March 11, 2002

Although the technology is ingenious, analysts disagree about whether Given Imaging’s camera-in-a-pill will be a moneymaker.With investors feeling gloomy and the markets still dim after the Sept. 11 attacks in the United States, it took a tiny camera inside a pill, tunnelling through the human body like an intrepid reporter, to shine some light on the trading floors.

The camera, invented by Given Imaging, based in the northern Israeli town of Yoqneam, may have opened the door to a new era of non-invasive medicine, in which doctors will virtually explore the insides of the human body instead of carving up patients with scalpels. The product, which received U.S. Food and Drug Administration approval in August, also pried open a nervous Nasdaq. Despite the company’s lack of revenues, Lehman Bros. led Given Imaging to become the first IPO in the U.S. after Sept. 11, raising $60 million at $12 per share.

Shares were trading at $11 on the Nasdaq stock market March 4. The company announced sales of $3.5 million for the fourth quarter of 2001 and $4.7 million for the full year, the first full quarter of sales for both the U.S. and European markets following FDA clearance of the device in August.

Still, turning new medical devices into commercial success stories has always been a challenging feat, and Given Imaging will be no exception.

“They must create a market, and convince both physicians and patients that the product really works,” said Kobby Finkelstein, healthcare analyst at Investec Securities in Tel Aviv. “They will also have to convincingly show that their product is at least as effective as existing treatments and can save money for insurance companies.”

But Gavriel Meron, Given’s chief executive, expresses confidence. “It’s clear to me, and I think also to investors, that this technology is unique. We are opening up a whole new market opportunity. As the company grows and achieves its targets, the value of the company will increase substantially.”

The company’s product certainly has science-fictionesque appeal. Given’s capsule swims through the small intestine for eight hours, scouting for diseases and sending wireless transmissions of 50,000 images to a receiver belt worn by the patient. When the fantastic voyage is over, a doctor uploads the images to his PC and watches a speeded-up version of the footage to make the diagnosis.

For patients, the new treatment offers hope of a painless end to the conventional diagnostic methods of endoscopy and enteroscopy, in which the bowels are probed via mouth or rectum. Given Imaging expects patients to be a driving force in market penetration. As word gets out, they hope patients will begin demanding that doctors spare them the agony of the uncomfortable conventional methods.

Investment bankers Robertson Stephens, which was involved in the IPO, agrees about the potential for patient demand. In a recent report, the firm said that Given will be able to capitalize on its “patient friendly interface” to tap into a market with enormous potential. Wade King, the group’s medical technology analyst, estimates that each year approximately one million examinations of the small intestine take place in the United States and another three million in the rest of the world. Even though Given began selling in only 2001, Robertson Stephens expects revenues to jump to $23 million in 2002 and $80.8 million the following year, as it captures 4.6 per cent of the market for small-intestine exams. The firm predicts that Given will break even in the second quarter of 2003.

Zvi Fireman, head of the gastrointestinal department at Hillel Yaffe Medical Center in the Israeli town of Hadera, confirms Robertson Stephens’s analysis. “There will be two forces promoting this product,” said Fireman, who is also on Given’s medical advisory board. “Patients will go to gastrointestinologists and ask for it. It will be the first time that the patient will press the physician to do the examinations. Second, physicians will want it because they will be able to see more diseases.” Fireman concedes, however, that most known disorders are located in the colon, or large intestine. The capsule works only in the small intestine, although the company is working on other products that may be able to film footage in the colon, esophagus and stomach.

For now, studies of the pill’s efficacy in the small intestine look promising. In one clinical trial, Given ran tests on 55 patients, who had collectively taken 340 different examinations that had failed to diagnose their problems. Once patients popped the pill, doctors were able to diagnose 62 percent of the patients. Another test, conducted by Rami Eliakim, chief of gastroenterology at Rambam Medical Center in Haifa, looked at 14 patients who were not successfully diagnosed using conventional methods. Preliminary findings showed that many were successfully diagnosed by the Given capsule.

Despite these signs of success, the medical community may not embrace the technology immediately. “They will only embrace it if the price will be lower and it will be covered by insurance,” Eliakim said. In its prospectus, Given Imaging puts the cost of the capsule at $450. Eliakim said his medical center charges $900 a pop, compared with conventional tests that cost about $150 each. Securing the support of insurance companies is key, said Yoram Ashery, vice president of business development at Given Imaging, and Given is engaged in heavy lobbying to get its pill approved by Medicare and eventually by private insurance companies in the United States.

But Ashery also believes that the capsule will gain the acceptance of the medical and insurance communities more readily that other medical technologies have in the past. First, unlike many medical technologies that require substantial re-education for doctors, the capsule requires almost no training, since it simply involves having the patient swallow a pill, followed by the doctor’s viewing of the video. “Looking at images is what gastroenterologists do anyway,” Ashery said. “The only new thing here is that they will be looking at images of parts of the body they have not seen before.”

Furthermore, Ashery said, doctors will jump at the opportunity to explore uncharted intestinal territory. “We believe doctors will make more money from this,” he said. “If you provide the doctor with better diagnostic tools, he can discover more pathologies and better ways to treat it.” And finally, for insurance companies, Ashery said, the prospect of eliminating many costly and inconclusive tests with a single, decisive examination will be the most compelling reason to offer coverage.

But, the past shows that, even if Given Imaging proves its technology is solid and perhaps revolutionary, new treatments and technologies rarely deliver on promises of dramatic cost-savings. Peter Crowley, managing director of the healthcare group at CIBC World Markets, said that any number of times minimally invasive treatments that were at first expected to make a dramatic impact on the bottom lines of insurance companies ultimately failed to deliver financially. “People thought that if we can introduce these minimally invasive surgical techniques, it would significantly shorten hospital stays, significantly improve morbidity or patient outcome and thereby significantly reduce costs,” he said. “What happened instead is a lot more people were willing to undergo the procedures, so you didn’t really save a lot of money.”

If, for example, Given’s pill catches on, it is likely that more patients will want to take precautionary diagnostic tests at younger ages. “Minimally invasive technologies sound terrific – and they are – but it has not yet been a huge money saver for the system,” Crowley said.

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Jason Harris

Jason Harris

Executive Director

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