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VeriChip implants put vital data within easy reach, but the accessibility makes some privacy advocates uncomfortable.
By KRIS HUNDLEY
Published November 28, 2004
DELRAY BEACH - Scott Silverman, chief executive of Applied Digital Solutions Inc., is banking that a microchip in his upper right arm will bring the company vast riches one day.
For now, however, the implanted chip, approved in October by the Food and Drug Administration, is attracting more media queries and privacy concerns than cash. Silverman realizes it might take some time before the public comes around to his vision of a VeriChip in every arm, making personal, medical or financial information accessible with the wave of a wand.
"This is not an iPod," said Silverman, comparing the device, which is about the size of a large grain of rice, to the personal music player. "This will not happen next month, next year, or even over the next five, 15 or 20 years. But it will work into our culture and our lives. It will almost take on a life of its own."
The VeriChip is injected by syringe into an individual's triceps in a quick procedure that requires no stitches. The silicon and glass capsule contains a microchip programmed with a 16-digit ID number and an antenna. When radio waves from a scanner pass over the chip, it responds by broadcasting the ID number, which can be used to access a computerized database. No data is stored on the chip.
The company estimates the cost of implantation will be about $200 and says the device could last a lifetime.
With fewer than 1,000 people "chipped," uses have ranged from the whimsical to deadly serious. In Barcelona, Spain, club-hoppers with the chip get instant entry to a bar's VIP room and can use the same chip to put drinks on their tab. In Mexico City, VeriChip gives the attorney general and his associates access to documents on top-secret drug investigations.
Silverman thinks VeriChips could become ubiquitous for critically ill or Alzheimer's disease patients, giving emergency room personnel instant access to life-saving medical information.
Used in tandem with door-mounted scanners, implanted chips could track the whereabouts of employees in high-security facilities like nuclear power plants or military bases. They could function in lieu of a credit card, with cashiers scanning the customer along with the groceries.
The FDA's approval of VeriChip for medical recordkeeping purposes last month opens the door to its use. But the public's reluctance to have a microchip embedded in the body - what Silverman has called "the creepy factor" - means the product won't be a slam dunk.
"If you go up to people and ask them if they want to be chipped, they think you're nuts," Silverman said. "But if you tell them this chip can pull up your medical records in an emergency, the acceptance rate goes way up."
The FDA warned of potential risks with the device, including the possibility it might move around the body or be incompatible with MRIs. Silverman said he understands the FDA's need to mention potential risks in any new technology, but those concerns are unfounded.
Katherine Albrecht, founder and director of Consumers Against Supermarket Privacy Invasion and Numbering, said her group has been unable to learn what, if any testing, Applied Digital or the FDA did on the interaction between the VeriChip and MRIs. If no testing was done, the company must warn people of possible dangers, she said.
"Because the chip has a ferrous core, it could potentially act as a reverse bullet in an MRI machine," Albrecht said. "If you sign up your elderly grandmother (for a VeriChip) because you think it will keep her safe, it could cause more problems than it would solve."
While Applied Digital says the VeriChip would replace traditional medical alert bracelets, Albrecht said people might need to wear such bands, warning hospitals they have a VeriChip implanted in their body.
Privacy advocates, meanwhile, say that despite VeriChip's potentially benign uses, its widespread acceptance would signal a major turning point in society's definition of individual rights.
"These chips can have very Orwellian consequences; they can limit our autonomy in very big ways," said Robert Ellis Smith, who has been tracking privacy issues for 30 years as publisher of the Privacy Journal in Providence, R.I. "It's a huge departure from 1,000 years of history and tradition where people have the right to travel and do as they please unless they are harming someone else."
Silverman, 40, argues that personal information is safer when it is accessed through a tamper-proof VeriChip than through ID cards that can be stolen. And he said the chips are an improvement over biometric identifiers like fingerprint, retina and facial recognition because there is never a false positive.
Silverman said the individual also decides who has access to stored information, which can be updated regularly. Initially the company will maintain the database.
Dismissing privacy as a "buzz word," Silverman said it masks a different gut reaction to the VeriChip.
"It's the invasive aspect" that bothers people, he said. "It's like a medical device. But I think the utilization of the VeriChip will dictate when you decide to put it in your body."
To hear Silverman talk, the obstacles ahead of VeriChip are nothing compared to the near-death experiences Applied Digital has avoided over the past three years.
Founded in 1993 as Applied Cellular Technologies, the company binged on vaguely information technology related acquisitions in the heady days of the dot-com boom. Its stock zoomed to more than $151 a share in early 2000, then proceeded to collapse with the tech bust.
Silverman, a lawyer who sold a wireless phone company to Applied in the mid 1990s, was hired by directors as a consultant in the summer of 2001.
Although Applied Digital had revenues of more than $150-million when Silverman joined the company, it was bleeding cash from its hodgepodge of 62 companies. Within nine months of coming on as a consultant, Silverman sold or closed 27 of 34 business units. He sliced the employee head count from 1,600 to 400. Overhead expenses were reduced by $90-million.
In 2002, the Securities and Exchange Commission initiated an informal inquiry into the company that has not been officially closed.
Despite Silverman's cost-cutting, Applied Digital was pushed to the brink in March 2003 when its biggest creditor, IBM, demanded payment in full of a $100-million debt.
