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CPTS > SEC Filings for CPTS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CONCEPTUS INC

Form 10-Q for CONCEPTUS INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto. This discussion contains forward-looking statements, including references to increased product adoption, product improvements, labeling changes, impact to our business from the Patient Protection and Affordable Care Act of 2010 ("ACA"), and other forecasted items that involve risks and uncertainties such as our limited operating and sales history; the uncertainty of market acceptance of our current and next generation products; dependence on obtaining and maintaining reimbursement from domestic and foreign governments; effectiveness and safety of our product over the long term; our ability to obtain and maintain the necessary governmental clearances or approvals to market our product; our ability to develop and maintain proprietary aspects of our technology; our ability to manage our expansion; our limited history of manufacturing our product; our dependence on single source suppliers, third party manufacturers and co-marketers; intense competition in the medical device industry and in the contraception market; the inherent risk of exposure to product liability claims and product recalls; litigation risks and other factors referenced in this Form 10-Q. Our actual results could differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission ("SEC") on March 15, 2012, and our subsequent Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012, and those included elsewhere in this Form 10-Q.

Overview

We are the leader in the development of innovative device-based solutions in permanent birth control. We manufacture and market our proprietary Essure® permanent birth control system, which is the most effective non-surgical permanent birth control available based on a comparison of five-year clinical trial data. The Essure procedure delivers a soft and flexible insert into a woman's fallopian tubes, causing a benign tissue in-growth which blocks the fallopian tubes. Successfully placed Essure inserts and the subsequent tissue growth around and through the inserts prohibits the egg from traveling through the fallopian tube, preventing conception. The effectiveness rate of the Essure system as determined in our clinical study is 99.83% after five years of follow-up. We obtained approval to market the Essure system in the European Union in February 2001 and obtained the U.S. Food and Drug Administration ("FDA"), approval for the Essure system in November 2002. Approximately 690,000 women worldwide have undergone the Essure procedure.

We sell the Essure system directly in France through our wholly owned subsidiary, Conceptus SAS ("SAS"), in the United Kingdom through our wholly owned subsidiary Conceptus Medical Limited ("CML"), and in the Netherlands through our wholly owned subsidiary Conceptus B.V. ("BV"). In the rest of the world, we sell indirectly through a network of distributors.

We operate in one business segment. Net sales information based on segments and geographic regions is provided in Note 13 - Segment Information in the Notes to Condensed Consolidated Financial Statements.

We were incorporated in the state of Delaware on September 18, 1992. We maintain three websites located at www.conceptus.com, www.essuremd.com and www.essure.com. We make available free of charge on or through our www.conceptus.com website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file or furnish such material to the SEC.


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The Essure System

The Essure system is designed to be placed into each fallopian tube during a single procedure using a hysteroscope, an instrument that allows visual examination of the cervix and uterine cavity, and our minimally invasive delivery system. The delivery system consists of a disposable plastic handle connected to our proprietary guidewire and catheter system. The insert is constructed of a stainless steel inner coil, a dynamic outer coil made from a nickel titanium alloy called Nitinol, which is commonly used in many medical devices and permanent implants, and a layer of polyethylene terephthalate, or polyester fibers, wound between the inner coils. Using the hysteroscope for guidance, the delivery catheter is guided through the uterus and into the opening of the fallopian tube. Once the physician has properly positioned the delivery system in the fallopian tube, the physician releases the insert. When released, the insert automatically expands to the contours of the fallopian tube and anchors itself in place. During a three-month period, the polyester fibers within the insert elicit a localized, benign tissue in-growth that occludes, or blocks, the fallopian tubes, thereby preventing conception.

Currently, local anesthesia is used as the predominant method of controlling discomfort during the Essure procedure. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician. There is a three-month waiting period after the Essure procedure is completed, during which time the patient must continue to use an alternative form of birth control while tissue in-growth occurs. After three months, U.S. patients complete a confirmation test called a hysterosalpingogram, ("HSG"), which provides confirmation to the doctor and the patient of both the placement of the inserts and the occlusion of the fallopian tubes. Outside of the United States, the confirmation test entails a standard flat plate pelvic X-ray or transvaginal ultrasound ("TVU") conducted three months after completion of the procedure, with a subsequent HSG if proper device location has not been confirmed.

