Bayer sees fertile ground behind struggling Conceptus sales

The $1.1bn price tag put on Conceptus yesterday must have many wondering what Bayer sees in its target. To be sure, the California group plays to Bayer’s strength in women’s health with its birth control device Essure, yet it was only able to generate a small profit in 2012 after 10 years on the US market, an amount that suggests the German group overpaid.

No doubt Bayer sees unexploited promise that justifies the big cheque it is about to write. It brings to the table a larger sales force with greater reach than Conceptus can muster, and while the spongy implant will require representatives to guide specialists on its proper use, its sales could probably benefit from greater awareness among gynaecologists and patients alike.

Permanent solution

Essure is placed in women’s fallopian tubes during a short non-surgical procedure – the company claims 10 minutes of hysteroscopic time. A natural barrier builds around the insert to prevent sperm from reaching the egg; after three months a physician confirms that the procedure is effective through a low-pressure and low–volume hysterosalpingography (HSG). Five-year data indicate a failure rate of 0.17%.

Bayer touted the acquisition as adding another string to its bow: a permanent contraceptive system to supplement its franchise of hormonal pills and the Mirena levonorgestrel-eluting intrauterine device, which is effective for five years. Essure is pitched at women who are certain they do not want any more children and want a permanent solution.

Under usual value metrics, the price is well in excess of a typical acquisition. The $31-per-share cash offer, a 20% premium over Friday’s close, was in excess of sell-side analysts’ price targets, which already tend to take into account the possibility of M&A.

Conceptus made $5.4m of net earnings on $140.7m in Essure sales in 2012. In 2011, the company lost $7.9m as sales stumbled in France and Spain, its two biggest overseas markets. To drive growth it chose not to implement year-end sales incentives or a 2012 price increase. The 10% jump in sales in 2012 brought it back to 2010 levels.

Looking up, looking down

This year was looking up, with US healthcare reform rules abolishing co-payments for contraception services, expansion to women over 40 in France, and clinical data to determine whether the HSG test at three months can be replaced with transvaginal ultrasound at the time of insertion.

There was also the potential for a next-generation device to receive a CE mark as early as the end of the year. This might also eliminate the need for the HSG test, removing that barrier to sales and potentially expanding the market.

While positive news might have been a boost, Conceptus is restricted by scale. It has only 192 sales representatives, a tiny fraction of what Bayer has at its disposal worldwide.

With more than 40,000 obstetrician-gynaecologists in the US alone, Conceptus was not in nearly the position to build awareness of Essure that it probably needs to be to achieve its potential. That does not even consider what Bayer potentially could do with direct-to-consumer work compared with Conceptus, which had $87m of cash on March 31.

Still, even considering how well Bayer might be able to convert the Essure assets into a bigger money spinner, the Conceptus buyout seems rich, as witnessed by a price that trumped even the usually bullish sell side. The German firm will need to be ruthless in stripping out costs and aggressive in building sales to justify the $1.1bn payout.

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @JonEPVantage on Twitter

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