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Conceptus Inc., (NASDAQ:CPTS)

F1Q09 Earnings Call

April 21, 2009 4:30 pm ET

Executives

Kim Sutton Golodetz – Investor Relations, Lippert/Heilshorn & Associates

Mark M. Sieczkarek - President and Chief Executive Officer

Gregory E. Lichtwardt - Executive Vice President, Treasurer, and Chief Financial Officer

Analysts

Jonathan Block - Suntrust Robinson Humphrey

Shawn Fitz - Stephens, Inc.

Jason Bedford - Raymond James

Eric Schneider - UBS

Amit Hazan - Oppenheimer & Co.

Charley Jones - Berrington Research

Thomas Kouchoukas - Stifel Nicholas

Kevin Kotler - Broadfin Capital

Operator

Good afternoon ladies and gentlemen. At this time I would like to welcome everyone to the Conceptus Incorporated First Quarter 2009 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday April 21. I would now like to turn the conference over to Miss Golodetz. Please go ahead ma’am.

Kim Sutton Golodetz

Thank you. This is Kim Golodetz with Lippert/Heilshorn and Associates. Thank you all for participating in today's call. Joining me this afternoon from Conceptus are Mark Sieczkarek, President and Chief Executive Officer and Greg Lichtwardt, Chief Financial Officer.

This call will follow the usual format, beginning with prepared remarks by management, and then we'll open the call up to your questions. In order to accommodate as many of you as possible, we ask that you limit your questions to one, plus one follow-up before rejoining the queue.

Earlier today, Conceptus issued financial results for the first quarter of 2009 and financial guidance for 2009. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Lippert/Heilshorn in New York at 212-838-3777 and speak with Cheryl Palazzo.

Before we begin, I would like to caution that comments made during this conference call by management will 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 Form 10-K and Forms 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 strategic planning decisions by management, reallocation of internal resources, general recessionary pressures, decisions by public and private sector payers, scientific advances by third parties, and introduction of competitive products, among others.

Importantly, the content of this conference call contains time sensitive information that is accurate only as of the date of the live call, today, April 21, 2009. The Company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Mark Sieczkarek. Mark?

Mark Sieczkarek

Thank you, Kim, and good afternoon to everyone. We appreciate you joining us today. In our prepared remarks today Greg and I will discuss the financial performance of Conceptus for the first quarter of 2009, guidance for both the second quarter and full year of 2009 and then I will update you on our important goals for this year and beyond. After that, of course, we will take your questions.

Let me start with a brief discussion about our first quarter financial performance before turning the call over to Greg. For the first quarter of 2009 we reported net sales growth of 29%: now this result is virtually identical to our fourth quarter 2008 results of 30% year-over-year growth after adjusting for the European Distributor acquisition. This is a great result for us and indicates that we are not only correctly forecasting the seasonal impact of deductibles resetting, but also we do not see a further change to our business from the global economic contraction as compared to the fourth quarter.

As a reminder, we discussed on the last call the offsetting impacts that we felt the economy may be having on our business. On the one hand layoffs can certainly impact medical procedure volume if unemployment is protracted and health insurance is lost. On the other hand, as we are all reading in the media, families are reexamining their priorities and for many the worsening economy can lead to a permanent birth control decision that has been under consideration given the difficulty of an unplanned pregnancy in tough economic times. Despite the negative macroeconomic affect on elective medical procedures, we feel that these two effects have mostly offset one another.

One further note related to the first quarter results on our physician metrics: As we anticipated and forecasted, the number of physicians entering and exiting preceptorship and transitioning to the office has continued to remain healthy and robust, although a bit below levels of recent record historical quarters.

Because we continue device programs and tactics to step up our performance it is my full expectation that we are again going to see a pick up in each of these metrics with the typical seasonal rebound in the business in Q2 as well as from the impacts of advertising in the consumer awareness territories.

Overall our goals for the year remain to add 1,800 to 2,000 physicians to preceptorship and certified status and to add between 1,300 and 1,500 physicians through the ranks of those doctors performing Essure in sights of minimal anesthesia including the office.

With respect to guidance, as we indicated in the press release, we remain confident in our full year numbers both top line and bottom line. For top line the range implies a growth of 23% to 32%. With the first quarter growth of 29% and the expectation that our consumer awareness campaign from both this year and last year will contribute to our growth for the remainder of the year, we are confident that we are solidly in the range for the full year. The bottom end, of course, continues to assume a flight or worsening economy and volatile currency markets as well

With that, I am going to ask Greg to comment in more detail on the financial results for the first quarter. Greg?

Gregory Lichtwardt

Thank you, Mark. As I usually do, I would like to take a few minutes to provide some additional commentary to our financial results as well as to make a few comments on our financial guidance for the second quarter and full year as reported in today’s press release.

With respect to first quarter net sales worldwide sales of $27.2 million represents a 29% growth over the first quarter of 2008. Domestic sales increased 29% to $21.2 million year-over-year. As mentioned on our last call, we anticipated and saw a sequential quarter decrease in our domestic sales of approximately 7% primarily due to the seasonal affect of deductibles resetting under private insurance plans causing non-urgent care procedures, such as ours, to be delayed to later in the year after those deductibles have been met.