The Essure System Benefits

With 99.83% effectiveness based on five years of follow up, the Essure system is the most effective form of permanent contraception on the market, based on a comparison of five-year clinical trial data. We developed the Essure system in response to the market need for a less invasive and more cost effective permanent birth control solution for women who are done having children. The Essure procedure is typically performed in a physician office setting without general anesthesia and women typically can return to their daily activities within one day. Tubal ligation, which is a more traditional female permanent birth control procedure, is done in a hospital or ambulatory surgery setting and entails general anesthesia and requires additional recovery time. Benefits of the Essure system compared to tubal ligation procedures and other birth control methods are highlighted below.

Benefits for the patients:

• Proven five-year effectiveness rate of 99.83%;

• Procedure performed in the comfort of the doctor's office in less than 10 minutes (average hysteroscopic time);

• No risks associated with incisions or general anesthesia (common in tubal ligation procedures);

• No hormones;

• Short recovery time - most women are discharged within 45 minutes and return to normal activities within 24 hours or less;

• Confirmation - three months after the Essure procedure, a doctor is able to perform an Essure Confirmation Test to confirm that the inserts are properly placed and the fallopian tubes are fully blocked, permitting the patient to rely on the Essure system for permanent birth control; and

• Convenience - no recurring management of contraception usage after the Essure Confirmation Test.

Benefits to the physician and healthcare system:

• More efficient and productive solution resulting in cost and time savings by eliminating overhead, and reducing or eliminating certain indirect and procedural costs such as anesthesia, post-operative care and hospital stays associated with tubal ligations;

• Ability to visually confirm proper placement of radiopaque inserts during the procedure;

• Short procedure time and relative ease of performing the procedure;

• Elimination of risk associated with incisions, general anesthesia, and adverse events associated with tubal ligation including thermal injuries and bowel injuries; and

• Less resource-intensive environment - while the Essure procedure may be performed in various settings including the physician's office, hospital operating room and an ambulatory surgery center, the majority of Essure procedures take place in physicians' offices.


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Benefits to the payers:

• Lower cost procedure compared to tubal ligation due to reduced use of general or regional anesthesia and reduced number of post-operative hospital stays;

• Elimination of certain costs - no operating room expenses because the procedure can be performed in the physician's office;

• Cost savings resulting from the potential reduction of unplanned pregnancies; and

• Most effective form of permanent birth control available, based on comparison of five-year clinical study data.

Physician Penetration

We require physicians to be preceptored for three to five cases by a certified trainer before being able to perform the procedure independently. We continue to see an increase in the number of trained physicians or those who are in the process of training to perform the Essure procedure. The level of sales for the Essure system is related to the number of physicians trained to perform the procedure. However, we understand that a strong base of trained physicians does not necessarily correlate to a proportional increase in revenue. Furthermore, there are no revenues associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship. In addition to training new physicians, we also focus on increasing Essure system utilization by those physicians who are already trained to perform the procedure.

New Indications and Product Updates

In 2011, the FDA approved the removal of the nickel hypersensitivity contraindication from the Essure system Instructions For Use ("IFU"). The FDA decision was supported by nearly a decade of commercial use and data gathered from the Essure clinical trials that demonstrate no causal relationship between dermal nickel sensitivity and the Essure system. The IFU label change expands the number of potential patients, as women with a known hypersensitivity to nickel as confirmed by a skin test may now be candidates for the Essure procedure.

In January 2012, we initiated the Essure TVU confirmation study. We believe that the 600-patient study will provide data to support a labeling change in the United States. This study is designed to evaluate TVU as a first-line confirmation test to verify proper placement of Essure inserts three months following the Essure procedure. TVU advantages for patients include the ability to return to the familiar setting of the physician's clinic and avoid ionizing radiation associated with X-rays. TVU advantages for physicians include more control over the entire Essure procedure and improved patient compliance with the confirmation process. TVU is already approved as a first-line confirmation test outside of the United States.

