Several Setbacks for Conceptus

Contraceptive device maker Conceptus (CPTS - Snapshot Report) has started off the New Year with new headwinds. Recently, the company’s request to prohibit its competitor Hologic (HOLX - Analyst Report) from selling its permanent birth control product Adiana system in the US was declined by a US District Court judge. Moreover, with such a verdict, Hologic will no longer be required to pay any royalty to Conceptus on future sales of Adiana.

Earlier in October 2011, Conceptus had received a favorable ruling in the District Court of the Northern District of California in a patent litigation case against Hologic. The jury had ruled that Hologic’s Adiana Permanent Contraception infringed two of Conceptus' patents related to the Essure procedure. As a result, Conceptus was awarded $18.8 million as compensation for damages. Later, Conceptus sought to stop Hologic from selling Adiana products in the US. The latest court ruling was in response to Conceptus’ attempt to stop Hologic from selling Adiana in the US.

Added to this setback, Conceptus recently decided to discontinue its Gynecare Thermachoice Uterine Balloon Therapy System’s promotion in the US. This decision was primarily based on the company’s intention to focus on driving sales of its key product Essure permanent birth control system. Consequently Conceptus declared a 15% drop in its US field sales organization.

All these recent hitches led to a 5% drop in the company’s share price to $11.86 on Monday.

Looking Ahead

Conceptus’ domestic top-line performance continues to remain affected by the macroeconomic factors including high unemployment rates that hampered the market for non-urgent procedures like Essure. In addition, OB/GYN office visits declined leading to soft growth in the trans-cervical sterilization market. Moreover, the lack of company resources for the re-education of existing customers on the efficacy of Essure is a matter of concern.

We are concerned about the penetration of Hologic’s 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. We also believe that the current hindrances will further deteriorate the already gloomy situation.

Presently, Conceptus retains a Zacks #5 (short-term ‘Strong Sell’ Rank) which also corresponds to our long-term ‘Underperform’ recommendation on the stock.

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