Conceptus' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: Conceptus, Inc. (CPTS)

Conceptus, Inc. (CPTS) Q4 2012 Earnings Conference Call February 5, 2013 4:30 PM ET

Executives

D. Keith Grossman – President & CEO

Gregory E. Lichtwardt – CFO & Treasurer

Analysts

Thomas Gunderson – Piper Jaffray

Jonathan Block – Stifel Nicolaus

Matt Dolan – Roth Capital Partners

Jeremy Feffer – Cantor Fitzgerald

Matt Hewitt – Craig-Hallum Capital Group LLC

Michael Rich – Raymond James

Chris Cooley – Stephens

Tony Barch – Park West

Mark Landy – Summer Street Research Partners

Operator

Good day ladies and gentlemen and welcome to the Conceptus 2012 Fourth Quarter Financial Results Conference Call. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Greg Lichtwardt, Chief Financial Officer. Sir you may begin.

Gregory Lichtwardt

Thank you, operator and good afternoon everyone. This is Greg Lichtwardt Chief Financial Officer for Conceptus. Thank you for joining us this afternoon for a discussion of the company’s financial results for the fourth quarter and the year-end 2012 and the financial guidance for 2013 as announced today. Today’s press release is available on the company’s website at www.conceptus.com. Joining me no our call today will be Keith Grossman, President and Chief Executive Officer.

We will begin with prepared remarks and then open the call to your questions. To accommodate as many questionnaires as possible and the time we have allotted for today’s call, we ask that you limit your questions to one plus one follow-up before rejoining the queue.

As we begin, I would like to caution everyone that comments made my management on this call will contain forward-looking statements regarding the operations and future results of Conceptus that involve risks and uncertainties. I encourage you to review the Company’s filings with the Securities and Exchange Commission, including, without limitation, the Company’s Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

These factors include changes and strategic planning decisions by management, reallocation of internal resources, changes in the impact of domestic and global macroeconomic pressures, reimbursement decisions by insurance companies and domestic and foreign governments, scientific advances by third parties, risk, limitations and attempts to amend or appeal all are part of the Patient Protection Affordable Care Act of 2010 as amended among others.

Importantly, this conference call contains time sensitive information that is accurate only as of the date of the live call, today, February 5, 2013. Conceptus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

I will now turn the call over to Keith Grossman. Keith?

Keith Grossman

Thanks, Greg, and good afternoon everyone. On today’s call I’ll provide a review of our business including an overview of our fourth quarter performance and what we believe are strong trends and tailwinds behind our business. Greg, will then provide more details on our financial results for 2012 as well as financial guidance for 2013 and I’ll then wrap up with more detail about our commercial value drivers and strategy and initiatives to maintain and improve growth.

After our prepared remarks, we’ll then take your questions.

Overall, we’re very excited about the fourth quarter and the momentum we carry into 2013. We continue to execute on our plan to reestablish meaningful growth as measured by our record sales results and the 23.6% worldwide assured growth rate on a constant currency basis.

In the U.S., our fourth quarter sales result of $32.2 million was also a record one for the company and represented a healthy assured growth rate of 20.6% compared to prior year. This was driven by a combination of strong underlying growth and demand as we approximate organic growth of 13.5% as well as the conversion of Adiana market share which added another 7.1% to our growth in the quarter.

At the beginning of 2012, we told you we would not only begin to reenergize robust and sustainable top line growth, but also begin to show some real operating leverage as well. We also indicated them that our earnings productivity would grow over the course of the year.

For the fourth quarter, our adjusted EBITDA increased 371% and for the full year it increased 100%. We believe we can continue to show increasing drop through particularly in 2013 and we reflected as much in our guidance.

From the standpoint of the overall market backdrop, the patient visits to U.S. OB/GYNs for several quarters now have been ranging from $22 million to $23 million and the fourth quarter was no exception at around $22.7 million. Although this is the highest value within the past four quarters. Although this metric is not necessarily directly related to our current sales performance, we do believe a place some roll over time as a leading directional indicator of overall patient demand.

Within the U.S. permanent birth control market, our data shows that we are continuing to move the market share needle. As we previously reported, IMS data shows that there were approximately 605,000 U.S. female permanent birth control procedures in 2011. IMS data through November suggests that 2012 overall market will be about 2.5% lower at roughly 590,000 procedures, as the majority of which, the majority of that decline rather, can be attributable to the removal of Adiana from the market.

We estimate that our share of the total U.S. female permanent birth control in the fourth quarter was 15.1%, up 250 basis points year-over-year reaching an all-time high, as well our share of what we call the most addressable portion of the market and interval and vaginal delivery postpartum procedures was 25.3% in the fourth quarter and that reflects an increase of 450 basis points year-over-year.

Throughout 2012 we made steady progress on several consumer related growth drivers including branding, consumer awareness and website traffic generation and this continued through the fourth quarter. This year, we’re continuing our national direct-to-consumer or DTC print and digital advertising campaign that will be increasingly emphasizing online initiatives including streaming applications, mobile applications and social media.

In past calls, we’ve discussed our goal to increase total brand awareness of Essure, but that’s only one aspect of how we benchmark improvement. The third-party brand survey we track compares Essure to other birth control brands and includes metrics like campaign recall, brand consideration and recent brand action taken. As we’ve explained, while the survey methodology inherently trails by one month and the metrics can fluctuate pretty dramatically month-to-month. Directionally we see some very positive results over the past year.

During the fourth quarter, total brand awareness for Essure hit a high of 28%, up from a high of 24% in the third quarter. Using averages for the entire quarter, gives a lower value of 24.1% for Q4 and 22.4% for Q3. And by the way this average compares to 18.7% in the third quarter of 2011 just prior to the company starting its current advertising campaign. This gives us encouragement regarding the awareness campaign we’re running and we expect to continue to drive this important metric up over time. Bear in mind that these numbers are very responsive to our media spend pattern and we do expect that awareness may dip in the first quarter due to the fact that we intentionally pull back on advertising in the November/December timeframe.

