Since it launched its capsule endoscopy for the small intestine almost five years ago, Given Imaging Ltd. (Nasdaq: GIVN; TASE:GIVN) has enjoyed de facto market exclusivity. Its monopoly comes from the most prosaic of reasons: Given Imaging has no competitors. No other company has reached the sales stage of for a similar capsule, which is swallowed by the patient, and then sends a picture to the doctor's work station. Naturally, there are competing technologies, such as the conventional endoscope, but there is simply nothing resembling Given Imaging's technology.
Well known camera and precision instruments maker Olympus has more than announced that it was working on similar solutions. Until recently, this was a periodic threat that was usually directly correlated with Given Imaging's progress or its capital raising plans. However, the threat now seems to be more real, judging by the latest statements by Olympus managers.
The cloud over Given Imaging now has a name: OTF85. It is a capsule that recently began clinical trials in the US. At the prestigious Digestive Disease Week (DDW) 2005 conference in Chicago in mid-May, Olympus displayed its product. It is expected that Olympus will begin marketing its small intestine diagnostic capsule in Europe by the end of this year. In another year exactly, on the basis of indications provided by the company, it will launch the product in the US, when the DDW 2006 conference in held.
Olympus is not a new company like Given Imaging; it has 50 years experience making endoscopes, and its management claims that it has been working on an endoscopic capsule for 20 years. As a maker of precision instruments, Olympus's advantage, which it tries to emphasize vis-à-vis Given Imaging, is the quality of the image produced, as well as other points. Wells Fargo & Company (NYSE:WFC), for instance, notes the picture quality of the examples shown at the DDW 2005 conference, and that the resolution of Olympus's pictures is apparently better and cleaner than that achieved by Given Imaging. Wells Fargo analyst Ed Shenkan says Given Imaging's strength apparently lies in its more powerful software.
There is also a small South Korean companies casting eyes at the market: Metis Medical Systems, which told the DDW conference that it had met FDA representatives.
Will Olympus's announcement cause some doctors to wait until its product comes on the market, and defer purchases of Given Imaging's product? Are managers at Given Imaging worried by Olympus's declaration?
"I was at the DDW conference, and I wouldn’t call what Olympus said a 'declaraion'," said Given Imaging VP business development Yoram Ashery without hesitation. "There's a difference between making a public announcement and prominently displaying your product at your pavilion, and taking a few select people into a side room at the convention center. In the side room, Olympus isn’t ready to make promises. Anyone who hides his products and doesn’t want to display is probably right to do so."
"Globes": You're presumably planning to protect yourselves legally?
Ashery: "We don’t discuss such matters in the media, and I can't make any statements. I'm only prepared to say that we have a huge portfolio of patents: 300 international patent applications, of which 24 have been approved. You can assume that they're not only for decoration."
Lawyers for Given Imaging and Olympus have already tangled. In late 2003, Olympus petitioned the US Patent Office to declare parts of Given Imaging's patents invalid, because of prior publications in Japan.
Do you anticipate delays in orders, while customers wait for Olympus?
"I don’t know what the market will do, so I don’t want to speculate. We've heard from doctors that the important tool for them isn't the capsule, but the output reading station and software. They tell us that they don’t even see the capsule. The important thing is interpretation of the data, the speed of reading, and the various algorithms. The video from the capsule broadcasts for eight hours, and we have to enable doctors to read the data within 30 minutes. This means that picture quality is very nice, but there are many other important elements for the user. Some doctors may prefer to wait, while others will realize that capsule endoscopy isn’t a question of 'do I need this technology in the clinic', but 'when'. I ask, if we don’t know when Olympus will launch its product, why wait?"
Judging from Ashery's emotional reactions, Given Imaging obviously isn’t overjoyed - and it's hard to blame them - about the loss of the technology monopoly it has enjoyed in recent years, which gave it a market cap of $720 million. Meanwhile, it is working on plans to develop solutions for the entire digestive tract.
After the first endoscopic capsule for the small intestine, followed by one for esophagus, launched late last year, Given Imaging has set a timetable for launching a capsule for diagnosis of the colon. At the DDW 2005 conference, the company announced plans for clinical trials to begin in mid-2005. It will submit a file to the FDA a year later, and hopes to launch the product in 2007.
Given Imaging held a seminar for analysts in New York last week, where it supplied details about another pending event: a new pricing policy for its wireless receiver/recorder. Given Imaging's system comprises of capsules, a receiver/recorder carried by the patient, and a video transmitter and a work station for the doctor. The company announced that repeat customers, especially clinics and hospitals with more than one site, will get discounts on receivers/recorders and work stations. Receiver/recorders will cost $4,995, instead of the current $8,450. The discount on receivers will also be given to buyers of additional work stations, which will be sold for $17,500 each.
Are these market incentives prior to Olympus's entry? "No," says Ashery. "We conducted a market survey among our customers to find bottlenecks, and discovered two main ones: one is the need to sometime move work stations from place to place; and the other is that some places want more than one work station. Logistical problems, in other words. We therefore cut prices to encourage sales."
If that's the case, maybe you'll have to revise your guidance for this year? After all, sales of receivers in absolute terms will fall as a result of the measure.
"There's no effect now. It's true that we'll gain less capital per piece of equipment, but on the other hand, more capsules will be bought. In our opinion, the overall effect of the measures will boost sales. In general, our guidance is changed every day."
Published by Globes [online], Israel business news - www.globes.co.il - on May 23, 2005