Look to Elron to Capitalize on Given Imaging's Success

Includes: ELRN, MDT
by: Shlomo Greenberg

This week, Elron Electronic Industries (Nasdaq: ELRN) increased its holdings in Given Imaging (Nasdaq: GIVN) to more than 21% -- quite a significant share.

Increasing a stake in a company by so much is a move that shows confidence in its future, and to be honest, I am surprised that Elron hasn’t made any share acquisitions in Given Imaging before. I presume that when the matter was raised at the meeting of Elron’s board, not all the directors were in favor. After all, the decision to increase its position in Given Imaging two years ago at prices much higher than those of today cost Elron a good deal of prestige and money.

There are two approaches one can take in situations such as these. One is the belief that falls in the share price of a company such as Given Imaging represent a buying opportunity, while the other considers that an acquisition at a time like this will be viewed in future as a waste of money.

The truth is that these kinds of approaches are more appropriate for decisions on second or third investments in a start-ups, but I have no doubt that when the Elron board considered the investment there were those who felt that the millions spent on acquiring more Given Imaging stock could have been put to better use elsewhere.

I feel that Elron made the right choice in acquiring additional Given Imaging stock, because the company is now perceived by analysts and investors as a one-product company that has reached preliminary saturation.

Given Imaging rose from $8 in mid-2003 to $45 in September-October 2004, approximately a 5.6 fold increase. It rose due to its phenomenal success on the ground. Wall Street discovered that here was a company with a unique and innovative medical product that had never been tried before, and which had managed to persuade insurance companies to insure diagnostic procedures conducted with its product. The product in question is, of course, Given’s capsule endoscope. What was crucial here was not Given’s unique and innovative solution for scanning the gastrointestinal tract, but rather its success in persuading doctors and fund managers, and generating sales of $87 million within two years.

This achievement created a phenomenal reputation for the company on Wall Street, which is why the stock made its meteoric climb. Since then, however, the company slowly became an ordinary company after it failed to unveil any new products, and that was what brought the stock down. But anyone who is familiar with the medical device industry in the US is aware of two things. One is that it is very difficult to join its club of successful manufacturers. The second thing is that if you do manage to get your product on the market and make some strong sales, like Given Imaging did with its capsule endoscope, you will have created a base of customers who will tell their friends. These will be the customers for the next product, especially if it helps more than the previous one.

More than 100 million members of health schemes in the US received approval to use the capsule, a huge figure for a foreign company with a new product, especially if it happens to be a medical device. 2006 is a critical year for Given Imaging. On the one hand it can either continue to function as it has done so far, and will be perceived by investors as the “camera in a pill” company. If that’s the case, then the stock will continue to mark time.

Since the company is known to have already developed endoscope capsules for the esophagus and colon, then Given Imaging’s breakthrough is only around the corner and will happen when Wall Street feels the time is right. The company’s latest quarter shows that it is continuing to see growth in its limited traditional field, albeit not at the same rate as in the past. Elron is fully aware of developments at the Yokneam company and probably knows which stage the two other capsules have reached on Main Street. CFO Yuval Yanai was specifically quoted as saying (in a report published by “Globes” on July 31), that Given Imaging will become a three-product company in 2007; that is to say, there is a good chance that it will begin marketing its esophagus and colon capsule endoscopes.

What I think will happen is that the capsules will become available in 2007 but major sales will only come at the end of that year and, probably, in 2008. If this happens, the share acquisitions by Elron and Discount Investment Corporation will have been well timed. The replacement of the company’s management was another smart business move. “This car needs a new driver,” say the old timers, and you don’t need to look for too many reasons for Given Imaging’s decision to replace its founder and leader. I am sure that Gavriel Meron was not replaced because he was bad, just as Nachum Shamir was not appointed because he had more experience and connections.

So is this the right time to go out and buy Given Imaging shares? Maybe, but it would be definitely be worthwhile buying Elron, because Given Imaging is but one of the companies held by Elron that is currently doing well, and according to what I have discovered, all Elron’s companies are continuing to improve. Elron is the only ETF that genuinely represents the best in Israel’s economy and since the stock is trading at a price well below its basic accounting value, this has, I feel, created a buying opportunity.

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.