Conceptus Beats Estimates

Zacks

Contraception device maker Conceptus Inc. (CPTS) reported break-even EPS during the second quarter of fiscal 2012, a penny short of the year-ago quarter. However, the reported EPS surpassed the Zacks Consensus Estimate of loss of 1 cent per share.

Revenues in the reported quarter were up 5% year over year to $35.5 million, marginally ahead of the Zacks Consensus Estimate of $35 million. Sales from the domestic and international market recorded respective growth of 5.2% to $26.7 million and 4.4% (16% at constant exchange rate or CER) to $9.4 million during the quarter. International sales were significantly affected by unfavorable currency movement.

Even amid several macroeconomic headwinds in the form of persistent unemployment and limited consumer spending, the improvement in the reported quarter primarily came on the back of the recent exit of the company’s direct peer Hologic’s (HOLX) Adiana from the permanent birth control market. Moreover, the company’s gradual progress in improving commercial execution is gradually accelerating its growth.

Conceptus derives a major share of its revenues from Essure permanent birth control system. The domestic sales for Essure during the quarter were up 6.5% year over year.

Sales of the Essure system depends on the number of physicians trained to perform the procedure. Conceptus is striving towards making the system available worldwide by raising consumer and physician awareness as well as training physicians to perform the procedure.

During the reported quarter, the company expanded its U.S. physician penetration by enrolling 377 new physicians into preceptorship, certifying approximately 273 physicians and transitioning approximately 88 physicians to performing procedures in the office setting. To date, around 15,200 physicians are fully equipped to perform the Essure procedure.

Conceptus reported gross profit of $29.1 million, up 5.1% from $27.7 million in the second quarter of 2011. Gross margin during the quarter expanded 10 basis points (bps) to 82.0%.

Operating expenses increased 2.3% to $26.4 million, driven by the company's DTC advertising campaign, product development cost of the next-generation Essure device and clinical trials for the Essure Transvaginal Ultrasound confirmation study partially offset by reduced expenses attributable to lower headcount in the domestic market. However, operating margin of the company during the reported quarter expanded 187 bps to 7.53%.

The company’s bottom line was, however, affected by an income tax provision of $1.5 million on pre-tax income of $1.6 million compared to benefit of $0.17 million on pre-tax income of $0.29 million in the year-ago quarter. The significant jump in tax rate in the reported quarter was due to certain adjustments in tax deductions for equity-based compensation expense.

Conceptus exited the quarter with cash, cash equivalents and short-term investments of $60.1 million compared with $101.4 million at the end of fiscal 2011. In the second quarter, the company’s cash flow from operations was $0.7 million.

In February 2012, Conceptus redeemed its 2027 senior convertible notes for $36.6 million. In December, 2011, $50.0 million of the original 2027 notes were refinanced and are now due in 2031.

Guidance

Conceptus reiterated its revenue guidance of $140–$144 for fiscal 2012.

Our recommendation

The recent exit of Adiana from the permanent birth control market should be highly beneficial for Conceptus. Notably, on April 30, Conceptus announced the settlement of its patent infringement litigation related to Hologic's competing product Adiana permanent contraception system. As per the agreement, Hologic agreed to withdraw its Adiana system from the market.

The Supreme Court’s decision on June 28, 2012 to uphold the Patient Protection and Affordable Care Act of 2010 (“PPACA”) (also known as Obamacare) is another positive development, since it provides a huge impetus to Conceptus’ business. The company is upbeat regarding the fact that under the PPACA, the entire list of contraceptive methods approved by the U.S. Food and Drug Administration (“FDA”), including the Essure procedure, will be covered by all private insurance plans.

We believe that the Supreme Court ruling will emerge as a landmark development for women's health care. We also believe that the recent tailwinds will largely benefit Conceptus’ sales performance as it will increase access and affordability of the Essure procedure worldwide.

However, we remain concerned about the limited growth visibility arising from difficult macro-economic conditions resulting in a weak hysteroscopic sterilization market. Currently, Conceptus retains a short-term Zacks #3 Rank (Hold).

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