green light to implant microchips rases share prices

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Verichip share prices hit the roof two years ago when the Food and Drug Administration gave the green light to implant microchips into humans.

Published: October 13, 2004

Applied Digital Corp



HERE'S A COMPANY that wants to get under your skin.......literally.

Shares of Applied Digital (ADSX: 2.65, 0.00, 0.0%) 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: 4.16, -0.03, -0.7%), 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: 82.34, -1.54, -1.8%) 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.)

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<TYPE>EX-99.2
<SEQUENCE>3
<FILENAME>ex99p2.txt
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Exhibit 99.2

[SEAL] DEPARTMENT OF HEALTH & HUMAN SERVICES Public Health Service

------------------------------------------------------------------------------

Food and Drug Administration
9200 Corporate Boulevard
Rockville MD 20850

OCT 12 2004

James Santelli
Vice President, Finance and Chief Financial Office
Digital Angel Corporation
490 Villaome Avenue
South Saint Paul, Minnesota 55075-2443

Re: K033440
Evaluation of Automatic Class III Designation
VeriChip(TM) Health Information Microtransponder System
Regulation Number: 21 CFR 880.6300
Classification: Class II
Product Code: NRV

Dear Mr. Santelli:

The Center for Devices and Radiological Health (CDRH) of the Food and Drug
Administration (FDA) has completed its review of your petition for
classification of the VeriChip(TM) Health Information Microtransponder
System, a prescription device, as per 21 CFR 801.109, that includes the
VeriChip(TM) Pocket Reader and the VeriChip(TM) with the insertion device.
The VeriChip(TM) Pocket Reader is indicated for use as a portable instrument
that non-invasively reads the ID number of an implantable microchip that is
inserted into the arm of the patient. When activated, the VeriChip Pocket
Reader displays a unique identification number that may be used to access
the patient's identity and authorized health information from a secure
database. The VeriChip(TM) is indicated for use as a miniature, implantable
microchip that is inserted into the subcutaneous tissue of the patient. The
VeriChip(TM) provides the patient a unique identification number that may be
used to access a database containing the patient's identity and health
information.

FDA has determined that this device, and substantially equivalent devices of
this generic type, should be classified into class II. This order,
therefore, classifies the VeriChip(TM) Health Information Microtransponder
System, and substantially equivalent devices of this generic type into class
II under the generic name, Implantable Radiofrequency Transponder System for
Patient Identification and Health Information. This order also identifies
the special control applicable to this device, entitled, "Class II Special
Controls Guidance Document: Implantable Radiofrequency Transponder System
for Patient Identification and Health Information."

FDA identifies this generic type of device as:

21 CFR 880.6300 Implantable Radiofrequency Transponder System for
Patient Identification and Health Information


Page 2 - Mr. Santelli



An implantable radiofrequency transponder system is intended to enable
access to secure patient identification and corresponding health
information. This system may include a passive implanted transponder,
inserter, and scanner. The implanted transponder is used only to store
a unique electronic identification code which is read by the scanner.
The identification code is used to access patient identity and
corresponding health information stored in a database.

In accordance with section 513(f)(1) of the Federal Food, Drug, and Cosmetic
Act (21 U.S.C. 360c(f)(1)) (the act), devices that were not in commercial
distribution prior to May 28, 1976 (the date of enactment of the Medical
Device Amendments of 1976 (the amendments)), generally referred to as
postamendments devices, are classified automatically by statute into class
III without any FDA rulemaking process. These devices remain in class III
and require premarket approval, unless and until the device is classified or
reclassified into class I or II or FDA issues an order finding the device to
be substantially equivalent, in accordance with section 513(i) of the act
(21 U.S.C. 360c(i)), to a predicate device that does not require premarket
approval. The agency determines whether new devices are substantially
equivalent to previously marketed devices by means of premarket notification
procedures in section 510(k) of the act (21 U.S.C. 360(k)) and Part 807 of
the FDA regulations (21 CFR 807).

Section 513(f)(2) of the act provides that any person who submits a
premarket notification under section 510(k) for a device may, within 30 days
after receiving an order classifying the device in class III under section
513(f)(1), request FDA to classify the device under the criteria set forth
in section 513(a)(1). FDA shall, within 60 days of receiving such a
request, classify the device. This classification shall be the initial
classification of the device type. Within 30 days after the issuance of an
order classifying the device, FDA must publish a notice in the Federal
Register classifying the device type.

On August 4, 2004, FDA filed your petition requesting classification of the
VeriChip(TM) Health Information Microtransponder System into class II. The
petition was submitted under section 513(f)(2) of the act. In accordance
with section 513(f)(1) of the act, FDA issued an order on July 22, 2004,
automatically classifying the VeriChip(TM) Health Information
Microtransponder System in class III, because it was not within a type of
device that was introduced or delivered for introduction into interstate
commerce for commercial distribution before May 28, 1976, which was
subsequently reclassified into class I or class II. In order to classify the
VeriChip(TM) Health Information Microtransponder System into class I or II,
it is necessary that the proposed class have sufficient regulatory controls
to provide reasonable assurance of the safety and effectiveness of the
device for its intended use.


Page 3 - Mr. Santelli



Based on the information submitted in the petition for the VeriChip(TM)
Health Information Microtransponder System, FDA has determined that the
VeriChip(TM) Health Information Microtransponder System can be classified in
class II with the establishment of special controls. FDA believes that class
II special controls provide reasonable assurance of the safety and
effectiveness of the device.

The potential risks to health associated with the device are: adverse tissue
reaction; migration of implanted transponder; compromised information
security; failure of implanted transponder; failure of inserter; failure of
electronic scanner; electromagnetic interference; electrical hazards;
magnetic resonance imaging incompatibility; and needle stick. The special
controls document aids in mitigating the risks by identifying performance
and safety testing, and appropriate labeling. Thus, in addition to the
general controls of the act, an Implantable Radiofrequency Transponder
System for Patient Identification and Health Information is subject to the
following special control: Class II Special Controls Guidance Document:
Implantable Radiofrequency Transponder System for Patient Identification and
Health Information.

Section 510(m) of the act provides that FDA may exempt a class II device
from the premarket notification requirements under section 510(k) of the
act, if FDA determines that premarket notification is not necessary to
provide reasonable assurance of the safety and effectiveness of the device.
FDA has determined premarket notification is not necessary to provide
reasonable assurance of the safety and effectiveness of an Implantable
Radiofrequency Transponder System for Patient Identification and Health
Information and, therefore, the device type is exempt from the premarket
notification requirements. Thus, persons who intend to market this device
type need not submit to FDA a premarket notification submission containing
information on an Implantable Radiofrequency Transponder System for Patient
Identification and Health Information, unless they exceed the limitations on
exemptions in 21 CFR 880.9 (e.g., different intended use or fundamental
scientific technology).

A notice announcing this classification order will be published in the
Federal Register. A copy of this order and supporting documentation will be
on file in the Dockets Management Branch (HFA-305), Food and Drug
Administration, 5630 Fishers Lane, Room 1061, Rockville, MD 20852 and will
be available for inspection between 9 a.m. and 4 p.m., Monday through
Friday.


Page 4 - Mr. Santelli



As a result of this order, you may immediately market this device, subject
to the general control provisions of the Act and the special controls
identified in this order. If you have any questions concerning this
classification order, please contact Gail Gantt, R.N. at (301) 594-1287.

Sincerely yours,

/s/ Donna-Bea Tillman
Donna-Bea Tillman, Ph.D
Director
Office of Device Evaluation
Center for Devices and
Radiological Health


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