Thursday, October 14, 2004

A Company That Wants Under Your Skin - Literally

One-Day Wonder
Fantastic Voyage
By Lawrence Carrel Published: October 13, 2004

HERE'S A COMPANY that wants to get under your skin — literally.
Shares of Applied Digital (ADSX) surged 68% to $3.57 Wednesday after the Delray Beach, Fla., company received the go-ahead from the Food and Drug Administration to implant microchips into humans for medical use. Known as a VeriChip, the radio-frequency identification, or RFID, device is being codeveloped with Digital Angel (DOC), Applied Digital's publicly traded subsidiary. Digital Angel, based in South St. Paul, Minn., saw its stock climb 29% to $3.49.
"This is a big deal," says Kevin Dede, an analyst at Merriman Curhan Ford. "The major hurdle to overcome is the whole George Orwell '1984' thing, that fear that Big Brother is watching you."
About the size of a grain of rice, a VeriChip can be implanted under the skin, usually on the upper-arm between the elbow and the shoulder. Once inserted there in a brief outpatient procedure involving local anesthetic, the microchip isn't visible to the naked eye. The unique 16-digit verification number transmitted by a VeriChip's radio-frequency signal can only be picked up by a proprietary scanner.
While the technology has a number of potential applications, from security to financial, the FDA's decision only applies to medical uses. In theory, doctors treating a patient implanted with the chip could with the wave of a scanner gain access to a person's medical history, including blood type, drug allergies and pre-existing conditions. That could prove useful in emergency-room situations, in particular, when a patient isn't responsive. The information isn't stored on the chip itself; rather, the verification number on the chip is linked to a database that's accessed via encrypted Internet access.
Though on the surface the idea borders on the realm of fantasy, practical applications have already been found for the chips. Digital Angel, which is 70% owned by Applied Digital, currently uses the technology to track pets and livestock. Applied Digital licenses the technology from Digital Angel. In its written release announcing FDA approval, Applied Digital didn't specify when or how the VeriChip would gain widespread acceptance among the medical community. Company officials couldn't be reached immediately for comment.
Now 16 years old, Applied Digital began as a computer distributor. By 1993, it was specializing in mobile-communication and data collection using wireless computers. The company went public in 1994, and a year later it began an acquisition spree that pulled in an eclectic mix of nearly 100 companies in fields as diverse as computer-aided design, retailing applications and satellite subsystems. It bought Destron Fearing, which had developed an animal-tracking chip, in 2000. Applied combined Destron Fearing with its digital mini-transceiver technology operations to form the subsidiary Digital Angel.
Privacy concerns dogged Applied Digital when it unveiled a chip prototype four years ago. Civil libertarians and others worried the chips could be used to track individuals. At that time the company promised only to use the chips externally and projected a market potential of $70 billion. So far the rosy outlook hasn't panned out. Applied Digital had a net loss of $3.0 million on sales of $26.3 million for its second quarter.
Facing financial pressure to pay back the $100 million it owed to IBM (IBM) after the chip failed to catch on in 2000, Applied Digital changed chief executives, restructured debt agreements and began selling off assets to raise cash. IBM eventually settled for a $30 payment, and forgave the other $70 million. Applied Digital ultimately narrowed its focus to three divisions: Advanced Technologies, which includes VeriChip; Digital Angel, which was spun off in 2002; and InfoTech USA, which generates most of Applied Digital's revenue. InfoTech installs, maintains and services telecommunication facilities and equipment.
In a sign of acceptance, at least in animals, Digital Angel last month said it planned to sell its tracking chips to the Canadian government, which is funding a national cattle-identification drive in response to a case of mad-cow disease that turned up last year.
"The potential market size for the VeriChip is substantial," says Merriman's Dede. "The idea is insurance companies might want this type of identification with transplant patients or new-joint recipients, essentially anyone constantly in and out of hospitals — especially if that person is allergic to standard medications. The profitability potential is immense. But obviously it's a matter of volume." (Dede, who thinks there's potential for the VeriChip to replace traditional military dog tags, doesn't own shares of Applied Digital or Digital Angel; Merriman Curhan Ford doesn't have an investment-banking relationship with either company.)