International sales increased 26% to $6 million in the first quarter as compared to the prior year. Now on a constant exchange basis we would have recorded total international sales of $6.9 million, as compared to the $6 million actually recorded, due to the much stronger dollar in 2009. This represents a constant dollar international net sales growth of 44% and, as mentioned in the press release, the international unit growth is 40%. So, our international business is actually growing much more rapidly than would appear to be the case on the surface.

On a unit basis we shipped approximately 23,750 units during the first quarter of which the US accounted for 65% and international for 35%, which is consistent with our historical trend. International average selling prices were comparable with the fourth quarter of 2008 at around $700.00 per unit, but down significantly from the $785.00 per unit in the first quarter of 2008 reflecting the strengthening of the US dollar over the past year. Domestic average selling prices increased to above $1,350.00 per unit reflecting a domestic price increase in the first quarter of 2009.

With respect to domestic physician metrics during the quarter we are again pleased with the number of physicians entering and completing training. In the quarter we had 452 physicians performing their first preceptored cases, 452 physicians becoming certified, and another 260 physicians transitioning to the office. As Mark mentioned, while these metrics are down from the record numbers experienced in the second half of last year, they remain robust and in line with our expectations.

For the full quarter 59% of procedures were performed at sights of minimal anesthesia which is comparable to the fourth quarter of 2008 and up from 46% during the first quarter of 2008. It is our expectation that this percentage will continue to grow, albeit at a slightly slower pace than in the future than in the past few years.

At the end of the first quarter we had approximately 3,300 physicians in preceptorship, 2, 500 physicians certified in performing in the hospital and 3,600 physicians certified in performing in the office. While the percentage of procedures performed in the office did remain constant in the first quarter compared with the immediately preceding quarter, we did increase the number of physicians in that office category by 8%.

At the end of the first quarter we have approximately 9,400 US physicians who have performed at least one Essure procedure. Overall utilization rates obviously did decline during the first quarter due to the seasonal factors that I’ve mentioned, although this is not at all unusual for the first quarter and we still expect to see the rates rebound and hopefully grow through the end of the year as physicians mature in their respective categories of hospital and office certified.

Gross profit margin for the fourth quarter was 79% as compared with 74% in the previous year and 79% in the immediately preceding quarter. The year-over-year gross margin increase reflects the benefits from higher unit volumes and a domestic price increase offset by the decrease in international average selling prices.

On a sequential basis margins were relatively consistent, but somewhat lower than levels achieved in the fourth quarter of 2008 due to both foreign currency as well as international versus domestic sales mix.

Total operating expenses amounted to $24 million in the first quarter of 2009, below our forecast of $25 million provided at the end of last quarter. This compares to operating expenses of $22 million in the first quarter of 2008 and $17.7 million in the fourth quarter of 2008.

The sequential quarter increase in operating expenses from the fourth quarter to the first quarter of $6.3 million is primarily related to increases in spending for the direct to consumer advertising campaign and certain sales related activities that occur at the beginning of each year.

Other income and expense for the first quarter of 2009 was a $1.6 million expense on a net basis and can be summarized as follows: We had $400,000.00 in interest income, $1.8 million in interest expense and debt issuance amortization, and a $200,000.00 currency loss.

We did adopt Rule 14-1 in the first quarter of 2009 to account for our convertible debt and this increased interest expense by $1 million compared to the most recent quarter. You will notice in our press release table for the 2008 financial statements that we have also restated our Other Income and Expense line for 2008 to reflect the adoption of Rule 14-1. This increased our net loss by $900,000.00 in the first quarter of 2008 and we have adjusted the presentation of our income statement to reflect this change.

In comparing the $1.6 million overall expense for the first quarter of 2009 with the $200,000.00 expense in the immediately preceding fourth quarter of 2008 the primary difference is the $1 million additional interest expense for Rule 14-1 as well as the $200,000.00 currency loss that we incurred in the first quarter.

We continue to hold $48.5 million of student loan backed securities for which there have been no auctions for the better part of the year. We also continue to hold Series C2 Auction-Rate Security rights which is basically a put option that allows us to sell our auction-rate securities back to UBS as par value by June 2010 unless they are redeemed by the issuer sooner.

The changes in the fair value of these two instruments, that is the Put option and the underlying ARS was minimal in the quarter and did not impact earnings.

Non-GAAP net loss for the first quarter of 2009 was $1.7 million or a loss of $0.05 per fully diluted share. The first quarter of 2009 non-GAAP net loss excludes $1.3 million of stock based compensation, $1 million of Rule 14-1 non-cash interest expense, $200,000.00 in intangible amortization and $100,000.00 in debt issuance costs. This is compared to a non-GAAP loss per share of $0.15 in the first quarter of 2008 and all of this is shown in the GAAP reconciliation table in our financial statements.