Furthermore in the fourth quarter, year-over-year growth in website traffic to essure.com increased by 39%. This overall growth resulted primarily from direct traffic and banner ad click through traffic which was up more than 31%. This improvement in direct traffic entering our URL into their browsers a good sign that awareness is increasing and we feel these women are more engaged as they represent a higher percentage of returning visitors.

While consumer awareness is critical it alone does not serve to measure ROI and determine optimal DTC investment. As we’ve outlined before, we’re attempting to measure those things more definitively. We hope to be able to speak to that a bit more next quarter. In the mean time as we plan for 2013, we expect to maintain or slightly increase our investment in DTC compared to 2012 and will continue to measure our progress on the awareness metric.

Moving on to international, Greg will go through the numbers, but I want to add a few overall comments. Even with our strong quarterly results, we continue to focus on improving our existing European operations and identifying emerging opportunities. We recently added new country managers in both France and Holland as part of that evolution.

In France, as we announced in November, UNCAM removed its reimbursement restrictions on Essure for women under 40 who are seeking permanent contraception. This decision opens back up all of the French market for us to continue our overall share growth. Although we are already just standard of care there, there are still 15,000 to 20,000 procedures done as tubal for us to convert to Essure. While this reimbursement decision become effective on December 14, recall that patients at France have a four-month mandatory waiting period for any permanent birth control procedure, plus a two-month period received a referral to an OB/GYN and of course we also need sometime to get the word out on this change.

As such, we anticipate this really will have a positive impact on our sales growth beginning sometime in the middle of second quarter of 2013 that we provided for this in our guidance. We do not anticipate that the renewal of under 40 coverage will necessarily result in a bol elicitation (ph) for turning quickly to the procedure though we do think that return to growth in France in the second half of the year will drive something on the order of high single digit growth in France for all of 2013.

With regard to Spain, for now we’re consciously optimistic regarding 2013 for modest single digit growth despite the fact that we only – that we expect only a very small order from our Spanish distributor in the first quarter. The UK experienced growth of 37% in the fourth quarter driven by the new best practice tariff and our increasing effectiveness in training positions in opening up new centers.

We expect growth in the UK to contribute meaningfully to our international results in 2013. As reported to you in the third quarter, we’re continuing to work through the DRG reimbursement changes in the Netherlands. We’ve already made a fair amount of progress in working with individual health care providers in that country to recognize the inherent economic benefits of the Essure system compared to laparoscopic methods. And have got many of these hospitals lower their out of pocket walk-in tariff to the patient.

Although we finished 2012 below prior year in units, we are reasonably optimistic with our new management that demand is stabilized and we’ll be able to post year-over-year growth at least in the back half of 2013.

Now back to the U.S., we continue to make strides in advancing the discussion of Essure as a standard-of-care for permanent birth control. I’ll focus my comments on three opportunities we expect to leverage in upcoming quarters. One, the inclusion of hysteroscopic sterilization in recent publications, two, of course the Affordable Care Act, and three our opportunity in what we’ve turned the low resource market.

As you recall early in the fourth quarter, the OBG management general published a study in which an expert physician committee that hysteroscopic sterilization should be considered the best practice to physicians and their patients. In addition and as we mentioned in a release today, ACOG has just published a new practice bulletin on the benefits and risks of sterilization. This 13-page bulletin provides a comprehensive review of the safety and effectiveness of all permanent contraception compared with other forms.

ACOG’s practice bulletins are intended to provide OB/GYNs updated information on established techniques and current clinical management guidelines. This updated publication replaces the previous 2003 bulletin on sterilization and importantly now prominently features hysteroscopic tubal occlusion or Essure for the first time.

In fact Essure’s value proposition we think has given a ringing endorsement specifically the bulletin makes two key points in support of Essure. The first is that “hysteroscopic occlusion techniques, followed by a confirmatory HSG, have at least equal if not superior efficacy to tubal occlusion done by laparoscopy or minilaparotomy.” The second point is that “hysteroscopic tubal occlusion for sterilization has high efficacy and low procedure-related risk, cost, and resource requirement.”

Given Essure’s 10-year worldwide track record and a publication profile of more than 250 peer review papers, 1,000 of physicians who have champion the procedure their patients its gratifying to see that ACOG is finally placing Essure front in center in the important discussion of permanent birth control options. In our view, the bulletin sends a clear message that especially from a safety and efficacy standpoint tubals have been replaced by Essure’s the more advantageous female permanent birth control procedure since patients don’t have to sacrifice efficacy with a less invasive procedure.

The bulletin also represents the next stage of how physician should counsel the patients on all methods of birth control regardless of personal bias. Ultimately we believe this represents a very strong recommendation to gynecologist to include Essure in their discussions with patients who want permanent birth control.

Now with regard to the new women’s preventive services provision under the Affordable Care Act or ACA, we’re continuing to gather intelligence understand how the new law will impact our business. In the fourth quarter, we conducted an extensive payer survey of medical directors, those have participated represent roughly 84 million covered lives by the way.

Our key findings were encouraging, the majority of these directors indicated their plans will be covering all FDA contraceptive and sterilization methods and secondly over 75% of these medical directors responded that their plans will be covering both tubals and hysteroscopic sterilization with (inaudible).

Since most private plans are rolling into their new plan years in the first and second quarters of 2013, we really belief now is the time to begin more aggressive marketing. And we’re taking additional steps to education physicians about the ACA and roll our messaging to consumers to let them know that Essure is covered mailers, presenter pieces and a multimedia campaign. We’re implementing innovative solutions including a new patient insurance verification benefit support line which will enable consumers to call in to find that if their pairs will cover the Essure procedure with no cost and where to find a clinician in their area.

We’ve also armed our sales organization with training and tools to help our customers to realize benefits of these changes within their practice and we’re already hearing some success stories in the field. It maybe well into the year before we know the impact of the ACA on our business but we still believe that the no co-pay, no deductible benefit for female sterilization represents a significant boost in the quarters and the years to come for us.

