table, because I don't think the Street was really expecting anything from
ESO this year, anyway. You know, so what's going on with SB, and the
systems for, you know, greater adoption here, and other indications beyond,
you know, obscure bleeding?
Gavriel Meron: OK. Sorry to have you repeat that. Well I think that the biggest
challenges that we have, and - is changing behavior and changing
perception. And because we do have reimbursement, and we do have
reimbursement for, as I said, on an average five patients a week. But there
are things that are reimbursed under the current reimbursement before we
have this, you know, continued expanded indications, and continued moving
up the insurance line. In other words, we can actually, in some insurers
already, we can give a capsule for suspected Crohn's patient before doing
endoscopy. So that is moving. But that's not the major obstacle.
The major obstacle will be if we were at five today, then I would say that
would be the major obstacle. But we're not at 5, we're at 1.3. And the
gastroenterologists have been behaving in a certain way for years and years
and years. And what we're telling them is when they see a patient to think
differently. And that means we have to change their behavior, and that is
always a very difficult thing to do. And it requires sustained presence,
sustained activity. It's not only training and education, talking to them
from the podium, which of course, they are getting in a big way. It's like
going to listen to a Weight Watchers, lecture, OK, but that doesn't change
behavior on a day to day. Behavior - changing behavior is a challenge. And
being there, being in the accounts and doing things to get them in the
mindset that they see this patient and they give them the PillCam. That's
the largest one.
The other one is the change in perception which is not exactly the same as
changing behavior. There is a perception in many of our
gastroenterologists, that it takes forever to
read the capsule study. It doesn't take forever to ready the capsule study
any more. It's been reduced significantly. But if you are doing a study
once every two weeks, then in your eyes, probably you never get to the
level of expertise to breakout into the, what I would say the normal study
now, which is between 30 to 50 minutes. So that's a perception that
utilization can change.
The other perception is of a lack of reimbursement. Many
gastroenterologists think that they don't get reimbursed. And the
reimbursement, actually is extraordinarily good. So that perception to
break is not very complicated, but it has to be done. And it can be done by
walking through the paperwork, showing them success. And where we've done
that, we've seen a significant increase in capsule utilization. So there
are some not too difficult principals that have to be done to change this.
The changing of behavior is always the biggest challenge.
Peter Bye: OK. And then when you said a single digit increase in operating
expenses, you meant sequentially from Q2 for the rest - for the back half
of the year? Well I'm just trying, you know, I'm not sure if I completely
understand what your guidance was on operating expenses in the back half of
the year.
Gavriel Meron: Increase Q3, Q4, compared to where we are in Q2?
Peter Bye: Yes.
Gavriel Meron: I said, yes, single digits.
Peter Bye: Yes, but - OK, so it's compared to Q2 not year-over-year basis.
Gavriel Meron: Yes.
Peter Bye: OK.
Gavriel Meron: No. Because we're already 50 percent [inaudible].
Peter Bye: And then, do you have visibility on R&D credits, [inaudible] from the
chief scientific officer? So what are you looking for that sort of an
absolute net R&D spend for the back half of the year?
Gavriel Meron: What I can - we've shown in the financials the chief scientist
participation in Q2...
Peter Bye: Right.
Gavriel Meron: Right. That participation is actually for the six months. The
cycle that we do is we submit in Q1, so we don't record any revenue or
anything positive in Q1, because we don't yet have approval. When we get
approval, we record the six month portion of
it. And a similar number will be seen in the second half of the year. And
our R&D expenses will be similar to what they are now. But with again,
single digit growth.
Peter Bye: And then just any progress or update on - I know you seem to be
taking over on the US front, but any replacement for North America on the
sales front, longer term? The management.
Gavriel Meron: We do expect we're in the hiring process of a person to replace
Nancy who will have the experience of a company where we want to be, a
larger company, and that can take us to the next stage of growth and that
is in process.