"We literally had prepared the bankruptcy filing," Silverman said. "Then we reached a deal."
As part of the agreement, the board ousted Applied Digital's founder and chief executive, Richard Sullivan, and put Silverman in the top post. Three months later, IBM accepted $30-million as payoff. "I think they'd probably written it off years ago," Silverman said.
Free from major debt and reduced to nine subsidiaries, Applied Digital started to focus on success rather than survival, Silverman said. Key to that success was a redirection of the company toward exploiting its intellectual property rather than competing in the crowded IT services arena.
Among its intellectual property was implantable chip technology owned by its subsidiary, Digital Angel Corp. A majority stake in the South St. Paul, Minn., company had been acquired by Applied Digital in 2000. Applied Digital now owns nearly 70 percent of Digital Angel's stock, which went public in 2002.
Digital Angel started in business about 60 years ago, making identifying ear tags for livestock. About 25 years ago, the company introduced the electronic ear tag, which allows farmers to track cattle's reproductive and eating habits. Fifteen years ago, it developed the implantable microchip and has sold about 30-million of the devices for use in livestock, pets and fish.
The VeriChip for humans, also patented by Digital Angel, is virtually the same as the animal version, though it uses a slightly different casing.
Though Digital Angel has not been profitable (it had losses of $527,000 on revenues of $11.2-million for the quarter ended Sept. 30), Silverman thinks the company will break into the black by year-end. The key, he said, will be a growing demand for microchips in livestock and pets.
(The fish business, which consists of sellin g 2-million chips a year for tracking salmon in rivers in the Pacific Northwest, will remain stable, Silverman said.)
The discovery of mad cow disease in an animal in Washington state in December has led to increased pressure on the cattle industry to track cows from birth to slaughter. Silverman said Digital Angel's tags, which have been approved for use in a similar Canadian program, would likely be a vendor in such a program.
Through a distribution agreement with Schering-Plough, Digital Angel supplies chips for pets to 90 percent of veterinary clinics in the United States. For about $50, the devices are injected into animals so the pets can be identified if lost. About 1-million pets have been chipped and more than 6,000 dogs and cats are reunited with their owners each month as a result of the technology, Silverman said.
In March, Digital Angel will introduce the next version of its chip for the pet market: a biosensor that allows a vet or pet owner to take an instant reading of Fluffy's body temperature with a handheld $99 scanner. In mid November, the company announced its first commercial order for BioThermo chips from a distributor in Japan.
David Talbot is managing partner with New York's HealthVest Advisors, which invested in Digital Angel three years ago. He thinks that while the company's human VeriChip technology is getting all the publicity, it is the animal business that will be the moneymaker in the near term. Advanced chips with biosensors will open the door to even higher margins, he said.
"Digital Angel has very strong patents on any radio frequency microchip that uses a sensor, and that's a tremendous franchise," Talbot said of the BioThermo chip. "There are a lot of hypochondriac pet owners, so fear not, plenty of people will think that's a great feature. Vets will like it, too."
Talbot said it's not hard to imagine the next step could be microchips that gauge blood glucose for the human market. But he has given up trying to project a fortune from human applications.
"I'm sure it will work its way into the human market and ultimately that could be the biggest," he said. "But it will take years to get there."
Silverman is aware of the challenges but said the company is moving forward. This month, it signed a distribution agreement for VeriChip with Henry Schein Inc., the largest distributor of health care products to doctors in their offices. Within six months he expects to donate VeriChip scanners, initially priced at $650, to about a half-dozen high-profile trauma centers. That number will increase to 200 emergency rooms by 2006.
While profits from VeriChip might be a long time coming, Silverman said his goal is to see parent Applied Digital profitable in 2005. Publicity about the chips has boosted the share price of Digital Angel and Applied Digital, which had a 1-for-10 reverse stock split in early April.
On Friday, Applied Digital closed at $5.44 a share, up 157 percent since Oct. 12, the day the FDA approved VeriChip. Digital Angel's shares are up 121 percent since then, closing Friday at $5.98.
"VeriChip is the wild card," Silverman said. "What keeps me up at night is thinking about the different turns it might take, good or bad."
Regulatory or privacy issues come to mind as the biggest possible negatives, Silverman said. To avert such concerns, the company is drafting a proactive privacy statement, though Silverman suspects federal legislation will eventually apply to the devices.
Smith, publisher of the Privacy Journal, said VeriChip technology makes it obvious that no single government agency has responsibility for safeguarding an individual's privacy.
"Logically it would be the Justice Department, but it's not equipped to handle these kinds of questions," he said. "Most countries have privacy commissions, but we don't. So decisions about VeriChip are going to be made on the basis of market factors, not social factors."
Based on the public's willingness to produce photo IDs on demand and wear employee badges at work, Smith said he wouldn't be surprised to see VeriChips gain acceptance.
"Marketing and bureaucratic decisions have great force in this society," he said. "In the past, people were all too willing to accept convenience in exchange for privacy. Since Sept. 11, 2001, they are too willing to give up privacy for perceived ideas about security."
Times researcher Kitty Bennett contributed to this report. Kris Hundley can be reached at 727 892-2996 or email@example.com
[Last modified November 28, 2004, 00:41:12]