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Implantable RFID Business 'Not Self-Sustainable'

A VeriChip executive warned that the business is currently too small to be sustainable after the company reorganized last week. VeriChip now lacks revenue streams to fund its development and marketing of human-implantable RFID chips to support medical care, leading to questions about the company's very viability.
Tags: Privacy
May 20, 2008This article was originally published by RFID Update.

May 20, 2008—Human-implantable RFID microchips face an uncertain future in the wake of developments that the technology's developer, VeriChip, announced last week. The Delray Beach, Florida-based company announced it sold most of its assets to tool manufacturer Stanley Works for $45 million and that the rest of the company is for sale (see VeriChip Sells an RFID Business, More Change May Come). The remaining company essentially consists of the VeriMed Health Link business line, a patient identification service based on VeriChip's controversial, FDA-approved line of implantable RFID tags for lifetime human identification.

"That business is not self-sustainable," VeriChip vice president of corporate development Jay McKeage candidly told RFID Update. "It cannot stand on its own because of the cash burn involved in marketing to consumers."

VeriMed Health Link is a service in which patients have an RFID tag injected under their skin in the arm to provide lifetime identification. The tag is encoded with a 16-digit unique ID number, which medical professionals with VeriChip-issued readers can use to access the patient's complete medical history from a secure database. VeriChip markets the system on patient-safety benefits -- emergency room doctors or other medical staff can access a patient's medical history without relying on a patient response or an ID card. The idea is that even if a patient arrives unconscious or otherwise uncommunicative, his or her complete medical history is still accessible. The FDA approved VeriChip's human-implantable passive RFID microchips in 2004, but adoption has been limited.

While much lower-profile than the human chips, the RFID businesses that VeriChip sold to Stanley Works had in fact accounted for the vast majority of the company's revenue. VeriChip's implantable business unit generated a paltry $3,000 in revenue in the quarter that ended March 31, 2008, and produced a $1.5 million loss. Continuation of the VeriMed service likely depends on VeriChip finding a committed buyer.

In March, VeriChip announced it secured $8 million in debt financing. The company said the money would be used to repay a loan to its parent company, Digital Angel, and that the rest would finance its new business strategy through 2009. In April the company formally announced its new direct-to-consumer marketing strategy to spur VeriMed Health Link enrollment.

That strategy appears to have been abandoned, based on the fact that proceeds from the $45 million Xmark sale will not be invested into VeriMed Health Link. Instead, VeriChip announced the money will be used to retire debt, and $15 million of the remainder will be paid to shareholders as a special dividend. Another $4.5 million from the sale will be held in escrow for a year. VeriChip is required to purchase at least $875,000 worth of implantable microchips from Digital Angel this year as part of an escalating contract that runs at least through 2011.

"It appears the company had a liquidity issue in the first quarter," financial analyst Kevin Starke of CRT Capital Holdings in Stamford, Connecticut, told RFID Update. Starke specializes in analyzing distressed companies and formerly followed the RFID industry. "The money they borrowed in March appears to have been to fund operations until they could sell Xmark. Now they're left with so few assets it makes me wonder if they would continue as a public company."

VeriChip trades on the NASDAQ exchange under the symbol CHIP.

The market values VeriChip's business at approximately $0.77 per share once the share price is adjusted for the special dividend from the Xmark sale, according to Starke. "Of that, 37 cents is the company's share, so really, the market values the outstanding shares at 40 cents per share," Starke said. VeriChip shares were trading at $2.15 when he made his calculations on Monday. They have since sunk to $1.89.

VeriChip went public less than 16 months ago, opening at $6.50 per share on February 7, 2008 (see Human RFID Tag Provider VeriChip Announces IPO).

In 2007 VeriMed operations generated less than $100,000 in revenue, according to VeriChip's 10-K statement. In the document, VeriMed pins its hopes for a sustainable market on Medicare and Medicaid approving reimbursement for RFID tagging, but the federal insurers currently do not.

VeriChip never attracted the patients or revenues to match the attention it gained after announcing human-injectable RFID technology. The company has been a lightning rod for criticism by RFID opponents and privacy advocates. VeriChip cited privacy concerns and negative media coverage as risks to the business in its 2007 10-K report. It also acknowledged that people may not be willing to be implanted and that physicians may be reluctant to recommend the procedure. The document warned that the VeriMed system may not gain enough acceptance to continue as a business, an analysis that may soon prove true.
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