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Solid 4Q for Conceptus

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Contraception device maker- Conceptus Inc. reported earnings per share (EPS) of 17 cents during the fourth quarter of fiscal 2012, compared with a net loss of 8 cents per share in the year-ago quarter. The reported EPS surpassed the Zacks Consensus Estimate by 5 cents. The improvement in the bottom line was primarily driven by low interest and other expenses during the quarter. For fiscal 2012, EPS was 16 cents compared with a net loss of 25 cents per share in 2011.

Revenues in the reported quarter recorded a robust hike of 21.5% year over year (up 23.6% at constant exchange rate or CER) to $40.7 million, beating of the Zacks Consensus Estimate of $40 million. This includes a 19.3% increase in domestic sales to $32.2 million and growth of 30.8% in international sales to $8.5 million. Net sales for fiscal 2012 were $140.7 million, up 10.8% and beating the Zacks Consensus Estimate of $140 million. Revenues remained in line with the company’s guided range of $140–$144 million.

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 a 13.5% increase in organic revenues and the exit of the company’s direct peer Hologic’s (HOLX - Free Report) Adiana from the permanent birth control market. The conversion of Adiana’s market share added 7.1% to the company’s growth in the reported quarter. Moreover, Conceptus’ gradual progress in improving commercial execution is steadily accelerating its growth rate.

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 20.6% 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 427 new physicians into preceptorship, certifying approximately 288 physicians and transitioning approximately 77 physicians to performing procedures in the office setting. To date, around 16,000 physicians are fully equipped to perform the Essure procedure.

Conceptus reported gross profit of $34.2 million, up 22.5% from $27.9 million in the fourth quarter of 2011. Gross margin during the quarter expanded 66 basis points (bps) to 84.1%.

Operating expenses declined 19.1% to $24.9 million, driven by the company's lower marketing expenditures related to the direct-to-consumer campaign, lower selling expenses associated with sales force headcount reductions and lower legal fees. As a result, operating margin during the reported quarter expanded a huge 3133 bps to 22.9%.

Conceptus exited the fiscal with cash, cash equivalents and short-term investments of $69.9 million compared with $101.4 million at the end of fiscal 2011. In the third quarter, the company’s cash flow from operations was $11.2 million.


Conceptus provided its fiscal 2013 outlook. The company expects annual revenues in the range of $155–$159 million, up 10%–13% year over year. The current Zacks Consensus Estimate of $159 million remains at the upper end of the guided range.

Our recommendation

The exit of Adiana from the permanent birth control market should be highly beneficial for Conceptus. The company is upbeat regarding the fact that under the Patient Protection and Affordable Care Act of 2010 (“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 macroeconomic conditions, resulting in a weak hysteroscopic sterilization market.

Currently, Conceptus retains a Zacks Rank #2 (Buy). Other medical stocks such as ResMed (RMD - Free Report) and Acadia Healthcare Company (ACHC - Free Report) , carry a Zacks Rank #1 (Strong Buy) and warrant a look.

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