CPTS Conceptus, Inc. (MM)

Contraception device maker, Conceptus Inc. (CPTS) reported loss per share of 8 cents during the fourth quarter of fiscal 2011, worse than the Zacks Consensus EPS Estimate of loss of a cent and way below the year-ago quarter EPS of $2.66. However, the year-ago quarter included a net income tax benefit of $79.2 million. For fiscal 2011, loss per share was 25 cents compared with EPS of $2.64 in 2010.

Revenues in the reported quarter declined 8.5% year over year to $33.5 million, missing the Zacks Consensus Estimate of $34 million. The decline in revenue was primarily attributed to macroeconomic headwinds, which in turn resulted in persistent unemployment, challenging insurance trends with loss of insurance coverage and competitive market. Net sales for fiscal 2011 were $127 million, down 9.7% but in line with the Zacks Consensus Estimate and the company’s guided range of $126–$128 million.

Conceptus derives a major share of its revenues from Essure, which is a permanent birth control system. Domestic sales of Essure plunged 5.6% year over year to $27.0 million, mainly due to the prevailing macroeconomic pressure that resulted in the company’s decision of not implementing year-end sales incentives for its customers and not increasing the price of the product in January 2012. However, sales of the product increased 4.6% sequentially, reflecting successful growth initiatives including an expanded field sales presence and reduction in competitive trialing.

International sales declined 18.8% on a year-over-year basis to $6.5 million. The reduction was due to lack of orders from the company's distributors in Spain and Brazil as a result of lower demand in Spain and lack of third-party reimbursement in Brazil.

Sales of the Essure system depends on the number of physicians trained to perform the procedure. Conceptus is working to make the system available worldwide by raising consumer and physician awareness as well as imparting training to the physicians on performing the procedure.

During the reported quarter, the company expanded its physician penetration by enrolling 533 new physicians into preceptorship, certifying approximately 443 physicians and transitioning approximately 157 physicians to performing procedures in the office setting. Till date, around 14,500 physicians are fully equipped to perform the Essure procedure.

Conceptus reported gross profit of $28.0 million, down from $30.0 million in the fourth quarter of 2010. However, continued reduction in product manufacturing cost, an increase in average selling price due to channel mix and the recognition of direct sales in Holland arising from the company's acquisition of its Dutch distributor's business during the quarter led to higher gross margin (up 160 basis points to 83.5%) in the quarter.

Operating expenses increased 29.4% to $30.8 million, driven by a 39.8% surge in research and development expenses and 28.4% spike in selling, general and administrative expenses. The year-over-year increase in operating cost also reflects one-time severance costs associated with the resignation of the Company's former CEO and higher direct-to-consumer advertising and product development expenditures.

Conceptus exited fiscal 2011 with cash, cash equivalents and short-term investments of $103.4 million compared with $90.8 million at the end of December 2010. In 2011, the company generated $21.6 million in cash from operations.

Guidance

Conceptus provided its revenue guidance for fiscal 2012. For the full year, the company expects revenues in the range of $134–$138 million, well behind the Zacks Consensus Estimate of $138 million.

During the fourth 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.

Although Conceptus is increasing its sales force and undertaking several initiatives to recapture market share, the outcome remains unimpressive as the hysteroscopic sterilization market has been decelerating over three consecutive quarters. 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 #5 Rank (Strong Sell rating).

 
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