Peter Bye: OK. And just what would a temporary code, you know, you've talked
about that in the past on ESO, what would that mean? And, you know, what
kind of level are we talking about on rates? And when you get back from
your sales force that are saying the GIs are not getting reimbursed, so
they don't want to use it, what level of reimbursement would be meaningful?
Is it any reimbursement? Or, you know, is there a certain threshold that
they think is - would only be sufficient for them to use it?
Gavriel Meron: I think we're not at a threshold discussion. At the moment, they
have no reimbursement, and without the G code, you can't even write it up
as a procedure. And that is a barrier. The G code doesn't provide
reimbursement. It doesn't provide a level of reimbursement. But what it
does, it enables you to fill out a form and write a procedure, and submit
it to an insurer and explain the clinical reason why this was your
decision with this patient, and ask for reimbursement. And we have a hot
line that deals with this, and we've had very good success working with
valid clinical data and clinical reasons to use PillCam SB, and even
PillCam ESO.
So - but without a G code, many people are not willing. And hospitals are
not willing to do the procedure, until they see that they have a code that
they can write this procedure up to for reporting purposes. So it's just a
physical barrier, that enables you to start the process of getting people
using, so that they can record the procedure, and you can start gathering
data on the procedure. And being able to show volumes of procedures.
Peter Bye: OK. Great. Thanks.
Operator: We'll go next to Wade King from Montgomery & Company.
Wade King: Hi, Gabi.
Gavriel Meron: Hi, Wade.
Wade King: Yes, I've got a question. Would you mind reviewing the clinical data
to date associated with the PillCam COLON? What's been presented or
published to date if anything? And, you know, what do you consider to be
the major foundation for your submissions in the future?
Gavriel Meron: OK. Thanks, Wade. What we have said in the past call, we missed
you on a couple of calls, was that PillCam COLON was a product that we've
developed. And we're going to start doing in Q2, we have started doing in
Q3, initial clinical trials with a product for feasibility and preparation
for a major clinical study, that will be the basis of our submission for
FDA that we will do in 2006.
So there will be no clinical data published from PillCam COLON, and this is
too early to have that published. And what we're doing now is trying
different things, and finalizing the product, and preparing ourselves and
reviewing the sites that submitted their request to be part of the sites
that will do the trials next year. And it's a lot of preparatory R&D work
towards the trials. So there's no data that I can share with you at this
time.
Wade King: And given the different anatomy, colon versus small bowel, can you
give us any idea on, you know, variations and specs associated with the
PillCam COLON, versus the small bowel product, and also as to what you
would be looking for in terms of major pathologies, whereby you think this
PillCam COLON would have significant added value?
Gavriel Meron: OK. The technical specs of the PillCam COLON have not been
divulged anywhere, again, for competitive reasons. We have to be aware that
there may be competition lurking out there, and being very interested in
knowing the technical specs of this or that product. So unfortunately, I
won't be able to share that with you at this time.
The product, as we envision it, will be positioned as better than virtual
colonoscopy. And we expect gastroenterologists to accept the position that
colonoscopy or I would say conventional colonoscopy is the gold standard.
They will always prefer to do that as a screening tool than anything else.
However, we also know that there is a limitation, a physical barrier of
limitation to the number of colonoscopies, that can be performed by
gastroenterologists in the United States, and there's a huge gap between
that potential and the number of people who need to do screening
colonoscopy of every year, and that gap has to be bridged if we want to
provide the right patient care in the United States. And that is the
interest of everyone, the patient, the gastroenterologist and the payers.
So that is where virtual colonoscopy has come into the field. But we
believe that we can have a product that will be better than virtual
colonoscopy, we have to prove that. And if we can prove that, then we think
that that will be a product that gastroenterologists will gladly recommend
to their patients, who may prefer not to do conventional colonoscopy, but
will be willing to do PillCam colonoscopy and that should be a clear
preference over virtual colonoscopy.
Wade King: OK. Thanks very much.
Operator: We'll go next to Ed Shenkan from Wells Fargo.
Ed Shenkan: Good morning, Gabi.