With respect to the balance sheet we ended the fourth quarter with cash of $54.2 million. That was a decrease of $500,000.00 of cash of $54.7 million at the end of the fourth quarter. In summarizing, we used $700,000.00 in cash flow from operations primarily due to the net loss. We borrowed an additional $1.1 million under our line of credit with UBS and we used another $800,000.00 in capital expenditures primarily in support of our in-office hysteroscopy placement program.

In regards to the UBS loan, remember that in November 2008 we entered into a credit line agreement with UBS whereby we are able to borrow a certain percentage of the fair value of our auction rate securities under a credit line. The line is intended to be a no net-cost loan and is fully collateralized by our auction-rate securities. A line of credit will be repaid to UBS when our auction-rate certificates are either redeemed by the issuer or under the settlement agreement in June of 2010.

Domestic accounts receivable days sales outstanding continue at 36 days and worldwide DSOs decreased to 38 days as compared to 42 days at the end of the fourth quarter. Given the general economic conditions we feel these numbers are absolutely outstanding.

Inventory of $2.7 million is shown down from $3.8 million in the fourth quarter and is at planned levels.

Moving on to financial guidance, as reported in our press release, for the second quarter we are guiding to a revenue range of $30.5 million to $31.5 million which would give us a year-over-year growth rate of 19% to 23%. We are continuing to factor in a down economy, a strong dollar, and a potential competitor later in the quarter. On the positive side, we would expect to see incremental sales resulting from our advertising program launched in February.

On the whole we acknowledge that our guidance remains cautious given the current economic recession. We are also reaffirming our full-year sales guidance of $125 million to $135 million. Gross profit margins are expected to be between 79% and 80% in the second quarter and we expect total operating expenses of $25 million to $25.5 million. This would result in a non-GAAP income per share range of $0.01 to $0.03 for the quarter. We are also reaffirming our full-year non-GAAP earnings per share range of $0.48 to $0.67 per share on $11.4 million in non-GAAP adjustments.

That concludes my remarks, so I will turn the call back over to Mark. Mark?

Mark Sieczkarek

Okay thanks, Greg. As I customarily do, I would like to take the next few minutes to discuss our main initiatives for 2009. There are four important areas to address. First, the continued drive for office adoption; secondly, building consumer and clinical awareness; third, expanding our presence in targeted international markets; and last, submitting our fourth generation assured delivery system to the FDA.

First with respect to our drive to office based procedures, as I believe many of you already know, performing Essure in the office carries several important advantages. Most importantly, it is where the patient prefers to have the procedure done, because it is a more comfortable and anxiety free location. Fundamentally it means that the physician is using minimal anesthesia, probably only local anesthesia, and/or sedation.

Now the office also represents the location where the physician earns a greater portion of the total reimbursement for the procedure and it is more efficient in scheduling appointments than when in the hospital. The office is also the lowest cost site of service for both the insurance payer and for the patient with many in-office Essure procedures costing the patient just a small co-pay like a doctors’ visit.

The office will also prove to be a major advantage for the Essure procedure if and when competition enters this market. We designed Essure to be the optimal permanent birth control product for office use. Our purely mechanical mechanism of action does not rely on thermal injury with its attendant patient discomfort, pain management requirements, fluid management, and safety concerns, all of which are troublesome to manage in the office environment.

As a result of our pioneering efforts in office based hysteroscopy, today about 60% of our sales are to nearly 3,600 physicians who obtained hysteroscopic equipment and are safely and effectively delivering the Essure procedure in an office setting. We provide many programs in a compelling environment for physicians who now use in-office hysteroscopy for several other reasons, all because the Essure procedure taught them that visualization before treatment represents a significant improvement in care for their patients.

We train and provide programs in all of the elements that go into a successful experience for the patient including office staff training, equipment selection, and other procedures, room infrastructure, physician counseling skills, reimbursement, and referral network building. We intend to continue these programs into 2009 and to supplement them with new programs to keep the momentum going.

Just as an example, through the end of April we will have already conducted 20 of these programs with an attendance of nearly 1,500 healthcare professionals. We met our in-office goals in 2008 and I expect that we can add another 10 percentage points to our current 59% by year-end. I might add that once physicians begin to offer Essure in the office, the news travels fast amongst their patients and procedure volumes begin to increase. This leads to what I have mentioned several times to you. The physician office is the sight of highest utilization of Essure.

Our second major initiative for 2009 is to develop broader awareness of the Essure device and procedure amongst all physicians and consumers. You may recall that nationwide awareness of Essure was only at 2% when we kicked off our consumer awareness program last year. This program involves making both non-Essure physicians and patients aware of our safer, faster, and more effective permanent birth control option, as well as building our professional and patient brand identity around Essure.

We continue to search for effective ways to make Essure and its benefits known to all physicians who refer patients for sterilization procedures including family and general practitioners as well as the non-hysteroscopic OB Gyns.

As for the patient awareness initiatives, our primary program planned for 2009 is an expansion of our direct to consumer advertising program to 15 US cities totaling about 10% of the total US population. Now, the ads which are currently running will continue for four to six months depending on the city. We are spending up to $13 million on this program this year and expect proportional results with leading indicators already demonstrating a great level of interesting consumers and with the expectation of sales growth attributable to the ads beginning this quarter.

