Q2 2005 Given Imaging Ltd. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

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 on-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 of 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 20F 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, sir.

GAVRIEL MERON, PRESIDENT AND CEO, GIVEN IMAGING, LTD.: Thank you. Good morning everyone and thanks for joining me for our second quarter 2005 call. In the second quarter our worldwide sales reached 20.5 million or 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 then an adjustment of 0.6 million in the valuation allowance to 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 powers 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. PillCam's small bowel reorders in the quarter grew 52% compared to the comparable period last year. The sequential growth in revenue of excluding the promo on special revenue in Q1 that amounted to 3.8 million was 13%. Total revenue in the six-month period grew 51% compared to the comparable period last year.

Our 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%. Our installed base worldwide has reached 2,600 with 1,540 of those in the United States. Reimbursed live coverage has reached 340 million worldwide of which 180 million have coverage for expanded indication. Digestive Disease Week was a huge success and we received significant exposure with both the PillCam ESO booth manned by Inscope [ph] in addition to our large booth and the repeated presentation of the ICC Consensus for clinical use of PillCams.

We have hired a new Chief Financial Officer, Yuval Yanai, who will be joining us very soon. Yuval is a seasoned executive with many whose experience as a CFO view at traded public companies with operational experience in a medical device company so he provides us with the necessary financial strength in the management team. Following Nancy's resignation I have taken entire 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 expectations was due primarily to the slow finish in both system and PillCam sales during the quarter in the United States. Sales outside of the United States were ahead of our expectations, specifically with stronger than anticipated PillCam small bowel sales in Italy, France, in the UK, in Australia and in China. In the second quarter utilization of PillCam small bowel 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're seeing more and more accounts performing capsule endoscopy as part of their practice and less cross retrials of gastroenterologists as the technology pervades into the mainstream majority market. We're focused on deepening our hold in these accounts by heightening awareness of the benefit 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've seen average PillCam small bowel 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 capsule 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 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've decided upon together. 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 would expect that the endoscope practice would provide more leads for our reregistered roles 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 adequately sell the platform and be able to talk both small bowel and ESO to fully present the value of the platforms to all of our customers and prospects.

Reorders of PillCam ESO are linked closely to reimbursements 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 the DR2 and Rapid 3 and have purchased ten packs of ESO. Many of them have used six to eight of the initial ten-pack 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 their use and reorder PillCam ESO. 600 accounts ordering one ten-pack adds 2.7 million to revenue. We believe that ESO represents a …