Gavriel Meron: Good morning, Ed.
Ed Shenkan: You know, to follow on the theme of the colon pill trial, you
mentioned previously that, you know, it would be less than 1,000 patients,
and three arms of the study, virtual colonoscopy, colonoscopy and yours .
If it's about 1,000 patients, you know, what might it be the cost per
patient? You know, I know you're still working it through, but if you're
thinking it's a million to $2 million total, is that, you know, $100 per
patient, or $1,000 times 1,000 patients.
Gavriel Meron: Ed, first of all, I never said it would be less than 1,000. It
could be 1,000. It could be more. I said we haven't gone through the
statistics, and we haven't discussed with FDA what the number could be. It
could be 1,000, it could be less than 1,000. And depending on that number,
and depending on how much we negotiate with the different sites, to pay
them per patient, that will be the number in the end. And we do prefer to
negotiate with them without having a number on record.
And - but I can tell you that this is not a pharmaceutical study. This is a
device study, with patients who in many cases are really interested to do
this trial. So I'm not going to give you an estimate of the price that we
will pay to the site. And the two or $3 million - one or $2 million is
really not a number that is a final number or anywhere near to a final
number. But what I was trying to say is that it's not in the tens of
millions. It's in the single millions. And it will depend on the number of
patients that we will agree with FDA that need to be done to prove our
point. And it will depend on the negotiations that we will have with the
different sites, on how much to pay for these three arms.
So, again, I would say, single digit millions, and it's around 1,000,
that's my estimate. And beyond that, I don't think I can give much more
information at this time.
Ed Shenkan: All right, Gabi, thanks for the clarity there. One - as a follow
up, would you expect in that study to pay the doctors, you know, their
going rate for the capsule endoscopy when they do it, or, you know, might
they do it for free? Same thing with virtual colonoscopy, you know, if the
patients are in the study, might the doctors just give their time for free?
Gavriel Meron: Maybe, I'll hire you to negotiate with them, Ed.
Ed Shenkan: I'll try for you, give me a percentage.
Gavriel Meron: Yes, I'm not going to go on record to answer that question, I'm
sorry.
Ed Shenkan: OK. I guess where I was going ,was docs are getting over $1,000 to
do your study, the capsule endoscopy, so if the do this three arm study,
they might get $1,000 for that, and several hundred for colonoscopy, and
I'm not even sure how much it could be for virtual colonoscopy, but in
general you'd expect to pay the docs for all of this, for each patient,
right?
Gavriel Meron: Well I can't confirm that we pay $1,000 per study and for each
patient or for a full study. And there are very different protocols and
very different circumstances. And there isn't a number that you can tell if
it's the number in any case. In any case, I think that number that you're
describing per patient, I'm not aware of such a number anyway.
Ed Shenkan: OK. And for sales and marketing expenses, just to get an idea, on
a run rate basis, you're now at about $46 million, in '03 - I'm sorry, in
'04, you did about $34 million in sales and marketing expense. Should we
expect, you know, those expenses to continue to rise with some trend that
we've seen? Or, you know, is that maybe incorrect?
Gavriel Meron: I really hope that rises significantly because if that rises
significantly, that means that we've finally seen a significant increase in
sales of ESO. Don't forget the commissions that we pay for InScope for
sales of ESO and workstations are included in sales and marketing. And
since we pay 50 percent on PillCam ESO, and we pay 10 percent on our
workstations, and the - around that a significant increase in that number
will mean, that, you know, if we sell $100 million of ESO, we'll pay $50
million increase in sales and marketing expenses.
So you need to model, I think, fixed and variable. And if you've model
fixed and variable, I think you'll be able to see something a bit more
rational in anyone's eyes.
Ed Shenkan: OK. And as far as, you know, thinking about sales force expansion,
you expanded it last year. You know, are you planning anything for next
year? At what point
will you evaluate that? And, you know, since you have all of these J&J reps
which are helping you, will that offset, you know, maybe the amount of
additional reps you would need because you're getting so much help from
J&J?