But we’ve not identified any portion of U.S. growth represented in our 2013 guidance as coming from this new factor however. It should also be remembered that vasectomy as the male form of permanent birth control will not be covered by the no co-pay provision of the ACA and this is a 400,000 plus procedure market opportunity in the U.S. now that we do not currently address or include rather in our addressable market calculation.

Our low resource pilot continues to make progress as we discussed previously this program is on and to cap into the estimated 46% of the 100,000 non-c section tubals performed for Medicaid patients in those states that have still inadequate Medicaid reimbursement. By providing physicians adequate margin to perform Essure for Medicaid patients through rebate and pricing strategies, we believe customers will respond with higher adoption and utilization of Essure.

We met our goal of enrolling 100 accounts in six days by the end of the fourth quarter. While we’re in early stages of evaluating the actual utilization results, we’re encouraged. A significant portion of patients that received an Essure device in the pilot program were Medicaid patients and this means that we’re reaching a previously untapped market in those accounts.

We’re now looking at a second wave of state that we’re qualifying to add in a program. And we remain enthusiastic about this program’s potential to drive incremental revenue in 2013 and beyond though given its early stage, we again as included little to no impact from the expansion of this program in our 2013 guidance.

Moving now to progress on our next gen Essure device, everything is really going as planned and we’re pleased with both the results and the timelines to date, specifically we completed enrollment in our 60 patient safety trial in the fourth quarter.

In a simultaneous release today, we announced that we’ve treated our first pivotal trial patient in our CE Mark clinical study in Europe which is slightly ahead of our timeline expectations. We plan to initiate IDE clinical study for our U.S. PMA in mid-2013. And depending of course on the trial result, we remain on track to commercially introduce our next gen Essure procedure to the market in Europe in 2014 and to the U.S. market in 2016.

The key potential benefit of the new device is immediate permanent contraception without the need for a waiting period or a confirmation test which we think would even further improve our clinical and economic value proposition.

With regard to our Transvaginal Ultrasound clinical trials, we completed enrollment ahead of schedule and still estimate that our PMA supplement will be filed in the second half of 2014. Finally, I want to introduce a new development brought to you which we believe offers an interim advancement for the U.S. market while we wait for the second generation device here.

This Essure enhancement which we refer to internally as our 305 plus essentially offers ease of use enhancement for physicians in both the placement through the working channel of the hysteroscope and deployment with a two step approach compared to the current three step deployment approach.

The development of this product is nearing completion and we expect to file PMA supplement with the FDA following a small safety clinical trial later this year. And we expected to be for sale in the U.S. market in 2014. This product will not be launched internationally as we will be offering our next generation Essure the 505 product there by about that time.

Lastly before turning the call over the Greg, we announced last month that we’ve elected to vertically integrate the future manufacturing of Essure with our own operations in Costa Rica. Costa Rica offers favorable labor rates, low tax rates and an experienced pool of employees that are skilled and medical device manufacturing specifically.

We’re fully incorporate with tax exemption status. We have our facility already in release. We started our tenant improvement so we expect to install our production line by the middle of the year and begin validation in the third quarter in preparation for an FDA regulatory submission of first half of next year.

While it’ll take a few years to completely phase over all of our demand of this new internal capacity, once operational we anticipate the produce manufacturing cost will be lower than our current outsourced production cost. In conjunction with that announcement, we also announced that we welcome Joe Sharpe to Conceptus in the newly created role of EVP of Operations.

Joe has over 25 years of experience optimizing the operations of world-class medical device companies and has a proven track record of leading and small and large organizations with domestic and international manufacturing plans. Joe’s dedicated focus to the operations here will be acutely a demand with a variety of projects we have going on including Costa Rica but also the build out move of our corporate headquarters later this year as well as various product transfer projects to our manufacturing facilities including the second generation product which we need to be operational on by the end of this year.

So I’ll now turn the call over to Greg for review of our financial performance in more detail and to provide our 2013 guidance and then I’ll wrap up quickly when Greg is finished. Greg?

Gregory Lichtwardt

Thank you, Keith.

Turning to our financial results; worldwide sales for the fourth quarter of 2012 were $40.7 million representing an increase of 21.5% growth over the prior year. This consists of domestic sales increasing 19.3% to $32.2 million and international sales increasing 30.8% to $8.5 million both compared with the fourth quarter of 2011.

On a constant currency basis in removing the 2011 Thermachoice co-promotion commissions, worldwide sales growth would have been 23.6% year-over-year and more than double the rate f growth in the immediately proceeding quarter. For the full year, worldwide sales were $140.7 million representing an increase of 10.8%. This consists of domestic sales increasing 13.1% to $109.1 million, and international sales increasing 3.6% to $31.6 million.

On a constant currency basis in removing the Thermachoice commissions, worldwide sales growth would be 13.5% for the 12-month period. The growth in domestic sales for the fourth quarter results from procedure volume strength and conversation of Adiana accounts back to Essure, continued stabilization of OB/GYN physician office visits, our sales force optimization efforts, increasing patient awareness and other initiatives discussed by Keith are the primary contributors.

Excluding the Thermachoice commission recorded in the fourth quarter of 2011, the domestic growth rate for Essure sales in the fourth quarter would be 20.6%. Of this amount, former Adiana accounts converting their volume to Essure represented about $1.9 million or 7.1% growth and organic growth was 13.5% both representing a meaningful increasing growth from the immediately preceding quarter.

For the full-year, total domestic sales growth was 13.1% while domestic Essure sales growth was 14.4%. The increase in fourth quarter international sales year-over-year is attributable to several factors. First, relatively strong sales to our Spanish distributor in the current quarter compared to no sales to that same distributor in the year ago quarter had a major impact on the year-over-year growth rate.

