Exhibit 99.1
Given Imaging Third Quarter 2005 Earnings Results Conference Call
Moderator: Gavriel Meron
Tuesday, November 8, 2005
9:00 a.m. ET
Operator: Good morning and welcome, ladies and gentlemen, to the Given Imaging
Third 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 or 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 us for our third quarter
2005 call. Joining me on today's call is Yuval Yanai, our Chief Financial
Officer who joined us in September and has already made an enormous
contribution in strengthening our financial operations. Note that all of
the detailed financial information that we previously provided during our
call is now available on the investor relations section of our website.
This quarter was a good quarter for Given Imaging. We are pleased to report
that we achieved solid sales and strong profitability during a quarter that
typically is the weakest quarter for medical device companies.
Specifically, this quarter:
We achieved worldwide sales of $19.8 million, a 36% increase over sales in
the third quarter of 2004. This reflects an increase in our installed base
to 2,744 worldwide, of which 1,651 units are in the U.S.;
We achieved solid earnings per share of seven cents compared to basically
breakeven last year;
We realized a significant improvement in profitability at the operating
level moving from a loss of approximately 250 thousand in Q3 of last year
to an operating profit of 1.2 million this quarter;
We are also beginning to see the impact of our U.S. sales team's efforts in
driving utilization despite the normal summer slowdown.
o We delivered record PillCam SB reorder sales in the U.S. and we have
seen consecutive growth now for 14 quarters.
o Weekly per system utilization, in the U.S. increased to 1.2 capsules
from 1.13 during the third quarter last year.
We sold 114 systems in the U.S. compared to 85 systems during the third
quarter of 2004. We believe this reflects the increased level of
acceptance, conversion of leads from DDW and preliminary results of the
joint training of the Given and InScope sales teams that took place in the
U.S. in August. It is great to see these two teams collaborating so much
better in the field now. Maybe the change in the compensation plan also
played a role.
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Through our constant focus on improving operational efficiencies, we were
able to increase gross margin to a record level of 76.7%.
I'd like to take a moment to review some recent highlights:
o Given Imaging and InScope participated in several medical conferences
this fall including the American College of Gastroenterology meeting,
Australian Gastroenterology Week, United European Gastroenterology
Week and the World Congress of Gastroenterology. These meetings were
significant for three reasons:
o First, we exhibited at these conferences and saw a marked
difference in the acceptance level of PillCam among all GIs at
these meetings.
o Second, abstracts presented at the conferences continue to show a
trend toward using PillCam SB to diagnose expanded indications
such as iron deficiency anemia, Crohn's disease and small bowel
tumors. These abstracts and published papers are already
affecting ad-hoc reimbursement and we expect that this will
translate into additional expanded reimbursement policies.
o Third, PillCam SB is a great product. This is being confirmed by
the consistent results reported at all of these meetings from a
variety of institutions all over the world.
o On the PillCam ESO reimbursement front during the third quarter :
o We reported to you in detail in the press release on the progress
we and the GI societies have made on the reimbursement front for
PillCam ESO. We view CMS's decision to recognize PillCam ESO
under the existing CPT code with a modifier as an important step
for Medicare patients, giving hospitals a uniform mechanism for
reporting Medicare claims for PillCam ESO. In addition, we worked
in close collaboration with InScope and the GI societies to
complete the CPT application for the PillCam ESO procedure which
we believe was submitted yesterday to the AMA.
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o Endoscopy, the official publication of the European Society of
Gastrointestinal Endoscopy or ESGE, published The Consensus from this
year's International Conference on Capsule Endoscopy (ICCE), in the
October issue. The consensus formalizes practice guidelines for using
PillCam SB and PillCam ESO. We are making efforts to help our
customers incorporate the consensus guidelines into their clinical
practice and are already seeing payers reimburse on a case-by-case
basis according to these guidelines.
I'd like to share some highlights of recent medical meetings with you.
At the World Congress of Gastroenterology meeting in September in Montreal
there were 13 scientific abstracts presented on PillCam endoscopy. In
addition, Given Imaging sponsored a Sunrise Symposium on Capsule Endoscopy
at 6:30 a.m attended by a standing room only audience of more than 200
physicians. This is yet another example of the growing level of interest
among the worldwide GI community in our product. It was at the World
Congress that Olympus officially launched their version of the capsule.
Also at the World Congress meeting, we launched our next generation of
software known as RAPID 4. RAPID 4 is an incredibly powerful tool which
makes it easier to read and interpret the images captured from the PillCam
SB and PillCam ESO video capsules. RAPID 4 is pending clearance from the
FDA, and we hope to begin offering this product to physicians in the U.S.
as soon as we receive clearance to market - hopefully in the near future.