Gavriel Meron: Yes, the additional sales force from J&J is of value of course,
and this is why we're now doing the sales training together in order to
enhance that value. We still have to cover our customers, in a way that we
can change their behavior. And that means that we cannot have regions or
territories with too many customers because then they're not going to be
able to see them often. So we do want them to see our customer's often in
order to change behavior. And the growth - we grew from 30 to 40 territory
managers as of the beginning of the year, so that was a significant growth.
Additional growth, incremental growth will continue as we increase the
number of workstations.
In order to enable our territory managers to cover consistently and in the
right way, their customers, and have their customers achieve the level of
customer satisfaction that we want them to have. So what we will be seeing
as a function of increasing in work stations, we will be seeing an increase
in sales reps. And so for modeling out, I would do something like that,
something like divide by 40 or whatever, the number of workstations. And
that will be the number of reps approximately, OK. It doesn't work exactly
that way, because it's not - every region is a bit different. But I think
there's an approximation that will probably bring you very close to where
we are.
Ed Shenkan: And a question about the proposed CMS reimbursement, you mentioned
it in your press release going up from $496 to $552.
Gavriel Meron: Right.
Ed Shenkan: You know, is that enough of a change, if it goes into place to
make a real difference in the business? And, you know, what impact would
you expect if this proposal goes through?
Gavriel Meron: Well when we go to hospitals and we speak to administration, as
in everywhere else, they say, you know, what's in it for me? And with
Medicare where it is, what's in it for was about $40 per procedure, and
this doubles that, more than doubles that. So is that going to make the
difference? No. Will that make a difference? For sure.
Ed Shenkan: OK. And last question, and then I'll get back in queue would be
the consensus guidelines, you've not set September as an expectation for
publication, what impact do you think that will have, you know, with
utilization? Will there be a delayed effect for the increase in
utilization? Will it happen right away? You know, and how will you use
that, to supplement your sales effort? Will it make a big difference? Or do
you all ready have enough of those - of that body of literature, you know,
that this won't make such a huge difference for you?
Gavriel Meron: Yes, well we've been - first of all, we've all ready learned, I
think, that nothing happens overnight. I think that is very clear. We've
been utilizing in our sales forces, the consensus as part of the selling
tools since the consensus was prepared. And so we'll not start - we're not
waiting with that until September.
Where it does have a significant difference is two things. First of all,
when our sales force will be presenting it. They will be presenting it as a
published Endoscopy paper, which is different than a Given-supplied paper.
The other one -the other area is, of course, reimbursement, and for payers,
the fact that it's published by endoscopy, they will look at it in a
different way. And that will help us in the reimbursement activities that
we're doing.
Ed Shenkan: So will it help you to get first line reimbursement, which we've
seen, you know, happen, you know, recently?
Gavriel Meron: What we've seen happening is all ready based on that type of
data, even though it wasn't yes, published in Endoscopy. The fact that it's
published in Endoscopy just supports that. It gives comfort to the payers.
And we told the payers it was going to be published. Many of them said, OK,
you know, when we see then we'll look at it. And as you see some payers,
they say, you know what, we agree, it makes sense. We'll expand our policy.
We'll change the policy and so on.
And changing policies is a selling job. And some sales you succeed with
what you have, and some sales you need more to make the sale.
Ed Shenkan: Thanks for the explanations, Gabi. I'm going to get back in queue.
Gavriel Meron: Thanks, Ed.
Operator: We'll go next to Anthony Vendetti from Maxim Group.
Anthony Vendetti: Thanks. I think most of my questions have been answered, but,
the ESO reimbursement I - can you just give us an update on how that's
progressing? And when, you know, if that timeline has changed at all? And I
know there were negligible sales, I guess, for the ESO capsules this
quarter, do you actually want to give that number? And that's it, thanks.