Even excluding sales to Spain however, other OUS markets posted strong unit volume growth of 13.4% for the fourth quarter. European countries including France, United Kingdom, Finland, Italy and Portugal all showed double-digit growth as did Canada and Latin America. France in particular showed a 600 unit increase for 12% growth. Somewhat offsetting this strong performance was continued weakness in Holland caused by the increase in patient out of pocket payments for the Essure procedure.

Also currency continues to be a drag on our reported dollar sales growth although the fourth quarter saw somewhat remarkable strengthening in the Euro so the impact was less negative than in previous quarters. Currency lowered our translated sales by about $260,000 for the fourth quarter and $2.2 million for the full year when compared to the prior year.

On a unit basis, we ship approximately 34,400 units during the quarter of which 67% were shipped in the U.S. and 33% were shipped outside the U.S. International average selling prices in the fourth quarter were lower just under 10% year-over-year reflecting both the increase in distributors sales compared to direct sales notably Spain as well as currency impacts. Domestic ASPs remain well above $1,350 for the quarter.

Continuing down the income statement, gross profit margin for the fourth quarter was 84.1% compared with 83.5% on prior year fourth quarter. For the full year, gross profit margin for 2012 was 83.3% compared with 82.2% for 2011 and most of this increase was caused by lower cost of good sold from product cost, royalties and lower scope depreciation.

Total operating expenses of $24.9 million in the fourth quarter of 2012 represent a year-over-year decrease of 19.1%. Contributing to the year-over-year decrease were severance costs for the company’s former CEO in the prior year fourth quarter of approximately $3.3 million, lower marketing expenditures of $1.8 million primarily related to the company’s direct-to-consumer campaign, lower selling expenses of $500,000 associated with sales force headcount reductions taken earlier in the year and lower legal fees of $1.4 million primarily associated with the now settled Adiana patent infringement action.

Partially offsetting these reductions were increases in expenses associated with the TBU clinical study and product development related to the next generation Essure device of approximately $500,000 as well as certain administrative increases of $500,000.

For 2012, total operating expenses of $103.9 million represents a decrease of 3.3% reflecting the options of CEO severance cost in the current year, lower sales force headcount and legal fees partially offset by increased direct-to-consumer expenditures. In 2012 in total, the company spent approximately $8.4 million on the DTC initiative.

Adjusted earnings before interest, taxes, depreciation, amortization and equity compensation for the fourth quarter were $12.9 million, representing an increase of 371% year-over-year. Adjusted EBITDA for the year-to-date period is $28.2 million and represents a growth of 100% year-over-year.

Lastly, our book tax provision this quarter was 29% favorable to the expected 45% rate due to the partial reversal of our state deferred tax valuation allowance, a release of international tax reserves due to the running of the statute limitations, partially offset by further APEC tool shortfalls on former executive exercise as a stock option at a lower gain in the previously taken compensation expense reductions based on blacks souls.

Turning to the balance sheet, we ended the fourth quarter with cash, investments and restricted cash of $85.3 million which is an increase of $15.9 million from the prior quarter-end. Cash from operations in the fourth quarter was an inflow of $11.2 million, proceeds from stock option exercises totaled $5.8 million and capital expenditures were approximately $600,000 for the quarter.

We have reserved approximately $2.2 million in cash during the fourth quarter in conjunction with the long-term lease on the company’s new headquarters. With regard to balance sheet metrics, we finished the quarter with 44 days sales outstanding and receivables and 4.2 months of inventory on hand, both very normal metrics for us.

Moving on to financial guidance as reported in our press release, we are introducing our 2013 guidance to include a sales guidance range of $155 million to $159 million and an adjusted EBITDA range of $34 million to $37 million.

With respect to the sales range, this provides a growth of 10% to 13% while we saw substantially better growth in this in the fourth quarter and we certainly are hopeful that we can do better than this range. We are cognizant that a number of uncertain global economic factors and of course we are working our way through a relatively large amount of change and transition in our organization. As a result, we want to be a bit cautious and not let our numbers get out in front of us as we start the year off.

Included in this range is the expected impact from the French UNCAM age restriction elimination particularly in the second half of the year. Ongoing incremental sales from Adiana accounts continuing their conversation to Essure which impacts mostly the first half of the year, further penetration in the UK market and partial correction in the out of pocket situation in Holland to restore growth there as well as a domestic price increase recently noticed to most U.S. customers.

As Keith mentioned, we have not included in this range, the expected future benefits that should result from the Affordable Care Act eliminating out of pocket payments for contraception or the impact of our lower resource initiative to the extent that we decide to launch the program beyond our ongoing pilot. Later in the year, as their impact becomes more clear, we hope to be able to provide more visibility. The growth in adjusted EBITDA from the provided guidance range is 21% to 31% which is more than double the rate of growth in sales and generally indicative of our ongoing operating expense control for profitable growth.

Although we expect similar gross profit margins in 2013 as we saw in 2012, we are absorbing the medical device excise tax into our other cost of goods sold and have implemented a price increase that will roughly offset this tax. Also, although we do expect a significant increase in R&D expense year-over-year approaching 50% due to the multiple clinical trials, validation expenses of our Costa Rica operations and ongoing produce development expenses, we expect a much more modest low to single digit growth in SG&A as we are adding very few new sales territories this year foresee flat general administrative expenses and are planning only a modest increase in DTC spend primarily to massive advantages of the Affordable Care Act.

Overall we expect a mid upper single digit growth in total operating expenses. Our expect that our $4.8 million in other income and expense of 45% take rate and an increase in our fully diluted share count through the year 2013 averaging by year-end approximately 35.5 million diluted shares.

With respect to calendarization, we expect lower worldwide growth in the first quarter of mid to upper single digits possibly as high as 10% year-over-year. Internationally, due to reimbursement challenges in Holland and continued volatility in shipments to our Spanish distributor, we expect flat sales growth at best, so a significant reduction from the 30% achieved in the fourth quarter just ended.