We have detailed in the press release information about the other medical
meetings that took place during the quarter: UEGW, AGW, ACG, and APGW.
Also for the first time we participated in American Academy of Family
Physicians Annual Scientific Assembly in San Francisco in September. There
were more than 10,000 PCPs participating in this meeting. InScope and Given
both had booths and conducted
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research to better understand the drivers of referral patterns of this very
significant group of physicians. For small bowel diagnostics, we learned
that they are referring the majority of their patients to radiologists to
perform small bowel follow through and many of them were not aware of the
value of a PillCam SB test. So it was important that we were there.
In Japan, we have continued to provide the Ministry of Health in Japan with
responses to their questions. The good news is that their list of questions
is growing shorter and we do hope that approval will be granted in the near
future.
We are well on our way to realizing our vision of PillCams for the entire
GI tract. PillCam SB and PillCam ESO are approved and we are currently
working on bringing PillCam colon to market. Thus far, we have tested the
Colon capsule in healthy volunteers, many of them over the age of 50, and
have been able to gather useful information that we will use in designing
our pivotal trials. Global pivotal clinical trials are expected to commence
in 2006 and we anticipate launching PillCam COLON in Europe in late 2006
and in the U.S. in 2007.
As we updated in the previous call, we expect to complete our U.S. clinical
trial for the Patency capsule and submit an application to the FDA for
clearance this quarter. 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 may be a valid concern for
potential strictures.
Before we open the call for questions, I'd like to reiterate our fourth
quarter and full year 2005 guidance which remains unchanged from guidance
provided in our second quarter earnings announcement. In the fourth quarter
we expect sales to be in the range of $23 to $26.5 million, with earnings
per share of $0.11 to $0.19 cents per share.
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Annual guidance for 2005 is unchanged, between $84 - 90 million in revenue
and earnings per share of 15 to 26 cents per share.
Operator, you can open the call for questions now.
Operator: Thank you. At this time if you'd like to ask a question, you may do so
by pressing the star key followed by the digit one on your touch-tone
telephone. If you're using a speakerphone, please make sure that your mute
function is turned off to allow your signal to reach our equipment. Once
again, that's star one to ask a question. We'll pause for a moment to
assemble our queue.
And we'll go first to Lee Brown, with Merrill Lynch.
Lee Brown: Hi, good morning.
Gavriel Meron: Morning, Lee.
Lee Brown: Just a quick question on your efforts to train the sales force on the
clinical aspects of the ESO. Did that training result in any significant
amount of time of the sales force being out of the field? And if so, would
you have expected obviously a bit stronger sales?
Gavriel Meron: The training that we performed in Q3 was in two pieces. One piece
was in Houston and the other in Atlanta. We had the - half of the U.S.
Given together with half of the InScope sales force in one of the meetings.
It was a three-day meeting. And the other half in the - in the other
meeting. So they were out of the field for three days. But I think
typically in every quarter you're going to have trade shows, you're going
to have activities that are not direct setting activities at a similar
level. I wouldn't extrapolate from that any sales information. Those
meetings, of course, were hugely important in gelling the teams together,
and it really is wonderful to see how they are coordinated now at the
territory manager level, at the regional manager level, the area managers
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and so on, all the way through the organization, sharing leads and sharing
the efforts to drive work stations and PillCam utilization in the different
territories.
Lee Brown: OK, thank you. And then in terms of the PillCam ESO reimbursement.
Given the 52 modifier only allows for 50 percent of the fee, is there a
certain lower level of payment also attached to the CPT 91299 in that
manner as well, or is that not related to the 91110.
Gavriel Meron: The 52 modifier currently pays full price. The change to 50
percent is a change that will be in effect as of January 1. That is the
proposal that has been the decision. We're still arguing that decision. The
societies are supporting that argument that it makes sense perhaps for the
professional fee to be 50 percent, but definitely not the technical fee.
The technical fee covers the capsule and the capsule is a capsule is a
capsule, you know, it doesn't matter if it's an esophageal or small bowel
it still costs $450. There is understanding to that argument. There is not
much of a willingness to have exceptions. But even though there isn't a
willingness to have exceptions, we're still arguing that and that's not a
done deal from our point of view. So we are working to try to turn that one
around. Worse case it will be that they will be reimbursed 50 percent,
which of course is not enough to cover it in the hospital environment.
Now, as you know, this product is not really targeted as a major target to
the hospitals. The major target is to the clinics where most of the
patients, the GERD patients are. And if they aren't they should be. So the
position of the societies not to use the modifier but rather to use a
miscellaneous code allows you to submit it and get reimbursed on the full
PillCam reimbursement, which will vary depending of course on the payers.
But it's of course nowhere near the number that Medicaid is willing to pay
with the modifier.
