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Contraception device maker Conceptus Inc. reported earnings per share (EPS) of 7 cents during the third quarter of fiscal 2012, compared to net loss of 9 cents per share in the year-ago quarter. However, the reported EPS surpassed the Zacks Consensus Estimate by 2 cents.

The improvement in the company’s bottom line was primarily driven by lower income tax provision during the quarter combined with low interest and other expenses.

Revenues in the reported quarter were up 7.2% year over year (up 10.2% at constant exchange rate or CER) to $35.5 million, missing of the Zacks Consensus Estimate of $37 million. Sales from the domestic market recorded growth of 12.8% to $29.1 million. However, international sales declined 12.3% to $6.4 million due to unfavorable currency movement and macroeconomic headwinds in Europe.  

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 exit of the company’s direct peer Hologic’s (HOLX - Analyst Report) Adiana from the permanent birth control market.

During the quarter, sales coming from this former competitor’s account, increased 38% year over year, while the organic growth across all of the company’s domestic business was 11%. Moreover, Conceptus’ gradual progress in improving commercial execution is gradually accelerating its growth.

Conceptus derives a major share of its revenues from the Essure permanent birth control system. The domestic sales for Essure during the quarter were up 14.3% year over year.

Sales of the Essure system depends on the number of physicians trained to perform the procedure. Conceptus is striving toward 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 407 new physicians into preceptorship, certifying approximately 286 physicians and transitioning approximately 105 physicians to performing procedures in the office setting. Till date, around 15,600 physicians are fully equipped to perform the Essure procedure.

Conceptus reported gross profit of $30.0 million, up 9.9% from $27.3 million in the third quarter of 2011. Gross margin during the quarter expanded 200 basis points (bps) to 84.6%.

Operating expenses declined 4.1% to $24.8 million, driven by the company's lower domestic sales headcount and legal fees, partially offset by costs associated with the DTC advertising campaign, product development cost of the next-generation Essure device and clinical trials for the Essure Transvaginal Ultrasound confirmation study. As a result, operating margin during the reported quarter expanded a huge 1020 bps to 14.7%.

Conceptus exited the quarter with cash, cash equivalents and short-term investments of $65.9 million compared with $101.4 million at the end of fiscal 2011. In the third quarter, the company’s cash flow from operations was $8.7 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 exit of Adiana from the permanent birth control market should be highly beneficial for Conceptus. 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 these recent tailwinds will largely benefit the company’s 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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