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Conceptus Beats Earnings, Merger Announced

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Contraception device maker, Conceptus Inc. reported earnings per share (EPS) of 5 cents in the first quarter of 2013, a massive improvement from a net loss of 9 cents per share in the year-ago quarter. The reported EPS betters the Zacks Consensus Estimate of a loss of 2 cents. 

Quarter in Detail
Revenues in the reported quarter recorded a robust hike of 17.5% year over year to $34.1 million, beating the Zacks Consensus Estimate of $32 million. This includes a 21.7% jump in domestic sales to $26.5 million and growth of 5% in international sales to $7.6 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 17.6% 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 4.6% 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 22.2% 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 improved its U.S. physician penetration by enrolling 341 new physicians into preceptorship, certifying approximately 83 physicians and transitioning approximately 47 physicians for procedures performed in the office setting. To date, around 16,300 physicians are fully equipped to perform the Essure procedure.
Conceptus reported gross profit of $28.5 million, up 19.3% from the prior-year quarter. As a result, gross margin during the quarter expanded 120 basis points (bps) to 83.4%.
Operating expenses declined 11.8% to $24.4 million, driven by the company's lower marketing expenditures related to the direct-to-consumer campaign. Consequently, operating income came in at $4 million compared with $3.9 million loss incurred in the year-ago quarter. 
Conceptus exited the quarter with cash, cash equivalents and short-term investments of $87 million compared with $69.9 million at the end of 2012. 
In a separate story, Conceptus inked a definitive merger agreement with German-based Bayer HealthCare (BAYRY - Free Report) . Bayer will initiate a public tender offer to acquire all shares of the Conceptus common stock within the next ten days. 
Based on a purchase price of $31 per share, Bayer will pay $1.1 billion for the acquisition. While we await further details from Conceptus, the company pulled back its guidance for 2013 as the acquisition is expected to close by mid-2013.  
Our View
The news of the buyout sparked investor optimism as shares of Conceptus jumped 19.54% (or $5.06) on Monday, Apr 29 to reach a new 52 week high of $30.97 on the day of the announcement. However, we keep an eye on further developments as the closing price of $30.96 on Monday hovers around the purchase price of $31 per share. Thus, Conceptus' shareholders might not benefit a great deal from the buyout. 
Coming back to the quarterly results, Conceptus reported another solid quarter to surpass the Zacks Consensus Estimate. Margin expansion was another upside in the quarter. Notably, the exit of Adiana from the permanent birth control market continues to support Conceptus’ growth. However, we remain concerned about the limited growth visibility arising from difficult macroeconomic conditions, resulting in a weak hysteroscopic sterilization market.
Currently, Conceptus carries a Zacks Rank #3 (Hold). Other medical stock such as Intuitive Surgical Inc. (ISRG - Free Report) , carrying a Zacks Rank #2 (Buy) warrants a look.

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