Lee Brown: OK, thanks. And one last question just in terms of the ESO. Any sort
of color you can give us on your outlook in terms of capsule sales in terms
of volume?
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Gavriel Meron: Yes, the color should be black. As you know, in PillCam ESO we
have variable income. So we expect of course to continue to see net
contribution from the product, hopefully increased net contribution. It's
very dependent at this time on reimbursement and private reimbursement. We
have seen some private reimbursement wins on a local not-public basis, on a
case-by-case, or even non-publishable policies. In other words, people have
said, OK, we'll do this, but, you know, don't publish it. However, we do
need to have, I would say, the first public-private payer which will drive
the others to go public as well with this. And we still don't have that.
But once we do have that - as you know we've mentioned this in the past -
we do have already an installed base of I think more than 700 accounts
ready to go with PillCam ESO and are waiting for reimbursement. And this
was one of the takeaways I think that I personally took from the meetings
that we've had. As you see, we've had many meetings with the
gastroenterologists in the past month or two, and there is a large
constituency of gastroenterologists who understand that young people don't
want to lose a day's work, they want the PillCam ESO, and they're providing
it - and they are providing it -and they will do many more if this is a
reimbursed procedure.
So I think the key to seeing significant traction in PillCam ESO is
reimbursement. I believe that will come, if not sooner than later, but I
hope it will be sooner. And when that happens I think we'll be able to see
significant movement in this product and to the revenues that we had all
expected.
Lee Brown: Super. Thank you very much.
Operator: And our next question comes from Amit Hazan with SunTrust Robinson
Humphrey.
Amit Hazan: Hey, good morning, guys. Can you hear me?
Gavriel Meron: Yes. Hi, Amit.
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Amit Hazan: OK. Just a - just a few questions. First of all on the guidance.
Understanding that you kept your guidance for 2005, should we be reading
anything into the wide range that you left for the fourth quarter that you
have any kind of concerns or just are waiting to see what the impact of
Olympus is going to be in the European market.
Gavriel Meron: First of all, European impact - there's Olympus in the European
market is something that of course that we are looking it and we're
concerned and we're looking with concern. But I - if you're going to back
to the guidance question I wouldn't link those things. I think the guidance
is wide because we don't see any reason to change guidance, unless there's
a really - reason to do that. The range, of course, can be affected whether
or not there are announcements for ESO and for reimbursement, because we
think that can drive very quickly some significant upside, and that's what
we thought initially. I wouldn't change that. I think that we're very
comfortable with a consensus of the analysts forecast based on our previous
guidance, and I wouldn't see it as alarming in any way.
Amit Hazan: OK, great. And then just on Olympus. Maybe you can just give us a
little bit more color on what you're seeing. I know it's been only one or
two weeks out there. But as far as pricing, are they being - you know, are
they pricing their systems much less to try to get them into the
physicians' hands, or what kind of - what are you seeing so far?
Gavriel Meron: Yes, it's at two levels. First of all, about Olympus and the
point of view of how we're going to react and what we're going to do. I
think it's clear that I'm not going to be able to comment on this call.
Actions will speak louder than words and words can only harm actions. So we
won't be talking about that. And they have presented, as I said, at the
World Congress. No one has actually seen this product delivered anywhere
yet in the world, so I think it's a bit too early to be able to say how
this product compares and what it looks like before actual deliveries have
been made anywhere. So maybe in our next call we'll have more information
after
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deliveries, if there will be deliveries by our next call. That we still
have to see, and the jury's out on that.
Amit Hazan: OK. And just switching gears a bit to the Humana decision that was
made now a few months ago for the first-line diagnosis. How is that going
with trying to convince others? When we saw that we thought there might be
others coming soon. Are others telling you they still need more data or do
you feel that there could be more decisions in the near-term coming similar
to Humana. Where do we stand on that - on that issue?
Gavriel Meron: Yes. Amit, you know, insurers have a long list of reasons to
delay making enhanced reimbursement decisions. And so there's a gap -
there's quite a wide range of reasons. But we're not dealing with the
reasons, we're dealing with what needs to be approved and so on. So we're
working very hard to try to get additional insurers to get onto this
bandwagon. And I believe we will have additional insurers coming off the
bandwagon. Q3 was very quiet from that point of view. It was - we didn't
see any major announcements in Q3. Hopefully in this quarter we'll be able
to see some that will answer your question.
Amit Hazan: OK, great. And then just, lastly, a sales force question, if you can
update us on where your sales force stands right now as far as numbers and
also where J&J stands right now as far as numbers and whether J&J is
selling any other product at this time.