In February 2012, we announced that the FDA had approved labeling changes pertaining to the use of bipolar radio frequency NovaSure® Impedance Controlled Endometrial Ablation System following the placement of Essure system and a successful Essure Confirmation Test. NovaSure is a global endometrial ablation ("GEA") technology that treats menorrhagia, abnormally heavy menstrual bleeding. The expanded label change followed our reaching an agreement with the FDA on a post-approval study protocol, and enabled us to expand our U.S. IFU label. The Essure system is now approved to be safe and compatible with all the major GEA technology options including NovaSure, GYNECARE THERMACHOICE® Uterine Balloon Therapy System and Hydro ThermAblator® System. Because pregnancy following a GEA procedure can be dangerous to mother and fetus, effective birth control is vital and many patients are advised to consider permanent birth control, such as Essure.

In April 2012, the FDA approved the inclusion of 10 years of data on Essure effectiveness in commercial settings in the Essure system U.S. IFU and Patient Information Booklet ("PIB"). The FDA also approved inclusion of the full five-year clinical study results and effectiveness data in the IFU and PIB, which brought to a close the Essure clinical trials that began in 1998. The Essure system has maintained zero pregnancies among clinical trial subjects over five years. During the more than 10-year period in which Essure has been available commercially worldwide, we have collected records of all reported pregnancies from commercial use of the Essure system and their causes. Based on these reports, the Essure system's 10-year commercial pregnancy experience tracks closely with its five-year clinical rate of 99.83%.

In July 2012, we announced that we have begun a 60-patient clinical trial with our next-generation Essure system. The new Essure system is designed to offer immediate, permanent contraception without a three-month waiting period or 90-day confirmation test. In most cases, a TVU will confirm placement immediately following the new Essure procedure and may be performed in the physician's office. A satisfactory confirmation of proper placement will provide the patient the ability to rely upon Essure for immediate permanent contraception without the need for a secondary method of contraception for the first three months of wear. The clinical trial will evaluate the safety of the next-generation Essure system placement procedure and the three-month effectiveness of the new contraception technology. Data from the clinical trial will be used to initiate the IDE and CE Mark studies in 2013 for U.S. PMA supplement and CE Mark applications.


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Reimbursement of the Essure System

Market acceptance of the Essure system depends in part upon the availability of reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to continue to obtain reimbursement. In the United States, as of September 30, 2012, we have received positive coverage decisions for the Essure system from most private insurers and from all of the 51 Medicaid programs and favorable Medicaid office reimbursement (defined as $1,700 or more) in 36 states. We continue to receive positive responses relating to reimbursement, which we believe will help increase the adoption of the Essure system by doctors and patients. We intend to continue our effort to educate payers of the cost-effectiveness of our product and to establish further programs to help physicians to navigate reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individual's specific benefit plan.

Effective March 1, 2012, national average payment for hysteroscopic sterilization per the Centers for Medicare and Medicaid Service's ("CMS") Medicare Physician Fee Schedule is $444 when performed in a hospital (facility) and $1,935 when performed in a physician's office (non-facility). The Current Procedural Terminology ("CPT") code for hysteroscopic sterilization is 58565. The 2012 Medicare national average payment for hospital outpatient reimbursement amounts for CPT 58565 will be $3,220, which also includes the cost of the implant. In 2012, the Medicare national average payment for CPT 58565 in the ambulatory surgery center will be $1,808, which also includes the cost of the implant.