Our financial payback expectation remains in the 18/30 month time frame similar to what we experience in the original eight cities to date.

Although it is still early in the campaign, our ’09 campaign is mimicking our successful ’08 campaign with another doubling of web hits, a lot of call center activity and referrals to physicians. As you may recall, our ’08 program resulted in growth almost 3x our national average. It doubled our doctor sign ups as compared to the national average and it drove our awareness in those cities from 25 to 30%.

Now, kind of silently on the backside and the public relations front we have made continued progress. We had an article in Time magazine and a seven-minute clip in February on The Doctors’ show. Just a few weeks ago, you may have already seen some of this; we received a lot of National press when Trista Sutter a 38-year-old mother of two and a national celebrity announced she was going to have the Essure procedure. That story alone generated 100 million impressions thus far.

Just remember, building consumer awareness is the strategic key to creating an influction in our marketing expansion and we are committed to continually build this awareness through all means possible on behalf of women and our loyal shareholders.

The third initiative for 2009 is the expansion of our business in targeted international markets. We announced to you last quarter that we are establishing a direct sales organization in the UK with the expectation of a favorable report from the National Institute of Clinical Excellence to be published around the middle of this year. We also announced the regulatory approval of our product in Brazil where we are selling through a distributor. We believe that both the UK and Brazil opportunities will, over time, build into a sizable book of business.

Elsewhere internationally we are pliant complete product registration and to hire distributors in many large Asian markets.

International growth rates on a unit volume basis continue in the 40%+ range and we are excited about penetrating new markets, as well as bringing Essure to the standard of care of established markets such as France.

Lastly, our fourth initiative for 2009 is the continued improvement of the Essure system with the submission of our fourth generation delivery system to the FDA. As a reminder, the fourth generation launch induced further ease of use changes for the physician that will further decrease an already short procedure time and simplify, while making more precise, the deployment of the device. We expect to file a PMA supplement with the FDA this year and believe that the fourth generation device will further solidify our market leadership position in 2010.

Additionally, we continue to move forward with our fifth generation product development plans. Without giving you specific share, due to competitive reasons, about how this device will be different, I can tell you we are very excited about being able to leverage the extensive physician training consumer and professional brand creation that we have achieved while staying ahead of any potential competitor with an improvement that will be game changing for transcervical permanent birth control.

I have one final area to update you on. We continue to work with the FDA on our label claim involving the use of Essure with NovaSure®. We have obtained a favorable US label claim on compatibility with Thermachoice® and HD are ready, these are the other two endometrial ablation procedures, as well as a CE mark for compatibility with all three GEA procedures and we still anticipate some FDA action this year.

In conclusion, we have now performed nearly 285,000 procedures since FDA approval with most of the recent procedures coming from the office environment. With now 9,400 physicians having used Essure we have reached nearly 1/3 of all practicing OB guys in this country, however patient awareness of Essure across the country is only at 2%. The investment in building patient awareness is allowing us to generate profitable net sales growth and has confirmed for us that an educated patient will choose the less costly, non-invasive Essure method over a surgical permanent birth control procedure.

In a nutshell, we are very excited about the future growth of our product and our company.

With that commentary I would like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Block with Suntrust Robinson Humphrey.

Jonathan Block - Suntrust Robinson Humphrey

My first question pertains to your ongoing direct to consumer. I know you have got maybe 13 cities in total. I don’t think you have disclosed them, but in doing a little bit of digging I think it sort of runs all over the map in terms of how the states are faring in terms of the levels of unemployment etc… So, I was just wondering what you can share with us on the difference between some of those direct to consumer campaigns. Is there a big delta between some of these markets and if so is that based on the overall economy?

Mark Sieczkarek

Hey Jonathon that’s a great question. To summarize, I don’t think the answer is in yet on your specific question. Remember, we are continuing to test so we’re running these programs both at different kind of spend levels as well as in cities that are probably experiencing more of the economic recession than others.

If you combine everything I just said we’re probably seeing, right now, a slight differential in those cities and those experiencing the economic recession more so than others. But, it is so slight and it is so early in the program, I hate to say that we’re definitely seeing a trend at this point. I think that bodes well. I think, to one of our points in this discussion today, that even in a recession people are still thinking about birth control and maybe even more so.

Jonathan Block - Suntrust Robinson Humphrey

Okay great and just a quick one for you Greg. In the guidance for 2009 is there a specific tax rate that we should be using and then will that change meaningfully in 2010?

Gregory Lichtwardt

Well, I think for this year I would have you use a rate of let’s say 10% to 12%. That is going to be comprised of our international taxes and domestic alternative minimum tax. I don’t really have a very good answer for you for next year. I think that that percentage could decrease slightly maybe in the 8% to 10% range, but we’re currently looking at it and I can certainly answer that question for you within in the next couple of months.