Gavriel Meron: We currently have 40 sales people in the field and we expect to
increase that number moving into 2006, maybe even significantly, but after
we define our plans more clearly, I guess in our next call, I'll be able to
update on that. Concerning J&J's sales force and size, I don't think we
have the - we can comment on that. But they are also selling an additional
product and they definitely are abiding fairly, and more than fairly, with
the agreed-upon efforts that they are according to our agreement what
they're meant to be doing in the field. So we have no complaints on that
front.
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Amit Hazan: OK, great. Thanks very much. Have a good day.
Gavriel Meron: Thanks.
Operator: And we'll next go to Peter Bye, with Citigroup.
Peter Bye: Thanks, guys. Just a couple questions just on the - additional
disclosures. You say that SB is about 80 percent of sales. Did you see an
up-tick in price on that? Just because that gives me a higher PillCam sales
number than you reported.
Gavriel Meron: Peter, I'm not quite sure I understood your calculation. Could
you repeat it, please?
Peter Bye: Yes. Just PillCam SB was 80 percent of revenues. I'm just wondering
what price you were using on the PillCam SB.
Gavriel Meron: Oh, here you have it PillCam SB as a portion of revenue here, 80
percent.
Yuval Yanai: What is the question?
Peter Bye: What's the - what price are you using?
Gavriel Meron: (Well, if it takes) 80 percent of revenue, then it comes out to
something - Peter, can we back to you off-line on that?
Peter Bye: Sure, no problem.
Gavriel Meron: OK, that may - let us have a look at that and get back to you on
that.
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Peter Bye: OK. The other question is just on the - at the analyst meeting, you
know, you did a little bit of strategy to drive increased utilization about
lowering the diagnostic systems. Could you give us a little color on how
many went through that plan and did that help on increased utilization on
some of those accounts?
Gavriel Meron: Yes, what we did with the work stations, what we said was that
for a second or third work station in an existing account ...
Peter Bye: Right.
Gavriel Meron: ... since they've already paid for the license of the software we
have a reduced price, $4,995, something like that.
Peter Bye: Right.
Gavriel Meron: I think it's about $5,000. And we have - we saw some success in
that. And the actual percentage of work stations I don't have - we'll get
back to you on that.
Peter Bye: That's fine. But, I mean, you did see a corollary up-tick in
utilization, then, I mean, that is a gating factor?
Gavriel Meron: Well, you know, when you see an up-tick in utilization - and we
did, you know, we went to 1.2. And this is actually the first time we kind
of moved away from where we were last year. Because we came into Q2 before
we implemented changes here in the U.S. If you remember, in Q2 we had
exactly the same utilization as last year.
Peter Bye: Right.
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Gavriel Meron: Last year, Q3 went down to 1.13. And here we - even though it was
the summer and even though the larger percentage of our sales were coming
out the disposables, the utilization was pretty much the same as the
previous quarter, which means that we've really been pushing hard. Now,
what exactly has been driving it? Has it been additional work stations, has
it been additional data recorders? Is it the additional training that we've
done? Is it the way people are managing their time differently? It's all of
these things. And the education - the huge education that we're doing the
whole time, training and courses with the ASGE, with the AGA, on our own.
All of these affect utilization. And it's very difficult to say, you know -
analyze each one separately that's not do-able. So we're seeing that we're
doing a lot of good things and we're seeing initial results of that. And
hopefully we'll be able to see these results move even more in the quarters
to come.
Peter Bye: Right, OK. Great! And then just going forward, when I look at sales
and marketing, I mean, you do seem to - I mean, maybe - maybe it would be
worthwhile to even continued sales and marketing and physician education
seminars and the like. I mean, is that - is that a good run rate for your -
for your sales and marketing expense? I mean, it was down relatively
significantly from the past couple quarters. And I'm just curious why that
was the case or, you know, where you're getting the savings from there, or
where you're perhaps not spending where you had spent in the past.
Gavriel Meron: Well, sales and marketing, don't forget the - it includes also -
the sales and marketing cost includes our commission to InScope.
Peter Bye: No, I understand.
Gavriel Meron: Which is driven by PillCam ESO sales and it's driven by work
station sales, because they get 10 percent there and 50 percent there.
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Peter Bye: Right.
Gavriel Meron: And so that can have a significant effect on the fluctuation in
sales and marketing expenses. But depending on what percentage of our
revenue came out of ESO and what percentage of the revenue comes out of
work stations, there can be quite big fluctuations in that number. The core
number, the basic number of our marketing expenses has not changed and has
not been reduced. There is a - I would say, you know, we have in the first
quarter ICCE. And so that adds money to the expenses, maybe, you know, less
than a million dollars, but between half a million to a million dollars. So
that will be in Q1. Q2 you have DDW. In Q3 we had all these other meetings,
but they are not as expensive. These are less expensive meetings than DDW
and ICCE. I think the big driver of change in marketing and sales, as I
said, is commissions, and specifically commissions to InScope.
