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Form 10-K

Commission File Number: 0-27596

Conceptus, Inc.

1021 Howard Avenue

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting and non-voting stock held by nonaffiliates of the Registrant based on the closing sale price of the Registrant’s Common Stock on the Nasdaq National Market on June 30, 2003 was approximately $146,150,602 as of such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      There were 24,933,859 shares of Registrant’s Common Stock issued and outstanding as of February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the Registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

CONCEPTUS, INC.

FORM 10-K

TABLE OF CONTENTS

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      The following information should be read in conjunction with the Consolidated Financial Statements and the notes thereto. This annual report on Form 10-K, and in particular the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In this report, the words “believes,” “anticipates,” “intends,” “expects,” “plans,” “seeks” and words of similar import identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our limited operating and sales history; the uncertainty of market acceptance of our product; dependence on obtaining and maintaining reimbursement; effectiveness and safety of our product over the long-term; our ability to obtain and maintain the necessary governmental clearances or approvals to market our product; our ability to develop and maintain proprietary aspects of our technology; our ability to manage our expansion; our limited history of manufacturing our product; our dependence on single source supplies, third party manufacturers and co-marketers; intense competition in the medical device industry; the inherent risk of exposure to product liability claims and product recalls and other factors referenced in this Form 10-K. These factors are discussed in more detail below. Given these uncertainties, persons evaluating our business are cautioned not to place undue reliance on such forward-looking statements. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Market, Ranking and Other Data

      This Form 10-K contains various estimates related to the women’s healthcare, contraception and medical device markets. These estimates have been included in studies published by government agencies and market research firms and our estimates are based on management’s knowledge and experience in the markets in which we operate. These estimates have been produced by industry analysts based on trends to date, their knowledge of technologies and markets, and customer research, but these are forecasts only and are thus subject to inherent uncertainty. Our estimates have been based on information provided by customers, suppliers, trade and business organizations and other contacts in the markets in which we operate. We believe these estimates to be accurate as of the date of this Form 10-K. However, this information may prove to be inaccurate because of the method by which we obtain some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and other similar data included in this Form 10-K, and estimates and beliefs based on that data, may not be reliable.

PART I

Overview

      We develop, manufacture and market Essure^TM, an innovative and proprietary non-incisional permanent birth control device for women which was approved for marketing in the United States in November 2002 by the United States Food and Drug Administration, or FDA. Essure is a soft and flexible micro-insert delivered into a woman’s fallopian tubes designed to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure micro-insert prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization. Based on clinical trial data filed with the FDA in October 2002, Essure has been demonstrated to be 99.8% effective at two years of follow-up. As of November 2003, we have accumulated sufficient patient follow-up data from the Phase II and Pivotal clinical trials for a three-year effectiveness claim and have filed a PMA supplement with the FDA for a three-year effectiveness claim consistent with the one and two-year claim.

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      The Essure placement procedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative to tubal ligation, the leading form of birth control in the United States and worldwide. Laparoscopic tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure placement procedure does not require cutting or penetrating the abdomen, which is expected to lower the likelihood of post-operative pain due to the incisions/punctures, and is typically performed in an outpatient setting without general or regional anesthesia. In the Pivotal trial of Essure, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essure micro-insert. A patient is typically discharged approximately 45 minutes after the Essure placement procedure. No overnight hospital stay is required. Furthermore, Essure is effective without drugs or hormones.

      We believe Essure also appeals to women who have completed childbearing but who are using either temporary birth control methods or no birth control method. A woman’s tolerance to wearing Essure was ascertained in our Phase II clinical study follow-up to four years and has been rated as “good” to “excellent” in 99% of women at all visits to November 2003. Among women from our Pivotal trial who have worn the micro-inserts for up to three years, at least 97% rated their comfort with Essure as “good” to “excellent” at visits conducted to November 2003. Satisfaction was rated “somewhat” to “very satisfied” in at least 98% of visits through two years. At three-year follow-up (reporting as of November 2003), 92% of women rated their overall satisfaction as somewhat to very satisfied. Excluding the day of the Essure placement procedure, 92% of the patients in the Pivotal trial who were employed returned to work in one day or less. The safety and recovery profile of Essure is one of the reasons that we believe it may be a preferred alternative to currently available methods of permanent birth control.