Jonathan Block - Suntrust Robinson Humphrey

Okay and then it seems like Adiana might be in the home stretch here in the US and they’ve been out there OUS for a little bit. So, is there anything you can share with us regarding what you have or have not seen in OUS markets? I believe they may have done their first procedure in the UK. When you talk to doctors how are they approaching the market? What are they telling them? Are they placing the RF generator, are they trying to sell it? Any details you can give us would be great.

Mark Sieczkarek

Start off internationally our field check, the level of activity, has been really limited, there is really nothing of note to report. As you mentioned, they have done a case that was publicized in the UK and there are a couple that we know of in the Netherlands, but quite frankly it’s pretty hard to find documented evidence of the launch. It certainly, as you can see by our results, hasn’t affected our business. So again, it is relatively quiet on the other side of the pond, so to speak.

I think here in the states, as you mentioned, they did receive an approval ability letter at the beginning of March. That was somewhat anticipated anticlimactic. As we said, we are always anticipating, I think, in everything that we have talked to you guys about that. We see them probably sometime here in the US in later second quarter. Also from a, at least what was in the letter, that the data totally mimics what was presented to the FDA panel, so there are no surprises there.

Jonathan Block - Suntrust Robinson Humphrey

Okay great. Thanks for the color guys.

Operator

Your next question comes from Shawn Fitz from Stephens, Inc.

Shawn Fitz - Stephens, Inc.

As we think about what looks like an imminent launch at some point in the near future, from Adiana, could you talk about an overview of tactics and strategically how you are approaching your physicians in terms of trying to educate them on the various advantages and disadvantage s of the competing technologies. Also, could you maybe just walk us through how your are positioning the Essure product in the marketplace relative to Adiana?

Mark Sieczkarek

Sure Shawn. I think if I make this real simple for you, just think of it this way. If we think of them being in a perfect environment of the clinical setting they had a device failure rate of 18 per 1,000 procedures with 2/3 of those actually coming from method failure. Now, our commercial pregnancy rate, commercial pregnancy rate, after six years of utilization is less than 1 per 1,000 and not a single documented instance in the method failure.

So, I think that I would lead with the key message, clinical effectiveness is no secret. Which would you rather pick, a product that has a 1 in 50 chance of someone becoming pregnant or 1 in over 1,000? I think that kind of summarizes our approach, if you will, to the marketplace.

Shawn Fitz - Stephens, Inc

Great and then Mark, just as a follow up to that, could you refresh my memory on what the training requirements are going to be for Adiana?

Mark Sieczkarek

Well the labeling hasn’t come out, so that’s not necessarily clear. It has been indicated somewhere in there though that training will be required. I am sure it is going to be very similar to our protocol where physicians in preceptorship will do 3 to 5 cases before they are certified to do them on their own.

Shawn Fitz - Stephens, Inc

Okay, great guys. I will get back in line.

Operator

Your next question comes from Jason Bedford with Raymond James.

Jason Bedford - Raymond James

My first question is kind of an earlier question. On the DTC campaign are you seeing anything different from these ads versus the ads you ran last year?

Mark Sieczkarek

Jason, I would say very similar results. I would say the one thing that we are getting feedback on is that a lot more calls are going directly into the doctor’s offices. I think that is a good sign, because I think as maybe in the past doctors weren’t necessarily quite ready from a practice standpoint or maybe there was skepticism yet about Essure. This time around they are definitely treating it as though Essure is here to say and we’ve helped them prepare, if you will, for that onslaught in terms of handling the calls and their staff handling the calls as well.

So, I would say that that is probably the one thing right now is early in this campaign we are seeing relatively different. I think in terms of the up front doctor sign ups we got more of them this time around, because we had a little bit more time to prepare the market for it coming. We doubled web hits last year; we doubled them again this year. Like I said earlier in my prepared remarks everything else seems to pretty much be mimicking the results of the ’08 campaign which we definitely termed successful.

Jason Bedford - Raymond James

Okay, that’s helpful and then just you kind of alluded to the number of doctors entering preceptorship. Does that in any way reflect your efforts from selling perspective in terms of did you focus the sales force on, kind of, driving utilization versus getting new doctors on board?

Mark Sieczkarek

Well, yes. First and foremost, Jason, if you have to prioritize where we’re going it is relative to utilization overall. If we kind of carve up the US though, in terms of the DTC or consumer awareness campaign territories versus the rest, we are able to go in early two, three months before we turned on the advertising spigot to prepare doctors.

So, what we are seeing in these programs, I mentioned the 20 programs where we’ve had over 1,500 doctors and healthcare professionals get involved with it, a lot of that is a result of letting them know that the consumer awareness campaign was coming to their territory. In those cases in the territories where we are advertising we are signing up a lot of new doctors, but the overall priority and focus for our sales force is utilization.

Jason Bedford - Raymond James

Okay and then I have a quick question for Greg. Maybe I missed this, but what did you spend on DTC in the quarter?

Gregory Lichtwardt

We spent a little over $5 million as planned.

Jason Bedford - Raymond James

Okay, great. Thank you.

Operator

Your next question comes from Eric Schneider with UBS.