Peter Bye: I know. That's fair. But, I mean, let's just look -I mean, you know,
last year your sales and marketing Q1, Q2, Q3 was very flat. Q4 obviously
picked up. You had the ESO kickback to InScope as well as Q1. And then Q2
this year you had, you know, 11637, and this - with no ESO sales really,
and this year - this quarter was 9778. I mean, is that a lack of
productivity out of InScope then or - I mean, what should I be reading into
that?
Gavriel Meron: I think that we saw far less sales of PillCam ESO than we had in
the first quarter when we had the ...
Peter Bye: Right.
Gavriel Meron: ... promo. That's for sure. Beyond that I'm saying in Q1 I know
we had ICCE and in Q2 we had DDW.
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Peter Bye: OK.
Gavriel Meron: And in Q3 we didn't have that those rather significant
expenditures.
Peter Bye: OK.
Gavriel Meron: I wouldn't read into doing less activity in the field, having
less people. You know, we're the same number of people, maybe slightly
more, and we're doing training and education. I'm trying to think maybe in
Europe in August there's less training and education than there is in other
months of the year, that may have some seasonal effect, but I wouldn't
think that's very significant in the total number.
Peter Bye: OK, great. Just maybe I'll push you one last time on the Q4 guidance.
I mean, I understand not having to change it, but, you know, we are half
way through the quarter. Are we - are we seeing continued acceleration in
trends and utilization? Is that a fair commentary from the Q3 bump-up?
Gavriel Meron: Utilization is not something that you measure on a daily, weekly
basis from the point of view of presenting it as an investment number. But
what we're seeing is that we're doing a lot of things that we did starting
from the beginning of September after the training in August. And very good
responses to our products at the meetings that we had, all the different
congresses. So we have the potential to achieve the numbers in the guidance
and we believe that we'll do that. And there is - as I said earlier, there
is an up-side to enable us to reach the up-side and we feel very
comfortable with it.
Operator: Thank you. And our next question comes from Yair Reiner, CIBC World
Markets.
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Yair Reiner: Hello, good afternoon. A couple of questions for on the model.
First of all, in terms of gross margins, they were very strong this
quarter. Are the levels sustainable or are there any one-time items that
brought that number up?
Yuval Yanai: Hi, this is Yuval. I think that the - this level of gross margin is
sustainable. And of course we are doing - we are making all the effort now
to improve it. But this level has been achieved not as a one-time event but
because we've taken a series of actions in order to reduce manufacturing
cost and it starts to bear fruit right now.
Yair Reiner: Very good. Work station sales appear to be very strong this
quarter, stronger than I think many of us would have anticipated during the
summer. What was the linearity like and do you see those trends continuing
to the fourth quarter or are there some sales that just happened to float
to the cash register a little bit earlier rather than - rather than the
fourth quarter?
Gavriel Meron: I think what we're seeing is two strengths. One is the strength
of the idea of selling a second work station at $5,000, which are included,
of course, in the work station sales. In other words, allowing multi-center
clinics to expand their activity into the different clinics owned by the
same owner, which for us are additional accounts, but it's done in a very
comfortable way because the customers are already customers. And so that of
course is very convenient for us and convenient for them and expands
utilization and helps us achieve our goals. And the other part is that
there is, as I said, far more acceptance than I've seen ever before at the
GI meetings of the fact that everyone really has to be involved in PillCam.
It's not a question of will I have this in my practice as when should I
bring this into my practice. And so we're seeing that effect, yes.
Yair Reiner: Got it. Would you be able to give us a number in terms of how many
of the stations were second work stations or what your ASP now is for the
work stations given the mix of new and existing customers?
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Gavriel Meron: We'll look into that off-line, OK?
Yair Reiner: Good. Final question from me is on Japan. Do you have a sense of -
you'd made some kind of qualitative remarks about how things are
proceeding, but do you have a sense of when you actually might get
approval? Do you see it as being potentially a 2005 event or we should
think about it more in terms of really happening next year?
Gavriel Meron: Potentially it could still be 2005. And of course it could easily
slip into 2006. But there still is that potential.
Yair Reiner: Good. Thanks a lot, guys.
Operator: And we'll take our next question from Ed Shenkan, Needham & Company.
Ed Shenkan: Good morning, Gabi.
Gavriel Meron: Hi Ed.
Ed Shenkan: Hi. Just wanted to follow up as you guys sound very enthusiastic for
- still for PillCam Colon and you've reiterated, you know, a timeline
that's approaching. Is there anything more you could tell us about present
clinical trials, what you're seeing with them and any financial costs that
you might be closer to estimating for the PillCam Colon trial for next
year?
Gavriel Meron: First of all, Ed, welcome back ...