      In early March 2004, Planned Parenthood Federation of America (PPFA) approved Essure for use in qualifying Planned Parenthood Affiliates across the United States. PPFA has nearly 900 clinics under 123 PPFA affiliates that serve nearly 5 million people a year. PPFA tested the Essure procedure in clinics in Oregon and Pennsylvania, evaluating the ability of a typical clinic setting to successfully offer the procedure. Standards for the use of Essure in PPFA affiliates were then developed along with guidelines for the introduction of the procedure into Planned Parenthood clinic settings. We believe that PPFA’s thorough evaluation demonstrated that Essure can safely and effectively be offered in a clinic setting and this approval is of vital importance to our goal of making sure all women have access to Essure, including those who do not have private insurance coverage.

      We believe that physicians are receptive to Essure because it is a less invasive permanent birth control option to offer their patients. We also believe physicians find the Essure procedure relatively easy to perform after completing our training program. We believe hospitals are able to utilize their facilities more cost effectively with the Essure placement procedure compared with tubal ligation. We expect payors will continue to experience cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital stays associated with tubal ligations. In addition, payors may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the drawbacks of traditional permanent birth control methods but who may elect to use Essure.

      Essure is currently being marketed in multiple countries. In November 2002, we received FDA approval to market Essure in the United States. In 2001, we were approved to affix the CE Mark to Essure, indicating that Essure is certified for sale throughout the European Union, subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. In 1999, Essure was listed with Australia’s Therapeutic Goods Administration, or the TGA, which allowed us to market and sell Essure in Australia. In Canada, we received clearance from Health Canada to market Essure in Canada in November 2001. We also have distributors in Singapore, Indonesia, Morocco and Turkey.

      In order to focus our resources domestically, in January 2004, we have completed the sale of our wholly owned French subsidiary for a nominal amount to an investor group comprised of our former French management team and signed a long-term exclusive distribution agreement for Essure with the acquiring

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      In order to further decrease our production costs and improve gross profit, we are in the process of transitioning our manufacturing operations to Venusa, a third party manufacturer located in Mexico. We are currently working with the FDA to obtain approval of Venusa’s facility, and we expect to receive approval by the end of the first quarter of 2004.

      We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. We believe that physicians will not use a product unless they determine, based on clinical data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. Our biggest challenge is to speed up the adoption process to make the Essure procedure the standard of care for permanent birth control.

      Our strategy in the near term is to focus on the earlier adopters who have already been trained by our professional education group. We intend to help those doctors to build their practices so that they will perform more Essure procedures on a monthly basis. We will increase our call frequency to those doctors by our field representatives, strengthen referral programs to get women who are interested in the Essure procedure to those doctors, and continue with our marketing programs to increase Essure awareness among women and the medical community. We have also build strategic alliances with other businesses to help to promote Essure and to train new doctors.

      Market acceptance of Essure will also depend in part upon the availability of reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to obtain reimbursement. We have made significant progress in 2003 by obtaining coverage for 59% of the total insured, non-Medicare United States of America population. We intend to continue with our effort to educate payors of the cost-effectiveness of our product and further established programs to help physicians in navigating reimbursement issues to facilitate the process.

      In March 2004, the American Medical Association accepted our application for a level one Current Procedural Terminology, or CPT, code, which may be effective as early as January 2005, subject to the completion of certain processes. Category I codes are reserved for those procedures that have demonstrated clinical efficacy, widespread use and have FDA approval. By having a CPT code specific to the Essure procedure, it is expected that coding for reimbursement will become considerably easier for doctors and facilities and that there will be fewer incidents of doctors being reimbursed incorrectly. We expect that the new code, once the process to establish it is complete, will significantly ease the burden on a physician’s office in obtaining reimbursement for Essure, and accelerate the coverage of Essure by private insurance companies and Medicaid.

      We have a limited history of operation and have incurred significant operating losses since our inception in 1992. We will continue to be in a net loss position until sufficient revenues can be generated to offset expenses. In February 2004, we completed a private placement of common stock to generate enough cash to help us to reach profitability. However, if our revenue growth does not materialize as planned, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital.