Domestically, we expect a seasonal slow down in procedure volume due to the resetting of deductibles on a calendar year basis. We do not see an upside to this from families whose plans have already renewed and therefore include the benefits of the ACA due to lower awareness. Additionally we have enacted a final reorganization in the domestic sales group in early January that was recommended in last year’s productivity and efficiency audit and has resulted in a handful of territories being open. While we fully intend to fill these openings as quickly as possible, they are likely to be open for much of the first quarter thereby effective productivity in those geographies.

Worldwide sales growth rates after the first quarter are expected to increase and maintain at a more constant level throughout the remainder of the year.

Okay, that concludes my remarks. I’ll turn the call back to Keith for his final remarks. Keith?

Keith Grossman

Thanks, Greg. In order to finish the work we started in 2012 to transform the business, our 2013 plan contains similar objectives for different strategies. For this year we have four primary objectives. First, drive sales at market share growth; second, to drive continued operating leverage; third, to drive key product and clinical development milestones and fourth and finally to create strategies and infrastructure for long-term growth and profitability.

Looking ahead, we’re enthusiastic about the opportunities to position the benefits of Essure in an increasingly value driven health care environment. Our domestic and international growth rates are accelerating. Our organizational culture and effectiveness have made great strides in our groundbreaking next generation products and indications in moving along at or ahead of plan.

We’re continuing to focus on profitable growth and cash flow generation which is ahead of pace as well. And lastly, there are several tailwinds which were in the early stages of leveraging the more quickly establish Essure as a standard of care. And that we still have much work left to do, we’re enjoying a strong and I would say comparable sense of growing momentum within our organization which is refreshing in sharp contrast with a tough overall environment for much of the rest of the medical device industry and candidly with where we were just a short year ago.

With that operator, we’d like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tom Gunderson from Piper Jaffray. Your line is open.

Thomas Gunderson – Piper Jaffray

Hi, good afternoon.

Keith Grossman

Hi, Tom.

Thomas Gunderson – Piper Jaffray

Hi. Keith, on the guidance for 2013, you’ve got – you started off in your prepared remarks talking about strong trends and tailwinds you did north of 13% in 2012. I know Greg said you’re trying to be a littler conservative earlier in the year. But what do you see in 2013 that might get you to 15% to 20% growth? What kinds of things could be folded in that would be upsides to the number you gave us?

Keith Grossman

Well, I think there is a list of those things and I would reiterate Greg’s comment that we are, I think, still sort of midway through a significant transaction or transition rather inside this company. And it does take time and I think it deserves a kind of a cautious approach to things like guidance, but we think it is conservative. We certainly hope its conservative, but as we look at potential sources of upside to that guidance, I think certainly the way in which internally we tried to quantify the UNCAM effect, any real significant uptick on the little resource initiative of any size at all I think would represent some upside. We haven’t because we don’t yet know how to quantify the ACA impact on organic growth, but I think it’s telling that even early on in the year as we sent our sales force home from a national sales meeting fully armed for this, we’ve already begun to get some pretty interesting anecdotes from around the country.

So I think certainly those three represents (inaudible) I think we’ve been pretty conservative on just the internal productivity of our sales organization if I look at where we trended through last year and where we’re guiding this year. I think our sales force has positioned to do that well and maybe do better. So I think there is an execution upside as well, Tom.

Thomas Gunderson – Piper Jaffray

And then the follow-up is on the price increase. The, sounds like it might be in the 2% to 3% range. When did that take effect and when was it announced? Did anybody get a chance to buy ahead in November/December?

Keith Grossman

There was a small chance. So we made that announcement sometime in early December. It was effective on January 1 and the price increase was not the same for every portion of our channel. So the price increase was a little bit different. For example, the hospital channel when it was from the physician office channel where we’ve been very conservative about price increases and continue to be. I don’t think we saw evidence of much buying forward at all correctly. Now we don’t see everything and we don’t know the motivations of every customer when they cut an order, but we have a pretty good sense of that I think and I don’t think we believe that that had an impact in Q4.

Thomas Gunderson – Piper Jaffray

Got it. Thank you.

Keith Grossman

Okay.

Operator

Thank you. Our next question comes from Jon Block from Stifel Nicolaus. Your line is open.

Jonathan Block – Stifel Nicolaus

Great, thanks guys and good afternoon. Maybe just the first one on gross margin, Greg, maybe this one for you specifically. And gross margin, you spoke to maybe flattish I believe year-over-year, but in 2012 you got a really nice increase of over 100 basis points and that was with some headwinds, I mean you call that effects was a headwind, you kicked off this pilot program at the lower resources market. So can you talk to, if not even 13 longer term, how you see gross margin shaking out especially once you transition, make the transition over to Costa Rica. Thanks.

Gregory Lichtwardt

Yes, thank you Jon. So there is definitely still room for our gross margins to expand further. The changes here in the next couple of years maybe somewhat more incremental, but certainly Costa Rica will top list of opportunities for us. That alone could take upwards of 200 basis points to add back to gross profit margin. Certainly there are other engineering cost reduction projects that are ongoing with the product that could yield less labor, lower material costs that may expand margins further, but I think long-term we sort or settle in on 85% as kind of the upper limit of what we think about for this product.

Jonathan Block – Stifel Nicolaus

Okay, great. And then maybe the second question and Keith this might be more for you. Just when you look towards the 1Q revenue guidance, I think you said worldwide of 5% to 10% and you take the midpoint, I guess even before I get there. For Adiana, do you still expect maybe another $4 million, $5 million incremental in 2013 versus 2012, but that would allow you to capture roughly half of that 18. And the follow-up would be, if that’s the case, and you’re pointing to 5% to 10% growth in 1Q, after you back out another $2 million from Adiana you’re sort of flattish year-over-year. So can you speak maybe a little bit more broadly to, just the cadence of the quarters throughout 2013. Thanks guys.

Keith Grossman

Yeah, well I’ll speak to the first and I’ll let Greg handle the second part. From an Adiana standpoint, yeah I think that we expect to see incremental Adiana contribution $4 million to $5 million this year over last. Part of that is an assumption that we anniversary the impact really in Q3. If you remember Q2 was the effective date of the voluntary injunction that we entered into for the Adiana product with the logic. And there was inventory in the field such that we probably didn’t see the full impact until mid-Q3 of the product being off the market.