Ed Shenkan: Thank you.
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Gavriel Meron: Good to have you back. I don't think we can expand more on costs
and that until we finalize our work plans for next year. And probably we'll
do that in our next call. What we are seeing, we're seeing exactly what you
see in colonoscopy. We're seeing polyps, we're seeing disease, and we're
seeing the whole array of pathology that are seen under regular
colonoscopy, in actually very, very nice images. And since I said what
we're doing, we're doing healthy volunteers, but the range of ages in
healthy volunteers, probably more than half of our healthy volunteers are
over the age of 50, which allows us to get a glimpse of what we can expect
to see in the clinical trials. This has been very helpful and is enabling
us to define the trials that we will do in 2006, the sites, the protocols
and the procedures.
Ed Shenkan: Are you still planning on three arms to the trial and things that
you've discussed in the past? Any major changes?
Gavriel Meron: No changes yet.
Ed Shenkan: And as far as modifications to the pill, you know, we would expect
slight changes as you're getting more experience with it before your
pivotal trial. You know, do you expect major changes, and what types, you
know, do you expect? Is there anything you can tell us?
Gavriel Meron: No, I don't expect any technical change in the capsule that we're
using now in these preliminary trials. It will be the same PillCam that
will go into the trials next year.
Ed Shenkan: OK. If I could switch gears towards, you know, work station
expectations for the fourth quarter, which is typically your strongest
quarter. And you've surprised us well to the up side in the past. I'm not
sure if, you know, that might be part of your wide range of expectations
for the fourth quarter or not. Could you just tell us, you know, as far as
work stations go what you might be expecting in the fourth quarter. You
know, should we expect similar to previous historical
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trends, any changes that you would expect in pricing or, you know, anything
you could tell us there?
Gavriel Meron: Well, Ed, if I tell you won't be surprised.
Ed Shenkan: We'll still - we still want up-side surprises whatever you say.
Gavriel Meron: Yes, yes. OK. What we're doing, we have started implementing, as
I said, since mid August when we did this joint training with InScope. We
have the two sales teams working on selling the whole platform, which is
the platform - with the PillCam ESO and the PillCam SB. And that is
significant. And we just saw, I would say, the end tail of that in Q3. And
it does provide us with potential up-side in Q4. I am very cautious about
it because we haven't had any experience in seeing the other sales team
actually sell these devices. So the potential is there. If that potential
would actually occur or not is questionable and we're doing everything that
we can that it will happen. But this is the first quarter. It's not that we
a trend of a full quarter - not even one quarter - where these two sales
teams are working together to sell the whole platform. That's one element.
The other element is that as time goes by the PillCam SB has become a more
established product, a clear need in the GI clinic. PillCam ESO is becoming
a more understandable need compared to where we were last year, far more
understandable and far more recognition at all levels that this is a
product that everyone is going to need at the end of the day. However, the
drawback there is reimbursement. And the wild card is reimbursement,
because if there will be reimbursement announcements, this will enable the
platform message to be far more powerful. At the moment the platform
message is very good and very powerful, but if you don't have reimbursement
for one leg of the platform then this is something that allows
gastroenterologists to convince themselves to be able to delay. But with
reimbursement, of course - that question is moved away and we do expect to
see significant breakthroughs into the market.
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So there is potential for up-side. We know that our partners InScope are
also looking at the hepatologists as a new market where you may have a
gastroenterologist who's an endoscopist in a department with a hepatologist
alongside who is not an endoscopist. But they are looking at patients and
monitoring them for varices something that they could do easily on their
own without referring to the gastroenterologist-endoscopist. This is an
interesting additional market that may open up. This is new. Again, we have
no experience that we can check and track against. So these are elements of
up-side that could be there, and this is of course part of the up-side
potential that we see in Q4.
Operator: Thank you. And we'll take our next question from Anthony Vendetti,
with Maxim Group Brokerage Firm.
Anthony Vendetti: Thanks very much. Can you talk about the guidance? The
guidance excluding the special provision for taxes in the second quarter
was 20 to 31 cents. Is that still the guidance, excluding the special
provision for taxes?
Gavriel Meron: Just one second.
Anthony Vendetti: And maybe while you're looking for that you could just
elaborate a little bit more just in general - I know you don't want to get
into specifics on Olympus - but where is that, you know, in terms of
penetration in Europe and when do you expect it to be here in the U.S.?
Gavriel Meron: First of all, let's take it one by one. Your first question was
the -
Anthony Vendetti: The guidance.
Gavriel Meron: ((inaudible)) your first question, what ((inaudible))
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Anthony Vendetti: Yes, is guidance - is guidance still the same as it was in the
second quarter, which is the second quarter - in the second-quarter press
release you said guidance excluding the special provision for taxes was 20
to 31 cents for the full year.
