CPTS Conceptus, Inc. (MM)

Stricken by increased softness in procedure volumes, especially in the European market, combined with weaker US sales growth in November, Conceptus Inc. (CPTS) has lowered its revenue forecast for fiscal 2011. The company lowered its revenue guidance to $126–$128 million from the previous level of $132–$136 million. The current revenue forecast is well below the 2010 level of $141 million.

Further, the company decided to terminate its existing credit facility and discontinue paying commitment fees as it is not confident about meeting certain financial commitments. At the end of September 2011, cash, cash equivalents and short-term investments were $99.8 million compared with $77.8 million at the end of fiscal 2010. In the third quarter of 2011, the company generated $14.4 million in cash from operations. Additionally, it expects to use its $99.8 million cash in hand to repurchase $86.25 million of 2.25% Convertible Senior Notes (due 2027) in February 2012.

In separate news, Conceptus announced that Keith Grossman will replace Sieczkarek as the President and Chief Executive Officer of the company. Grossman previously was the managing director of private equity firm TPG.

Third quarter numbers

Revenues in the last reported quarter declined 2.4% year over year to $33.1 million. The decline was primarily attributed to macroeconomic headwinds, which in turn resulted in persistent unemployment, challenging insurance trends with loss of insurance coverage and competitive market.

Domestic sales of Essure plunged 5.5% year over year but climbed 4% sequentially to $25.8 million in the quarter. International sales rose 11.5% on a year-over-year basis to $6.6 million, mainly attributed to favorable currency exchange and higher average selling prices arising from channel mix. However, international sales declined 18.9% sequentially due to seasonality across Europe.

Looking Ahead

During the third quarter earnings call, management noted that the domestic top-line performance continued to remain affected by the macroeconomic pressures including high unemployment rates that hampered the market for non-urgent procedures like Essure.

Moreover, OB/GYN office visits declined leading to soft growth in the trans-cervical sterilization market. Moreover, Conceptus is facing severe challenges as Hologic’s (HOLX) Adiana, which is direct competitor of Essure, is being trialed by many physicians. This has become a real concern for Conceptus as it lacks the resource to re-educate existing customers on the efficacy of Essure.

We are concerned about the penetration of Adiana in the market, which has increasingly cannibalized Conceptus’ market share. Although Conceptus is increasing its sales force and undertaking several initiatives to recapture market share, the outcome remains unimpressive as growth in the hysteroscopic sterilization market has been decelerating for three consecutive quarters. This perhaps has induced the company to reduce its outlook. We also believe that the current sovereign debt crisis in some European countries along with austerity measures will further deteriorate the already gloomy situation.

Presently, Conceptus retains a short-term Zacks #3 (Hold) which also corresponds to our long-term ‘Neutral’ recommendation on the stock.

 
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