Eric Schneider - UBS

On DTC advertising you said and repeated that it’s around 10% of the population covered by the current campaigns, but since those areas are preferentially selected, where you have the density to make it worthwhile can you give us a sense of what proportion of your doctors or procedures are actually covered within those areas?

Gregory Lichtwardt

Just in general terms, 10% of our procedures that market creates is wide. I think if you go geographically and track our business, for the most part you have some anomalies, but population kind of mimics our business percentage as well.

Again, these cities were not necessarily for, I will say, higher utilization than others, but more of an in-office doctor presence. That was probably the first critical factor and then reimbursement also. It may be a couple of percentage points over the 10%, but for the most part it, again, mimics the population spread.

Eric Schneider - UBS

Okay that’s helpful. Based on that we had estimated that relative to a sort of unadjusted number, right, one where you weren’t doing advertising that DTC in all its forms contributed somewhere around 2,500 units to the quarter based on your pay back periods and the proportion of population covered. Is that in the ballpark that you’re seeing?

Gregory Lichtwardt

I could take that offline with you, but I think that’s going to be on the high side. We had far fewer cities that were running last year that would be creating incremental sales in the first quarter of this year. The advertising that started for this year started on Presidents Day in February and our belief is that we really won’t see any net sales increment from that program until this current quarter that we’re in now.

Eric Schneider - UBS

Okay and you changed the language, or adjusted the pricing, for sites office locations rather than sites of minimal anesthesia. How big is that difference?

Gregory Lichtwardt

There are also about 2% of hospitals included in there and about 5% of ambulatory surgery centers included in there that perform this procedure in a clinic setting with nothing more than a local. So, it is basically 52% are pure physician offices owned by private practicing physicians and about 7% in other sites of service ASPs and hospitals.

Mark Sieczkarek

Just to be clear on that, we referred to it as in-office before and it always included those numbers. I think the phrasing is what we changed not the underlying numbers or how we track those.

Eric Schneider - UBS

Okay so when you refer to doctors certified in office you are actually referring to doctors who are certified to work in the minimal anesthesia setting which may be their office or may be another site?

Gregory Lichtwardt

Yes, that’s correct.

Eric Schneider - UBS

Okay. Even though you’ve continued to make modifications in PMA filings with the products you’ve, over the last couple of years, continually ramped down absolute R&D dollars, can you continue to do that or does that have to start to move up at some point?

Gregory Lichtwardt

I think to your point maybe as a percent, if you will, of sales, we’ve seen the ratio go down. I think as we move forward given the base business where it is: for instance we’ve just finished up a very costly post approval latest reiteration of 305. That was kind of a balancing act where we finished the costly 305 post approval study, but we’re in the phase of beginning like the 405/505 studies.

To your point I think the dollars will rise ever so slightly, but the ratio and the percentages, the percent of sales, will go down.

Eric Schneider - UBS

Okay, great. Thank you.

Operator

Your next question comes from Amit Hazan with Oppenheimer & Co.

Amit Hazan - Oppenheimer & Co.

My first question is on the DTC. Just thinking about the 2008 DTC cities I am wondering if you can give us a little bit of color on how those locations did here in the first quarter. I think maybe I misheard you, Greg, but did they grow kind of in line with the growth that you reported in the US, or where they the multiple above that you saw last year. I would appreciate any color that you can give us around those cities in particular.

Mark Sieczkarek

This is Mark. They continue to perform above the national. I think I made the comment, you know, we did another awareness study six months after we kind of shut down the advertising in those cities and we were able to maintain that awareness percent of 30% which is really key to us. I think it is starting to show, certainly in the results, even as we see in the first quarter, because to the point of your question we are continuing to see a growth above the national average even in those 2008 cities.

Amit Hazan - Oppenheimer & Co

At the same multiple you saw last year?

Mark Sieczkarek

I would say it is close enough. There probably isn’t enough of a difference to talk about.

Amit Hazan - Oppenheimer & Co

Okay and then just back to the logic idea, Adiana. I am just wondering if you can give us a little sense of what kind of market share, if you are assuming they get approval and launch in the second quarter, what kind of market share do you think they would be able to obtain, if at all, this year.

Secondly, what might you do if they choose to use price as a way to gain market share and how might you defend that?

Mark Sieczkarek

At the end of the day, I talked about certainly the clinical superiority and there are probably about four other good reasons why doctors should continue using ours. Our intention is really not to lose any doctors. Not being naïve, there are certainly doctors who are going to trial the new product. Quite frankly, our hope is that many of these, they go to doctors who are currently not using hysteroscopic sterilization and create more awareness in the marketplace overall. I think that certainly that is a key.

To your other question in terms of price, I will use the adage you get what you pay for. In terms of, we just did a survey with our doctors and 80% of them basically said that clinical effectiveness is what matters to them. So, even given a price differential, they are certainly swayed by clinical effectiveness and I guess that kind of answers your question.

Amit Hazan - Oppenheimer & Co

Okay and, Greg, on the selling price in the US can you give us the exact figure that it went up to?

Gregory Lichtwardt

It’s around $1,390.00

Amit Hazan - Oppenheimer & Co

Okay great. Thanks very much.