Gavriel Meron: Right, we gave both numbers. Yes, we haven't changed the guidance
from Q2, that's correct. Yes, you just threw a number out. I didn't know
what you were talking about. Yes, because we're - we provided guidance now
- we just gave the numbers that were bottom line, the actual numbers.
Anthony Vendetti: OK.
Gavriel Meron: And in Q2 we also described the numbers if you exclude the
special provision. Yes, that hasn't changed. That's - OK, yes, yes.
Anthony Vendetti: OK.
Gavriel Meron: ... OK. What's your second question?
Anthony Vendetti: Just - if you can just talk about the competitive landscape
regarding Olympus just in general, where, you know, where they are at in
terms of launching and penetration in terms of Europe and the U.S.
Gavriel Meron: Yes, well, we know that they launched at the Australian meeting,
the German meeting, at UEGW, the general European meeting. They presented
and that they are going to launch and they are going to deliver product.
Since they have not yet delivered product it's difficult to analyze their
competitive position.
Anthony Vendetti: OK. And ...
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Gavriel Meron: As far as we know. I mean, you know - as far as we know we
haven't seen any deliveries anywhere yet.
Anthony Vendetti: OK. And in terms of your R&D - you know, I know there was a
little bit of focus on sales and marketing and we'll get back to that in a
second. But R&D, you know, stayed pretty flat this quarter. Last third
quarter it ramped up. Should we expect to start to see a ramp up in R&D as
the colon - the PillCam Colon Capsule trial, you know, starts to go - you
know, get underway.
Gavriel Meron: Yes, R&D does include of course the cost of the trials. And
clearly next year we will see an increase in that. I think we'll probably
be more ready to give you better guidance on that in our next meeting where
we will have already finalized our work plans and budgets for next year.
But there will clearly be an increase in R&D, in R&D people and in R&D
expenses related to the trials.
Anthony Vendetti: OK, and the last question. At the end of the third quarter you
received a $10 million milestone payment from InScope following the sale of
the 500th work station. And that's going to offset sales and marketing
expenses for - you know, over the 15-year life of the agreement. But that
did not impact the lower sales and marketing this quarter, correct?
Gavriel Meron: No, this is something that we invoiced towards - I think a day or
two before the end of the quarter. I don't know remember exactly what day,
but towards the end of the quarter. So it didn't have - that invoice didn't
have any effect on Q3. Moving from Q4 onward, if you take 15 years and
divide it by quarters and divide that number by quarters, then that will be
the effect of reducing our sales and marketing expenses, I don't know,
maybe $100,000, just a quick - something like that.
AnthonyVendetti: Yes, OK. And then just last on the colon - on the PillCam
Colon. What's the - because I think you mentioned the timeframe in the
second quarter. What's kind of the timeframe
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for these - you know, the three-arm trial that you talked about in terms of
from start to finish, the tentative kind of schedule for that.
Gavriel Meron: Yes, I don't think we've come out with that yet. And, again, I
think that in our next call I will be in a better position to give you more
details on where, who, how.
Anthony Vendetti: OK.
Gavriel Meron: So I'm not going to expand beyond what we said in the past on
this.
Anthony Vendetti: OK. All right, thanks.
Gavriel Meron: Thanks very much.
Operator: And we'll take our next question from Steven Greer, Merrill Lynch.
Steven Greer: Thank you. My question's been answered.
Gavriel Meron: Great.
Operator: Thank you. We'll now go to Joseph Biondo, with Biondo Investment
Advisors.
Joseph Biondo: Hi. I had questions about the colon trials and they've all been
answered. So thank you.
Operator: And we'll take our next question from Anthony Petrone, Maxim Group
Investment Bank.
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Anthony Petrone: Hi. Thanks. Most of them have been answered. Just one on gross
margin. If you still had the discount in effect this quarter for additional
systems, I mean, what else besides the manufacturing efficiencies you
mentioned last quarter contributed to the sequential up-tick here?
Gavriel Meron: By giving a discount we contributed to up-tick? I don't ...
Anthony Petrone: No, it did not. You still had it in effect. So I'm just
wondering how you still expanded further from the second quarter.
Gavriel Meron: Yuval.
Yuval Yanai: Yes, I think the level of revenue that we get from work stations is
relatively low compared to what we get from the PillCam. So it has of
course some effect, but on that - on the average I think that the average -
compared to average sales price if we do it still is - it's not
significantly affected by that. And the discount we give are not on all
systems but only on part of them.
Anthony Petrone: OK, thank you.
Operator: And as a reminder if you'd like to ask a question, please press star
one on your phone at this time; star one for a question.
We'll take a follow-up from Ed Shenkan, with Needham & Company.