On June 28, 2012, the U.S. Supreme Court upheld the majority of the Patient Protection and Affordable Care Act of 2010 ("ACA"), including the preventive health services provisions. As a result, all FDA approved contraceptive methods, including permanent birth control such as the Essure system, must be made available without cost to women under all private insurance plans. Under the ACA, private health plans are required to begin covering contraceptive services in new plan years starting on or after August 1, 2012. Currently, most insurance plans already cover the Essure system with a reasonable co-pay, subject to annual deductible requirements. While we cannot yet predict how our business will be impacted by the ACA, we believe it will benefit our patients and our business in the long term.

Reimbursement systems vary significantly by country and sometimes by region, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems.

In Europe, we are implementing a strategic plan to obtain or maintain reimbursement in a number of European countries. In France, we have official reimbursement with recommendation from Haute Autorité de Santé for the Essure system. Effective October 1, 2010, the Ministry of Health in France issued controls for reimbursement on hysteroscopic sterilization. These controls changed reimbursement to permit coverage only for women 40 and over, which has negatively impacted our business in France. We are currently advancing all of our options to reinstate Essure reimbursement for women under age 40. While we are optimistic that a policy reversal will occur by the end of 2012, we are unable to predict this outcome with any certainty.

During 2009, we received a positive review from the National Institute for Health and Clinical Excellence in the United Kingdom recognizing the efficacy and safety of the Essure system. In addition we have been working closely with the Department of Health ("DOH") to appropriately fund the adoption of hysteroscopic sterilization. Through these efforts, in February 2012, the DOH selected the Essure system as one of the innovative technologies that qualifies for the "Payment by Results" program. This represents a significant increase in reimbursement for the Essure system / hysteroscopic sterilization, raising the rate from approximately £274 per procedure in 2011 to a new reimbursement rate of £1,137. This new reimbursement rate took effect on April 1 2012.

Our Market

Birth control use in the United States is prevalent among a majority of women of reproductive age, defined as 15-44 years of age. The National Survey of Family Growth ("NSFG"), is a periodic survey that provides statistics on reproductive health in the United States and is conducted by the Centers for Disease Control and Prevention, National Center for Health Statistics. In 2012, NSFG published its most recent study entitled "Current Contraceptive Use in the United States, 2006-2010, and Changes in Patterns of Use Since 1995," which includes new data for 2006-2010. According to the NSFG, during the period 2006-2010, of the 61.8 million women of reproductive age in the United States, 38.4 million used some form of birth control.

The 2006-2010 NSFG estimated that of the 38.4 million U.S. women of reproductive age who use some form of birth control, 14.0 million or 36% relied on a sterilization method for birth control, including tubal ligation, vasectomy and hysteroscopic sterilization, making permanent birth control the most common method of contraception in the United States. According to the 2006-2010 NSFG, approximately 91% of women in the United States who have chosen female sterilization, which includes tubal ligation and hysteroscopic sterilization, have birthed two or more children.


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The 2006-2010 NSFG further estimated that approximately 24.4 million women in the United States use temporary methods of birth control, such as oral contraceptives, condoms, implants and injectables. Of those women, 43% chose oral contraceptives, 26% chose the male condom and 9% chose the Intrauterine Device ("IUD"). Of the 24.4 million women who use temporary methods of birth control, 9.0 million women state that they do not intend to have more children. We believe that by making these 9.0 million women aware of the benefits of a minimally invasive procedure, they will consider the Essure system in their continuum of family planning and opt for permanent birth control, rather than their current temporary method. This is our target market and we believe it is from this population that the incidence of sterilization procedures occurs.

Based on third party data and our estimates of the incidence of sterilization procedures, we believe there were approximately 600,000 tubal ligations and hysteroscopic sterilization procedures performed in the United States in 2011. According to the same source, among the women in the United States who chose female sterilization in 2011, approximately 89% were between the ages of 30 and 44.

Worldwide, there is a large market for permanent birth control. According to the United Nations World Contraceptive Use 2011, a report on birth control methods used by reproductive couples worldwide, 63% of women aged 15-49 years were using some form of contraception. The report indicated that female sterilization, including tubal ligation, is the leading birth control method worldwide and was used by 19% of those women, followed by IUDs at 14% and oral contraceptives at 9%.