Operator

Your next question comes from Charley Jones with Berrington Research.

Charley Jones - Berrington Research

Did you guys experience a notable increase in the number of physicians approaching you for training who noted that it was the DTP program that was the impetus for their request?

Mark Sieczkarek

Yes, absolutely Charley. In our cities where we advertised last year our doctors sign ups were 2x that of the national average. There are many, many stories that reps shared with me that doctors who didn’t even want to see them or talk to them about Essure were so overwhelmed by calls coming to their office that they called us for training.

As I mentioned earlier as well, the first four months of this year we put on 20 programs where we’ve had 1,500 healthcare professionals attend for training as well. I think certainly the direct to consumer piece is not only making our patients aware, but also doctors.

Charley Jones - Berrington Research

Maybe you will let me slide with this one, give me a honeymoon here, but I am hoping you could kind of give us an idea of how January, February, March, April have trended. Everyone is worried about the economy and maybe you can kind of just go through what you guys saw throughout the quarter. Then, kind of tied up in that, are you already seeing some notable trends in the cities where you have DTC on the consumer side, just in the last month or so? I know it is kind of a touch one, but…

Mark Sieczkarek

I think if you take a look at our year-to-year; you take a look at our performance versus guidance and you take a look at the two factors that really impact first quarter. One being the economic recession, if you will, and people doing less elective things out there, as well as this proliferation of the higher deductible plans, which now we have seen kind of ramp up for the last four years, I think all of that said things certainly went as we anticipated they would and all of those factors certainly played in to our results to a certain extent. But, I think all in all I don’t, as I mentioned in my opening remarks, I think we had a pretty decent offset, in terms of our business, relative to all of those environmental factors that I mentioned and are pretty pleased considering where we are right now in this economy.

Charley Jones - Berrington Research

Is it safe to say things got incrementally better each month or was April pretty tough?

Mark Sieczkarek

Well, we’re not talking about April here; we’re only talking about the first quarter. Normally what we see and we saw in the first quarter was a typical; I will call it a typical first quarter ramping of our business.

Charley Jones - Berrington Research

I’m sorry I meant March. I apologize for that.

Mark Sieczkarek

It tends to go, when you break into the new year it tends to go slow and you start to build momentum in, say, the second week of February all the way through March and that continues on then through the second quarter normally.

Charley Jones - Berrington Research

I know there is not a single answer for this, but do you have an idea what your average co-pay is at this point?

Mark Sieczkarek

In many doctors offices under private pay the co-pay is a typical visit co-pay. Well person annual co-pay, $10.00 or $20.00. I think the issue there is whether or not women know that going in, but a co-pay, for instance a tubal sterilization is usually 10% to 20% of the total cost of the procedure which can range anywhere from $5,000 to $8,000.00. So there is a big difference between going to get Essure and paying the co-pay of $10.00 or $20.00 which is basically the same that a woman is going to pay for her co-pay for a prescription or a months worth of birth control pills.

Charley Jones - Berrington Research

All right thanks and then do you expect to reverse your deferred tax liability this year, or is that what’s creating some of the question marks over the 8% to 10% rate in 2010?

Gregory Lichtwardt

Absolutely not; we will end up holding that for the better part of three years probably per GAAP. What we’re recording as a tax provision is the actual alternative minimum tax that we have to pay in the US and our international taxes that we have to pay, because we don’t have NOLs internationally.

Charley Jones - Berrington Research

To follow up on one of Jonathan’s questions, did you see dramatic differences in states with high and low unemployment rates? I mean, are we seeing differences like up 40%, down 40%, or is it closer together than that?

Mark Sieczkarek

There is a little correlation, but as I said in answering questions relative to DTC it is very, very slight and I wouldn’t say it’s creating a trend at this point.

Charley Jones - Berrington Research

Do you guys need any additional data for your compatibility with NovaSure, any additional clinicals or anything like that? Or is it pretty much just basic questions and answer sessions?

Mark Sieczkarek

We are in the process of answering questions, as is typically the case right now.

Charley Jones - Berrington Research

Okay, that’s it for me. Thanks.

Operator

Your next question comes from Thomas Kouchoukas with Stifel Nicholas.

Thomas Kouchoukas - Stifel Nicholas

I wanted to follow up on the question about the ’08 DTC campaign and kind of the momentum that you are seeing. You still have some momentum in those markets. Did you have to spend this quarter on maintenance advertising or could you talk a little about what you do to keep that momentum going since you have kind of moved on to a new wave of cities here.

Mark Sieczkarek

We did a little bit of maintenance, Tom, and most of that comes in a print format. Then we also had some of those with no maintenance at all. It is too early to talk about the results, but I think that the key things for us, I made comment on this earlier, is that we held onto the awareness that we initially created and we’re continuing to see an increase over the national average in terms of adoption of Essure. I think those are the two big takeaways.

This is kind of the basis to your question, what we’re trying to figure out how far and how long do we have to go in terms of continuing or not continuing to advertise in some of these towns. Once we create the ground swell, once we create the viral activity, once we get doctors recognizing this is standard of care, then we don’t need to go any further.