So we probably see $3 million to $4 million of incremental impact in the first half of the year and maybe another $1 million, the $2 million that leaks into Q3 and maybe even early Q4 to some small extent. So that’s just directionally what it probably looks like and that gets us probably to about half of the Adiana market share. There are possibility from – for a little bit of upside there. I think there probably is, but it would in fact be upside to our guidance. Right now, I think we’re trending at capturing about 50% of what we think the run rate was of Adiana. So that’s getting the other half of that 50% for the year is reflected in the guidance.

Greg, you want to take the second part of that?

Gregory Lichtwardt

So, Jon I said for the first quarter that worldwide growth would be mid to upper single digits maybe as much as 10%, but I think it would be help for the break that down between international and domestic. So internationally a best case as I said will be flat year-over-year and even possible that we’ll be showing negative growth internationally without a sizeable order from our Spanish distributor maybe even mid single digit decline. So that leaves domestic with the potential for being still in the kind of low teens to mid-teens growth year-over-year and I think that’s really the heart of what you are asking. So, if we assume maybe $2 million of that domestic growth is Adiana, that still gives us somewhere in the mid to upper single growth domestically. So it’s not flat, certainly not as good as it was in the fourth quarter perhaps and our desire to be cautious there I think speaks to that point.

Jonathan Block – Stifel Nicolaus

Perfect, very helpful. Thanks guys.

Operator

Thank you. Our next question comes from Matt Dolan from Roth Capital Partners. Your line is open.

Matt Dolan – Roth Capital Partners

Hey guys good afternoon. The first question, maybe I’ll start with my follow-up on the gross, I know you touched on Q1 there nicely. For the year, I think previously you’ve talked about exiting ‘12 in the mid to upper teens and then being able to sustain that, obviously your guidance is low double digits and you laid out nicely what’s included and what’s not, but can you tell us is there something that you’re seeing since the last update either geographically speaking or just in the underlying market that is (inaudible).

Keith Grossman

(inaudible) last year was obviously a very productive and positive one for us. we came into last year though with a recent history of letting some of our numbers get ahead of us and I think we just want to avoid that happening in the future and given the fact that we’re a single product company and we’ve got some variables looking ahead of us in terms of converting Adiana share and some of the other things that we’ve talked so far today, we simply want to be a bit on the conservative side and that is the only thing that is reflected in the tone of the guidance.

Matt Dolan – Roth Capital Partners

Okay. And then the second topic is maybe on this ACOG bulletin, Keith, maybe you could tell us what your guide instinct is, I know this is recent news, but you’ve trained closed to half of OB/GYN community. What is this bulletin mean to your business from a new account perspective as well as the ability to drive better utilization in the existing base? Thank you.

Keith Grossman

Well, I think it is probably as we described it would trying to look forward to this announcement. It is short of a standard-of-care endorsement which we, I think have told all of you to anticipate although it’s very positive. And we kind of view it as another log on the fire and another reason for our reps to be talking to existing and new customers and another reason for those who haven’t been trained on Essure to get trained on Essure. So I think it’s very positive. I think it does affect our message. I think it does contribute to our trajectory to standard-of-care. I don’t think this would really anything either of the societies could do would represent an inflection point in growth rate. But I certainly view it as a positive contributor.

By the way I think and hope that AAGL who I know is kind of thinking about these issues as well in this next year as able to way in through some of sort of an update a bulletin of their own.

Matt Dolan – Roth Capital Partners

Thanks.

Operator

Thank you. Our next question comes from Jeremy Feffer from Cantor Fitzgerald. Your line is open.

Jeremy Feffer – Cantor Fitzgerald

Hi, thanks for taking the questions. First I want to talk OUS, I’m wondering, I understand the commentary on first quarter. I’m wondering how we should think about pricing going forward. I know there are a lot of moving parts, a lot of different markets, but it had some pricing declines there or at least say ASP declines. How should we think about that in 2013?

Gregory Lichtwardt

So, Jeremy, this is Greg. I think right now we are using what would appear to be a conservative foreign currency forecast for the year. That impacts our international pricing maybe more than anything else. We do have set prices with distributors and generally in the markets where we direct our prices tend to be more or less fixed. So either a mix change between the volume of distributor versus direct business or changes in currency tends to be what affects our international ASPs.

So in this case, the average flow exchange rate for 2012 was $1.28 to the euro. We’re using an average rate for 2013 of $1.25 to the euro, obviously where the exchange rate is at today that seems hard to believe that the forecast services that we do – use do show the dollar strengthening fairly significantly throughout the year. So, that alone is probably carving off a couple of percentage points from our dollar sales growth compared to our unit growth internationally.

Jeremy Feffer – Cantor Fitzgerald

Okay. And then I just want to come back quickly to low resource opportunity. I know you guys are being very conservative not including anything in there. At what point do you make a determination that you want to make this a bigger part of your push and what sort of, I guess milestones you need to see to make this sort of a worthwhile initiative?

Keith Grossman

Yeah, there is really three things we assess in this pilot. One is and this is the key is increasing utilization. Can we incremental business in those accounts. Two, can we do so in a manner that provides a firewall sorts between whatever pricing we have to offer to capture that portion of the business and the rest of the business. And then third and finally can we manage backend part of this, specifically the rebate program which requires some meaningful interaction with the customer on documentation etc.

So now that we’ve got all the sites enrolled that’s what we’ll be keeping a very close eye out over this next quarter or two. I would think sometime either in or at the end of second quarter, we should be in a position to talk about what we’re doing for the second half of the year in terms of a broader rollout and if possible even maybe quantifying whether or not we think there is any additional impact for the second half of the year.

Jeremy Feffer – Cantor Fitzgerald

Okay that’s helpful. Thank you.