Gavriel Meron: OK. The ESO sales, as you say are negligible. There really isn't
much of a number to give there. It's very, very small. ESO reimbursement as
we had said, that we will be submitting to CMS in October, hopefully for
approval a year from then for approval as a code and reimbursement by
Medicare, in January of 2007. So that is still on track.
The G code, which is the temporary code, is something that we're working
on. We hope to get that, and not have to wait all the way until January
2007 to get that. And that is a
clear gate for renewed utilization. So we're working on that in parallel.
And in parallel, of course, we're working with private payers, to include
or expand their policies from PillCam SB, to include also PillCam ESO. So
those are the three efforts that are ongoing in parallel.
Anthony Vendetti: OK. Great, thanks.
Operator: We'll go next to Yoav Burgan from Poalim Sahar.
Yoav Burgan: Hi, Gabi. Just two questions for me. First of all, the CMS proposed
rule that you mentioned in your press release, when do you expect to
anticipate such a decision to be made?
Gavriel Meron: Well it's supposed to be effective January 1st, and I would
think November or December there will be a decision.
Yoav Burgan: OK, great. And my second question. How do you view the potential
competition coming from Olympus? Do you see their small bowel capsule as a
patent infringement?
Gavriel Meron: Yes, we're viewing our potential competition very carefully and
cautiously. And we're not going to be on record to say anything about them,
whether we are or not or we do see or don't see. That's the counsel that
we've received by our attorneys. So I -
obviously we're looking at it very carefully, and very deeply. But beyond
that, I'm not going to say anything.
Yoav Burgan: OK. That's all for me. Thank you very much.
Gavriel Meron: Thanks.
Operator: We'll go next to Bob Kaynor from Ramius Capital.
Bob Kaynor: Hi. I had a question about the new CFO hire. When does he - when
does Yuval come on?
Gavriel Meron: Yuval will be coming on in the next few weeks. He'll be full time
September first. And he will be in certain activities, all ready, here and
there, just getting prepared during the month of August, when most people
in any case, are going to be on vacation. So on the next call, he'll be
joining me.
Bob Kaynor: So will he be continuing as Koor industries CFO?
Gavriel Meron: No. He's resigned from Koor.
Bob Kaynor: OK, that's great. Thanks very much.
Gavriel Meron: Thank you.
Operator: And we'll next to Anthony Petrone from Maxim Group.
Anthony Petrone: Hi, thank you. Just on the sales force restructuring, I know
you're going to be training InScope and Given in the next several weeks,
are they both going to be focused on systems and capsules? Or is it going
to be one and the other? And how is that going to go forward?
Gavriel Meron: OK, thanks. The InScope sales force will be focused on PillCam
ESO. Our sales - on increasing utilization of PillCam ESO. Our sales force
is going to be focusing on increasing utilization of PillCam SB. The big
difference is going to be that both sales forces will be talking the
complete platform. And up to now, each sales force was talking the platform
in the terms of the PillCam's that they were increasing utilization, and
just mentioning on the side, that there's also another application.
That doesn't provide the value of the platform in an optimal way, and we've
all agreed to that. So therefore, there will be joint training on the
platform as a platform, so that each side, and each group will be
conversant and more than conversant on the value of PillCam ESO and PillCam
SB to the gastroenterologist. So that's where the key difference is going
to be moving forward.
Anthony Petrone: You keep mentioning, you know, the shifting from hunting to
harvesting. Is any of the sales force still going to be, you know, focused
on gaining new GIs as customers? Or is everyone now, going to be focused on
harvesting?
Gavriel Meron: The interesting thing is that there isn't a dilemma between
increasing utilization and selling more workstations. When you increase
utilization, you sell more workstations. And what we've seen is our stellar
performers in utilization, were also have stellar performers in workstation
sales.
There is a clear connection between being able to project the value of the
platform, and driving utilization, and increasing awareness of the customer
of the value of the PillCam study and why they should be doing this, and
doing this often. And the capability of selling more workstations in the
region. So we don't see that trade off. And it's training good practices to
achieve both. And the driver has to be increasing utilization, which then
of course, enables you to increase the sales of workstations.