Health Care Reform

On March 23, 2010 the Patient Protection and Affordable Care Act was signed into law. Among other things, the ACA requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of certain medical devices beginning in January 2013. This legislation will have a significant impact on our business. We continue to prepare for the implementation of this tax and to evaluate its potential impact on our business in light of several uncertainties regarding its application. As we further prepare for implementation and as the taxing authorities clarify aspects of the application of the tax relevant to us, we will be in a better position to ascertain its impact on our business. This tax will be material to our financial results; however, we are still evaluating the impact.

Results of Operations - Three and Nine Months Ended September 30, 2012 and 2011

                       (in thousands, except percentages)



                                                Three Months Ended September 30,                                  Nine Months Ended September 30,
                                                                                        2012-                                                             2012-
                                           2012                      2011               2011                2012                       2011               2011
                                                                                          %                                                                 %
                                    Amount       % (a)        Amount       % (a)       Change        Amount        % (a)        Amount       % (a)       Change
Net sales                          $ 35,475         100 %    $ 33,093         100 %          7 %    $ 100,001         100 %    $ 93,468         100 %          7 %
Gross profit                         30,016          85 %      27,345          83 %         10 %       82,975          83 %      76,405          82 %          9 %
Research and development
expenses                              2,370           7 %       2,144           6 %         11 %        7,058           7 %       5,574           6 %         27 %
Selling, general and
administrative expenses              22,447          63 %      23,723          72 %         -5 %       71,915          72 %      71,122          76 %          1 %
Total interest and other income

(expense), net (1,017 ) 3 % (1,660 ) 5 % -39 % (3,531 ) 4 % (4,833 ) 5 % -27 % Net income (loss) 2,284 6 % (2,902 ) 9 % -179 % (493 ) 0 % (5,375 ) 6 % -91 %

(a) Expressed as a percentage of total net sales.

Net Sales

Net sales were $35.5 million for the three months ended September 30, 2012 as compared to $33.1 million for the three months ended September 30, 2011, representing an increase of approximately $2.4 million, or 7%. Net sales were $100.0 million for the nine months ended September 30, 2012 as compared to $93.5 million for the nine months ended September 30, 2011, representing an increase of approximately $6.5 million, or 7%. Domestic sales comprised 82% and 76% of our total sales in the three and nine months ended September 30, 2012 and 78% and 74% of our total sales in the three and nine months ended September 30, 2011, respectively. Revenue from domestic sales increased 13% in the three months ended September 30, 2012 as compared to domestic sales during the three months ended September 30, 2011 and increased 11% in the nine months ended September 30, 2012 as compared to the domestic sales during the nine months ended September 30, 2011. These increases are attributable to increased procedure volume, in line with stabilization in the number of OB/GYN physician office visits, increased domestic average selling prices and our sales force optimization, which refocused the organization and improved commercial execution during 2012.

International sales comprised 18% and 24% of our total sales in the three and nine months ended September 30, 2012 and 22% and 26% of our total sales in three and nine months ended September 30, 2011, respectively. The decrease was mainly attributable to the impact of unfavorable currency conversion as well as a lower volume of sales to our distributor in Spain.


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Net sales by geographic region, based on the shipping location of our customer, are as follows (in thousands, except percentages):

                                      Three Months Ended September 30,               Nine Months Ended September 30,
                                        2012                    2011                   2012                    2011
Net sales                          $        35,475         $        33,093       $        100,001         $       93,468
United States of America                        82 %                    78 %                   76 %                   74 %
France                                          10 %                    13 %                   14 %                   16 %
Rest of Europe                                   7 %                     8 %                    8 %                    9 %
Other                                            1 %                     1 %                    2 %                    1 %

No customer accounted for more than 10% of total revenue for the three or nine months ended September 30, 2012 and 2011. No customer accounted for more than 10% of total gross accounts receivable at September 30, 2012 and December 31, 2011.

Gross Profit

Cost of goods sold for the three months ended September 30, 2012 was $5.5 . . .

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