Keith Grossman

Okay.

Operator

Thank you. Our next question comes from Matt Hewitt from Craig-Hallum. Your line is open.

Matt Hewitt – Craig-Hallum Capital Group LLC

Good afternoon gentlemen and congratulations on a good year.

Keith Grossman

Thank you.

Matt Hewitt – Craig-Hallum Capital Group LLC

Just a little bit more color on a couple of items. Number one, it sounds like Spain had a big quarter in Q4 after no order in Q3. I know it’s been lumpy, but you get any sense that market could stabilize or is it purely dependent on the economy in which case your best guess as anybody’s guess?

Keith Grossman

Well I think it’s a snapshot based on what we know today, before we’re entering this question and I think today it feels to us like the overall demand pattern there has in fact stabilized. Now will that feel better or worse a quarter from now, it’s very hard to tell. I kind of consider that situation not surprisingly to be a pretty volatile one. But I think it’s fairly stable at the moment. If I look back over the last quarter or two, in terms of our visibility to underlying demand, now as we get the orders from our distributor tends to be a little bit lumpy. But doing our best to assess underlying demand appears to be relatively stable.

I think there is opportunity for both upside and downside. I mean certainly we were on a more attractive growth trajectory in Spain before the economy sort of started to melt down there. So I could see if things stabilize there, some upside to where we are and of course I think like probably everybody listening to this call, I can easily imagine some downside if things get worse here, but I think we’re feeling right now like it’s stable and has opportunity for a modest growth this year.

Matt Hewitt – Craig-Hallum Capital Group LLC

Okay. And then separately, anecdotally, what has been the initial reaction by the doctors post the standard-of-care recommendation last quarter by the expert group. I mean has they come in and said this is what we needed. We can start it to order them all. We can start to recommend this procedure more or are they still kind of feeling out the waters?

Keith Grossman

Are you speaking to the OBG management consensus publication?

Matt Hewitt – Craig-Hallum Capital Group LLC

Yes, correct.

Keith Grossman

I think it depends on the doctor. I mean if you ask our sales force that question, they’ll tell you that in some cases they walk and discuss that with the physician and find it to be quite meaningful and impactful not only for existing accounts for potential new accounts. And in other cases, I think whatever a doctor has for utilizing the procedure at their current pace or not utilizing it aren’t really changed by that document. So I think like a lot of these things it is not anyone of them that really inflects the market up or for that matter down. But I think it’s a very positive part of the fact pattern in the story that our reps are able to bring in to these accounts. I would say in the net it has been very positive. It’s not been the single fact necessary to make a difference in behavior in every single account for Essure and I don’t think by the way the ACOG statement their bulletin will be either.

Matt Hewitt – Craig-Hallum Capital Group LLC

Okay. Thank you.

Keith Grossman

Yeah.

Operator

Thank you. Our next question comes from Jayson Bedford from Raymond James. Your line is open.

Michael Rich – Raymond James

Hi guys, this is Michael rich calling in for Jayson. Can you hear me okay?

Keith Grossman

You beat.

Michael Rich – Raymond James

Great, thanks for taking the call. Certainly back to Adiana, I was wondering if you can give us maybe a status update on some of the Adiana only accounts. Can you give us an idea how many or maybe a percentage of them that you’ve converted and whether they’re ready that are convertible going forward in 2013?

Keith Grossman

I’m sorry we don’t have that kind of granular breakdown ready for today’s call. Most of these accounts probably 70% to 75% of the accounts were hybrid Adiana Essure accounts. So we have a whole lot more visibility to those accounts and I think generally as you would expect, we’ve done better converting to the Adiana volume overdue short in those accounts.

In some of the Adiana only accounts, it took us a little bit more time to really try and get our arms around who and where they were and what their utilization was and I think again not surprisingly you’ll find it in those accounts. There were more, there was a higher incidents of concomitant use with NovaSure. And so I think we expect it fairly early on not to convert as much of that business over to Essure. And I think directionally those trends have all proven to be the case. I don’t have percentage breakdowns for you today.

Michael Rich – Raymond James

That’s fair. Is there any Adiana inventory still on the field? If there is that been pretty much whipped out of at this point?

Keith Grossman

Well, I certainly couldn’t claim there isn’t a kid or two out there, but I think it for the most part that inventory is gone.

Michael Rich – Raymond James

Okay, great. And then just lastly, on the gross margin guidance, I get that its flattish year-over-year but was that prior to the impact of the revised tax and if so do you have an idea. Could you quantify the impact of the revised tax?

Gregory Lichtwardt

So for us, the medical device tax which is going to be booked to cost of good sold is approximately 1.7% of our domestic sales. And as I said in my prepared remarks, our price increase was just little bit greater than that overall across the domestic channel. So those two factors offset each other. What we haven’t really dialed into this year’s plan as we’ve seen in previous years, our significant engineering cost reduction projects and that’s really just owing to the fact that the operations group is pretty busy with the Costa Rica startup. The new building here for our headquarters and the product transfers most notably for the next generation product. So we have a little less time this year to work on cost reduction projects. But basically the price increase is offset by the medical device tax.

Michael Rich – Raymond James

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Chris Cooley from Stephens. Your line is open.

Chris Cooley – Stephens

Thank you and I appreciate you taking the questions this evening. Could you guys talk a little bit about the operating leverage that you think is inherent the model going forward and I guess what I’m really trying to get here is what type of incremental sales productivity do you think you can get over the next 12 to 24 months that drives that? I mean understand that what’s taking place to gross margin and I think we’ve labored that now, but help me think about the middle of the P&L and what type of leverage you ultimately see in the model if you’re at an 85-ish percent gross? And then I have one follow-up after that. Thanks.

Keith Grossman

Okay. So Chris in the way I’m going to answer that is in terms of sales volume not time frame. I would say once is at volume in the low $200 million range, we would expect operating income margins on the order of 20% and by the time we’re at a sales volume of $300 million plus, we think that we could achieve operating income margins closer to 30%.

