Two cousin companies bet the fast-expanding market for animal RFID chips will extend to humans before long
Under the federally supported National Animal Identification System (NAIS), digital tags are expected to be affixed to the U.S.'s 40 million farm animals to enable regulators to track and respond quickly to disease, bioterrorism, and other calamities. Opponents have many fears about this plan, among them that it could be the forerunner of a similar system for humans. The theory, circulated in blogs, goes like this: You test it on the animals first, demonstrating the viability of the radio frequency identification devices (RFIDs) to monitor each and every animal's movements and health history from birth to death, and then move on to people.
Well, all you conspiracy buffs, let me introduce you to Kevin McGrath and Scott Silverman.
McGrath heads a small, growing company that makes RFID chips for animals…and people.
Silverman heads a second company that sells the rice-size people chips, which are the only ones with Food & Drug Administration (FDA) approval, for implantation in an individual's right biceps. They carry an identity marker that would be linked to medical records. His goal is to create "the first RFID company for people."
Human-Chip Company Plans IPO
While the NAIS remains voluntary on a federal level, and there is no formal people identification system as yet, both executives are moving aggressively to position their companies for the day when chips in animals and people are the norm rather than the exception. Mary Zanoni, a lawyer and critic of NAIS who has written extensively about the system, says that "the microchipping of livestock and pet animals is intended to make tagging more acceptable in helping these companies market their devices for people."
McGrath's company, Digital Angel (DOC), does nearly $60 million in annual sales and has sold several million chips for attachment to livestock, mostly in the U.S. and Canada.
Silverman's company, VeriChip Corp., is preparing for widespread marketing of its people chips with an initial public offering that it expects to complete within the next 60 days. It has begun building what he refers to as "the infrastructure" by signing up more than 400 hospitals to adopt system scanners and databases and about 1,200 physicians to make chips available to patients likeliest to benefit from them, such as diabetics.
While McGrath and Silverman aren't related, their companies are. Digital Angel and VeriChip have the same majority owner. Applied Digital Solutions (ADSX), the parent of seven smaller companies, owns 55% of Digital Angel and all of VeriChip.
Larger Farms Join the RFID Program
Digital Angel has a big head start in marketing, thanks in part to the Agriculture Dept.-sponsored NAIS program, which, while it is billed as voluntary, is expected by various opponents of NAIS, including Zanoni as well as blogs such as nonais.org, to be imposed on farmers by growing numbers of states. Michigan begins requiring RFID tags for cattle on Mar. 1 in the first such effort (see BusinessWeek.com, 12/19/06, "Farmers Say No to Animal Tags").
Farmers running midsize and large operations are signing up for NAIS in growing numbers. The USDA says 343,186 farms have registered, which translates into millions of animals, driven by what McGrath says are significant economic incentives.
One is inventory control. He points to a pig farm as an example. The farmer can use RFID tags "to monitor the amount fed to the sows, the medications they receive, when they get pregnant, the length of pregnancies, the number born to each sow, and the number of days to weaning."
As another example, he cites a farm with about 5,000 pigs that had an outbreak of disease, where some of the pigs got fever and several died. By being able to spot health problems earlier via scanning of RFID chips compared to "managing by clipboard," says McGrath, the cost of the disease in lost animals and treatment was about $75,000, vs. an expected $250,000 without chips.
McGrath acknowledges that Digital Angel's chips are more appropriate for factory farms than for smaller farms focused on selling locally. "If you're a farmer who sells to a neighbor, who cares" about RFID chips? "But if you are a farmer who sells to Japan, the Japanese say they want you to categorically state [the animal] is this age and has not had these diseases. If you cannot show this, the Japanese won't buy it." For those farmers who can pass the test, $25-per-head premiums await, he says.
People Tags Are More Profitable
McGrath, for now, is content to focus Digital Angel on the factory farm market, having seen sales of the animal chip rise from 200,000 in 2003 to about 3 million last year. "We believe we will continue to grow at that rate," he says. In addition, Digital Angel continues selling tags to track lost pets and to monitor fish like salmon for environmental purposes.
Silverman is taking a similar tack with VeriChip by expanding existing markets—the two primary ones are tags for the bracelets and anklets worn by newborn babies and their parents to prevent kidnappings, and those for elderly nursing home patients with Alzheimer's disease to recover "wanderers." Its 2005 revenues were $24 million.
But the big attraction for both companies, and the reason for the upcoming VeriChip public offering, is the lure of implanting the chips into people. McGrath points out that while the RFID chips attached to animals sell for about $1.50 each, and will likely decline to under $1 within a few years because of competitive pressures, the chips for people sell for $25, based on special design to allow implanting. "To the extent they [VeriChip] would need 1 million [chips], it would be huge for us," McGrath says.
For now, VeriChip has only "a couple hundred patients" who have had the RFID chips surgically implanted in their arms. The company is focusing its attention on building databases of patient medical information to attract hospitals to adopt the company's chips. The chips are being targeted at an estimated 45 million "high-risk patients"—diabetics and heart patients, for example, who could be brought into hospitals unconscious or semiconscious and thus not be able to identify themselves.
Business May Compel Chip Wearing
Of course, no discussion of these cousin companies would be complete without addressing the privacy concerns many people have about being tagged. Both McGrath and Silverman say their companies protect privacy by limiting data stored on the chips for both farm animals and people to identification numbers only, which are extracted via special scanners and then matched to records in databases.
McGrath also says he appreciates the concerns many small farmers have about the potential infringement on their privacy that NAIS represents. "You're dealing with people who are intensely independent," he says. "They don't like people looking over their shoulders."
Silverman says: "We are leaders in the RFID industry in facing privacy issues head on." The chip for people "should always be a voluntary product, with opt-in and opt-out capability."
As comforting as such statements appear, it's important to remember that adoption of the RFID chips doesn't necessarily need to be legislated to become nearly universal. If enough hospitals and insurance companies begin requiring them, or treating patients wearing them more expeditiously than nonusers, or providing discounts for usage of the chips, they well could become the norm. Then, not wearing a chip might be akin to not having a bank ATM card or, increasingly in Eastern states with toll roads and turnpikes, not having a transponder to pay tolls in your car (see BusinessWeek.com, 10/9/06, "Radio-Shipment Tracking: A Revolution Delayed").
Animal Farms Put Us on Notice
It's also important to keep in mind that the real prize for VeriChip is in assembling the databases of patient health information. The more patients in the database, the more leverage it has in the health-care marketplace. In that sense, it's in competition with retailers like Walgreens (WAG) that are collecting data via their walk-in clinics (see BusinessWeek.com, 7/17/06, "Drugstore Clinics Are Bursting with Health").
The most important opinion may be rendered by the financial marketplace, and so far, investors haven't fallen over themselves for either company. Digital Angel's stock over the past two years has declined from about $7.50 a share to the current $2.60. VeriChip's IPO has been put off several times by "market conditions," says Silverman, since it first filed in December, 2005. Since then, it has filed five amended offering statements, the most recent on Jan. 9.
It may be a while before we all begin wearing medical information chips in our arms, but the farm animals are telling us it's closer than we may have imagined.
David Gumpert provides updates on this issue at his blog, www.thecompletepatient.com.