Ed Shenkan: Thanks, Gabi. As a follow-up, I think Yuval may want to answer this.
On stock option expensing is there anything you can tell us as far as
expectations for 2006? And then also the shares outstanding number, for
model purposes I want to get that right going forward. You have 27.9
million shares outstanding on a fully diluted basis this quarter, and in
the first quarter of the year when you were also profitable it was 30.1. Is
the change there just due to the change in
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share price and certain options not being in the money or is there anything
else, there that we should know about as far as modeling it going forward?
Yuval Yanai: Well, I think with regard to the number of shares, which is
affected by the share price, I think we should wait until the end of the
year, then we can see what the situation is. With regard to the effect of
the stock option plan, we are now computing that and of course it will
affect our results for next year. And we will provide those numbers when we
give guidance for next year.
Ed Shenkan: And, lastly, as far as the replacement for Nancy Sousa, can you tell
us where you stand and what type of person, you know, you're looking for.
Yuval Yanai: Where we stand is that currently I'm performing that function in
addition to what I do. That's where we're currently standing. We do of
course hope to bring someone in who can lead sales in the U.S. from 100
million to 500 million to a billion and so on. So if you know anyone like
that, you know, give me his name and number. And so we're still searching.
Ed Shenkan: OK, thank you.
Operator: And due to time constraints, we'll take our last question from David
Rothschild with Rothschild Technology Partners.
David Rothschild: Hi, gentlemen. A couple of questions. First of all, do you
guys expect gross margins to be temporarily impacted next year when you
roll out the next generation PillCam?
Yuval Yanai: First of all, the gross margin of course could be affected, but I
think that the - what we at least have in our mind or plan is the - no
significant change in manufacturing cost. And you probably understood from
our previous answers once we delivered the first capsules immediately
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we start on reducing cost. So with the increased number of - hopefully of
capsules I don't think that will have any - any negative effect on the - on
the gross margin.
Gavriel Meron: I'll just add to that there are two elements that we need to be
aware of. First of all, the volume of capsules produced has a significant
effect on the cost. And of course the volumes next year we expect to be far
higher than the volumes this year. That's number one. And number two is
that with the new capsules we are using more advanced chips. And strangely
enough the more advanced the chips the lower the cost they are.
David Rothschild: Right, right. Yes, I mean, we had a debate a few years ago
about automated versus semi-automated and I'm not going to bother you guys
with that now. What about the colon capsule, is that using the guts of the
next generation Micron engine or is that using the older current generation
engine?
Gavriel Meron: No, this is the new generation.
David Rothschild: OK.
Gavriel Meron: All new products come out with the new - the newest chips.
David Rothschild: Right. And then as far as the patency capsule goes, are you
guys buttoned up on the functionality? I know there was addressing whether
or not I believe that it could melt from both ends, to use layman's terms,
and I think that's one of the things you did to address some of the
functional issues. But do you feel like you've got the window of time for
pass or fail narrowed down adequately? So is the - is the technology done
or are you just waiting for approval or do you still have more tinkering to
do with the actual product?
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Gavriel Meron: Well, there are two elements. The basic test is actually, you
know - it is sold around the world except in the United States at the
moment, and there are - and we're seeing actually not huge sales, but we
are seeing sales on a - on a steadily growing basis for those patients that
have suspected strictures, which of course is not a very large population.
But for those patients this is very significant. Now, there's a basic level
where if you - if you swallow the patency capsule and you excrete it whole,
then there's absolutely no question in our mind - and we have - all our
experience has shown that in such a case, from our experience, I think 100
percent of the patients passed the small bowel PillCam after that without
any problem.
David Rothschild: Yes.
Gavriel Meron: So that algorithm is a very clear and very - ((inaudible)) at the
moment. The wider issue, of course, what happens if it doesn't pass or if
you don't see it pass, what type of algorithm can you offer. And this is
being clarified and of course it will be admitted to FDA as soon as we
complete the number of patients that we had said that we would do for the
FDA and submit that to the FDA.
David Rothschild: OK. I have further questions, but we'll address them off-line.
Thank you, gentlemen.
Gavriel Meron: Thank you, David.
Operator: At this time I'd like to turn the call back over to Mr. Meron for any
additional or closing remarks.
Gavriel Meron: OK, thank you all for participating in today's call. I'd like to
remind everyone that Yoram Ashery will be presenting at the CIBC Healthcare
Conference taking place tomorrow. That's in New York at 3:00 p.m. Eastern
Time.
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In closing, I'd like to thank the Given team for their ongoing dedication
and hard work, which enables us to continue to grow at such a high pace.
So, thank you all again, and goodbye.
Operator: Thank you. That does conclude today's conference. You may disconnect
at this time.
END
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