Within the total operating expense category, the single biggest area of leverage for us is selling expense with increases in rep productivity. That will probably contribute somewhere between 10% and 15% to the operating income margin alone. And as we’ve demonstrated this year and last year frankly, other G&A categories for a single product company are not really anticipated to grow much. So then it’s primarily the leverage within selling expense.

Chris Cooley – Stephens

Okay that’s helpful. And if I could just a follow-up, I believe in your prepared remarks at the outside of the call, company touched on the UK as potentially being one of the major drivers for international sales growth in the coming year. Can you maybe just kind of quantify for us what level of penetration you think you can get in that market and potentially can you expand that market in the current years? Thank you.

Gregory Lichtwardt

So, the UK for this year our target is approximately 40% growth and that would give us total unit volume of 2,000. And we believe that market is about 15,000 procedures. So that gives us something around 13% share of the UK market, so obviously plenty of growth to come in future years.

Chris Cooley – Stephens

Okay, thank you so much.

Operator

Thank you. Our next question comes from Tony Barch from Park West. Your line is open.

Tony Barch – Park West

Hi, just one, just curious what kind of data you’re still looking to see before you make a decision on what is the launch delivery source market. Thanks.

Keith Grossman

Well I think we’re, as I mentioned earlier, Tony, we just got all of the trial sites enrolled right at the end of the fourth quarter. And we just need to make sure that we’re having an impact on low resources penetration utilization within those accounts to make sure we’ve structured at the right way. We’re doing the right things and we’re seeing an impact. We need to make sure we can protect our normal resource pricing and just simply manage the program administratively.

So I think we’ll be able to accomplish the latter two goals and as long as when you look at the time to look at utilization that we can drive here and as soon as we make that determination that’s really all we need to begin rolling it out to other states.

Tony Barch – Park West

So what’s the timeframe you think for making the go, no go decision?

Keith Grossman

Probably Q2 timeframe mid year latest

Tony Barch – Park West

Great, thanks guys. Great quarter.

Keith Grossman

Thank you.

Operator

Thank you. Our next question comes from Mark Landy from Summer Street Research. Your line is open.

Mark Landy – Summer Street Research Partners

First in person, Keith congratulations on a stellar year that’s nice turnaround from I think this time last year.

Keith Grossman

Thank you.

Mark Landy – Summer Street Research Partners

Just the quick question as it relates to sort of international trial that you started. With the two end points, the one or three months and the other like one year certainly the short-term end point is to assess closer or whether or not, is there any opportunity to use that end point to accelerate you in U.S. or is that not an option?

Gregory Lichtwardt

It’s a good question. So first let me put a finer point on the CE Mark trial. So the primary end point is three-year efficacy. So, sorry three months efficacy, so in other words we’re looking at rates of contraception at three months. That is the primary end point and it’s on that end point that we will make a filing for our European CE Mark. We will also as a secondary what I hope is a post-market end point follow-up with the patient to 12 months, for 12 months efficacy as well, but we’re not waiting for the 12 months efficacy point to make filing.

In terms of whether or how that could impact our U.S. trial, we’ve not yet completely negotiated the protocol with the FDA that’s something that’ll be taking place in the coming months. Our assumption, our timeline assumption is that the 60 patients we’re talking about in Europe probably will not contribute to the U.S. enrollment total. And the end points will be a little bit different. We’re assuming right now that the end point in the U.S. kind of a trial will be a one-year follow up of one year efficacy end point for submission.

There is some potential upside to that. We’ll certainly make our case and I think we’ve got a good case to make, but I think the best and safest assumption right now is that we’ll end up with a 12-month efficacy end point in the U.S. trial.

Mark Landy – Summer Street Research Partners

And as we kind of look at a little bit at the last two months, I think you had mentioned if you step back of your DTC from the commercial or the retail advertising. Is there anything to see the hits or, the hits that you’ve been hitting recording to your website and those metrics that you’d be managing. How are they adjusted to follow that pull back in spending?

Gregory Lichtwardt

I didn’t hear the last part of that Mark, how do they what?

Mark Landy – Summer Street Research Partners

Sorry, how have the visits equate the flow through? How is that adjusted or changed with the pull back in spending and are you seeing some amount of activity through your websites or are you seeing a slightly low activity? As suppose I’m trying to get a sense of the sustainability of the marketing campaign basically the sustainability of the marketing campaign and this is I think while the short-term it could be some insights into whether or not it has legs or traction without the spending?

Gregory Lichtwardt

Well we think it’s very sustainable. I think when we talk about the pull back in Q4 we talk about principally the print portion of our DTC campaign. It’s a very noisy environment leading up to the holiday and it’s just been our sense based on our advisors that the return on, from an awareness standpoint on print advertising in during the holidays is quite well. That doesn’t necessarily mean we pull back on all of our online DTC initiatives, but we do see typically some awareness impact any time you pull out of a portion of your medium mix, you inevitably will see some impact on your short-term awareness numbers. We actually saw and I think last Q1 because we saw a very similar impact from a pull back.

But I think overall, the campaign is very sustainable. I think we’re pretty encouraged by the impact we’ve seen on website traffic and awareness and look we’ve got pretty low consumer awareness metrics still out there right now. So as long as we can afford to grow the business profitably and still have in our investment mix a considerable DTC program. It makes sense to keep pushing on this until we think we can really evaluate it more quantitatively which is a little bit later in the year as we discuss. I think we’re cautiously optimistic that we’re doing the right things here from a DTC standpoint, but more to come.

Operator

Thank you. I show no further questions. I would like to turn the conference back to Mr. Keith Grossman for closing remarks.

Keith Grossman

Okay. Thanks everyone for joining us. We’re obviously thrilled with how we finish 2012 and we’re extremely excited about the opportunity for the business in 2013 and we look forward to talking to you in our first quarter call.

Operator

Ladies and gentlemen thank your for your participation on today’s conference. This does conclude the program and you may all disconnect at this time.

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