Anthony Petrone: Now on - because it seems that, you know, you mentioned before
changing the perceptions of GIs who are not totally sold on capsule
endoscopy at this point. What are they going to focus on to change the
perception of those GIs? I mean how is their approach going to be different
than it was in the past?
Gavriel Meron: Yes, I had that question earlier. And the details of how we're
going to do that, we see it as competitive information, so we're not going
to get into those details on this call.
Anthony Petrone: Just one last question on RAPID 4, is that needed to use the
COLON capsule?
Gavriel Meron: No. RAPID 4 has nothing to do with the COLON capsule. RAPID 4 is
an upgrade that has some features. And the most significant from the point
of view of the gastroenterologist is improved efficiency and the efficacy
of work. And it will enable...
Anthony Petrone: The time to review is less?
Gavriel Meron: It can be significantly less.
Anthony Petrone: OK, thank you.
Operator: And we'll take our final question from Derek Capo from Everest
Capital.
Gavriel Meron: Hello?
Operator: Mr. Capo, your line is open.
Derek Capo: Yes, sorry. Good morning.
Gavriel Meron: Good morning.
Derek Capo: My question is in reference how are you going to get other insurance
companies, like what you stated in your press release, like Humana, to
avoid having that first procedure, eliminating it, and allowing patients to
go straight to your procedure?
Gavriel Meron: Well we have had some success, some initial success with that.
That's been the focus of our efforts since the beginning of this year.
Based on the data that is out there, and based on the clinical studies, and
the common sense that a patient with suspected Crohn's handles, so the
paper was that was by Thomas Jefferson University study at the beginning of
this year showing that from the payer's point of view, they save money by
brining the PillCam as a first line tool for patients with suspected
Crohn's. And the reason for that is by doing that, you actually - if you
get a negative small bowel study, you don't have to do any additional
tests. That is very significant, and that reduces significantly their
costs. It reduces - it increases significantly the quality of life of the
patient. It's a very quick response to a patient with suspected Crohn's to
make the differential diagnosis, if they do or do not have Crohn's. And
send them back to school or back to work, whatever the case is, because
many of these are teenagers that are suffering, and they need the response,
they need to know.
And up to now, these patients go through repeated endoscopic tests. And of
course, that is not fair to them. It's not necessary. It costs money. And
so the Thomas Jefferson University study, the patient outcome shows clear
value to a PillCam SB study as a first line tool for patients with
suspected Crohn's.
Derek Capo: Thank you.
Operator: And ladies and gentlemen, that does conclude today's
question-and-answer session. At this time, I'd like to turn the call back
over to Mr. Meron for any additional or closing remarks.
Gavriel Meron: Thanks.
I think I've shown you that our potential for growth is solid. We are in
the transition phase of an $80M run-rate revenue company reaching for the
hundreds of millions of revenue.
We are now focusing the Given and InScope sales forces to work together to
leverage on that strength in the market. Additionally, the powerful
clinical data that was seeded at ICCE and presented at DDW, and the
consensus that will be published in the journal Endoscopy - will all have a
positive effect on our performance, on our sales and earnings moving
forward.
We are now preparing for the launch of our new RAPID 4 software at the WCOG
conference in Montreal which is September 10 to 14. This software will
provide
significant efficiencies to the gastroenterologist and we expect that this
will further drive utilization and create competitive advantage in the
market.
Our platform concept will be further enhanced by our new product - the
PillCam COLON - that has now commenced initial feasibility trials, as
planned.
We also will be attending some investor conferences in the U.S. and look
forward to seeing some of you at that time. In my next conference call I
expect that Yuval Yanai - our new CFO will be joining me so you will have
the opportunity to hear his comments too in the future.
I'd like to thank Zvi Ben-David for his work in the company as a CFO and
thank you all again for joining me on this call.
Operator: And that does conclude today's conference. We thank you for your
participation and you may disconnect at this time.
END