Thomas Kouchoukas - Stifel Nicholas

That’s helpful, thank you. Just to touch on the co-pay question from before; your language suggests that in most patients the patient only pays a co-pay and I’m curious to know, like, if you look at the entire base of office based procedures, I am sure there is insurance out there that you pay your co-pay and a bill comes later in the month. Could you talk about what the average out of pocket cost is for the patient, in the office, across the board? Also, what is the HSG add to that some 90-days later?

Gregory Lichtwardt

In terms of giving you an overall average it is hard to do that because, again, the vast majority currently of private pay in an office setting will treat it as a co-pay. That being said there are always anomalies. For instance, in the state of Florida for whatever reason private pay pays the doctor as much to do it in the office as they do in a hospital, so there is not necessarily a big incentive for doctors. But, obviously then that is going to cost the patient more being done in a hospital type of setting relative to the deductible.

So, it is hard to give you an overall average and I will just kind of stick to my original, which is the majority of payment plans currently they will just require a co-pay in the doctors office.

Thomas Kouchoukas - Stifel Nicholas

There has been a lot of media attention recently about the dramatic increase we’ve seen in vasectomies in several centers across the US. Some are saying they are up 30%, some are saying they are up 50%, especially in November after we got through that bad economic month. I am looking to kind of standardize what patients are looking at; what families are looking at as they say okay we need to take care of this; we want to be sterile. I would think in this economy you go for effectiveness, but also cost is going to be a driver.

My question on the HSG was did that add an element of cost that might make it sway a patient one way or the other?

Gregory Lichtwardt

Tom, generally the HSG is also a covered benefit and will also require a $10.00 or $20.00 co-pay when you go back in for the HSG; so it’s not really adding materially.

Thomas Kouchoukas - Stifel Nicholas

Okay that’s great. With that increase you’ve seen in vasectomies do you see the overall market growing? It seems to me that trend is a positive for you guys, but I want to make sure I’m kind of reading it right that it is not one in favor of the other in all cases, that the pool is bigger.

Mark Sieczkarek

Yes, I think the pool does get bigger, Tom, and it goes back to my point which we know we are already impacting. The fact that there are 7 ½ million families out there that are in the ripe age, 35, 44 with two plus kids and certainly we are trying to make them aware that Essure exists as an alternative.

I think the one thing that we’re, again, maybe a little bit novice at, but we have gone back and for instance during the depression birth rates declined materially. Does that mean that somebody gets either snipped, or gets an Essure, or gets a tubal? We can’t correlate that directly, but certainly, if you read the paper, you said vasectomies are up. There are other methods of temporary birth control. For instance condoms are up as well.

So, I think it all points to a growing trend that people are paying more attention to birth control overall. Certainly we would like to think that we’re benefiting from that as well and especially that we’re on the air too.

Thomas Kouchoukas - Stifel Nicholas

Okay great, thank you.

Operator

Your final question comes from Kevin Kotler with Broadfin Capital.

Kevin Kotler - Broadfin Capital

The age of the patients getting Essure, have you been tracking that? I am curious if there is a trend towards younger women and perhaps speaking of some doctors, I guess, as Adiana comes in is there an argument to be said that younger women might want a reversal and in vitro fertilization, or their procedure might be more minimal versus your procedure?

Mark Sieczkarek

That’s a multi-faceted question. First of all, we are not hearing, and again, because of HIPPA it is hard to track. We have to talk to doctors and get a general sense from them anecdotally. I wouldn’t say they are seeing any younger women. As a matter of fact, OB Gyns in general stereotypically will push back real hard on somebody who is young in terms of permanency. So, I don’t hear or see a trend towards younger people going for the permanency piece.

I think to your second question relative to IVF, there are a number of papers already that have been published relative to Essure being done first and then IVF being done as well successfully. So there is no, let’s say, medical reason why an Essure can’t be done and five years later somebody can go in for an IVF. It already has been done with healthy births on the backside. So, I don’t see a potential competitor entering the market and using that as a potential advantage for their product.

Kevin Kotler - Broadfin Capital

Okay and you talked about, I think, 59% of the procedures are being done in a minimally anesthetic office settings. I was just curious, in trying to get an understanding of your competition, do you look at, or have you tracked, the percent of these offices that have like NovaSure? I am basically trying to figure out what a worse case scenario may be. What percent has a Hologic NovaSure system in their office?

Mark Sieczkarek

Well we absolutely track that.

Kevin Kotler - Broadfin Capital

Can you give us any color on how that overlays?

Mark Sieczkarek

For competitive reasons I am not going to talk about that.

Kevin Kotler - Broadfin Capital

Okay, fair enough. Well, thanks a lot.

Mark Sieczkarek

Thanks for all of your excellent questions and again, we do appreciate you joining us on this call today. We look forward to speaking with you again at our second quarter conference call. For those of you going to ACOG, which is held in Chicago in May, we’ll probably see you there as well.

We will talk to you soon. Thank you again. Bye now.

Operator

Ladies and gentlemen that concludes your conference call for today. We thank you for your participation.

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