      We maintain two websites located at www.conceptus.com and www.essure.com. We make available free of charge on or through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q,

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Our Market

      A 1995 National Survey of Family Growth performed by the Centers for Disease Control and Prevention, or CDC, the most current available statistics on United States reproductive health, estimated that 64% of the 60.2 million United States women of reproductive age (15–44) use some form of birth control. The most common form of birth control in the United States according to this 1995 CDC survey was tubal ligation, followed by oral contraceptives, condom and vasectomy.

      According to the 1995 CDC survey, 39% of women who use any form of birth control rely on permanent birth control methods, such as tubal ligation and vasectomy. In 1971, vasectomy, a male sterilization procedure, outnumbered tubal ligation by more than three to one. As a result of the adoption of a less invasive laparoscopic procedure in 1971, tubal ligation procedures currently outnumber vasectomies by 75% annually. Published reports estimate that 700,000 tubal ligation procedures are performed each year in the United States, and the prevalence increases with age and number of children. Approximately 90% of United States women who have had tubal ligation have two or more children and 65% are between the ages of 35 and 44 at the time of procedure. Despite the decrease in vasectomies since 1971, we estimate that there are still approximately 400,000 vasectomy procedures performed each year in the United States.

      In addition to permanent birth control procedures, the 1995 CDC survey estimated that approximately 21 million United States women use temporary methods of birth control, such as oral contraceptives, implants and injectables. Included in this group are approximately seven million women, who have two or more children, which we believe makes them more likely to consider permanent forms of birth control. Furthermore, researchers in a 1999 article published in Family Planning Perspectives theorized that women may not be completely satisfied with long-term use of temporary methods of birth control. The Family Planning Perspectives article reported that 44% of women using temporary birth control change methods for a method-related reason within 12 months, increasing to 61% by 24 months. For these reasons, we believe our market includes not only women who desire permanent birth control, but potentially also women who have completed childbearing but are using either temporary birth control methods or no birth control method at all because no viable non-incisional alternative to tubal ligation is currently available.

      Based on data from the CDC’s 1995 National Survey of Family Growth, the following chart summarizes birth control methods used by women using contraception between the ages of 30-44 in the United States:

      Worldwide, there is a larger market for permanent birth control. The most current and available report on worldwide birth control statistics is a 1998 United Nations report on birth control methods used in 1993 by reproductive couples. The report indicated that tubal ligation, the leading birth control method worldwide, was used by 32% of reproductive couples, followed by intrauterine devices, or IUDs, at 22%, oral contraceptives at 14% and condom at 7%.

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Other Available Permanent Birth Control Methods

      Tubal Ligation. Tubal ligation is the most common form of birth control. It combines high effectiveness with no required user compliance and a very low risk of long-term side effects. However, the difficulty in accessing the fallopian tubes has made it necessary to perform incisional surgery. The two most common methods of tubal ligation are laparoscopic tubal ligation and tubal ligation performed by mini-laparotomy or laparotomy. Each method of tubal ligation has a one-year effectiveness rate of approximately 99.5%.

      Laparoscopic tubal ligation, the least invasive method of tubal ligation, requires one to two punctures to be made in the abdomen and carbon dioxide gas to inflate the abdomen to improve visibility and access for the surgeon. The fallopian tubes are then ligated by cutting or cauterizing, or by mechanical occlusion using clips or rings. Because laparoscopic tubal ligation requires penetration of the abdomen, 93% of laparoscopic tubal ligations are performed under general anesthesia. The typical surgical procedure takes approximately 45 minutes and is followed by four to five hours of recovery time in a hospital setting. Women typically return to normal activities four to six days after a laparoscopic tubal ligation. Tubal ligation by laparotomy is a more invasive method of tubal ligation due to a more extensive incision and is associated with a higher rate of complications and longer hospital stays and recovery periods.

      In 1992, the CDC reported the result of a large, prospective trial conducted between 1978 and 1988 of women undergoing tubal ligation by either laparoscopy or laparotomy, and reported that major complications occurred in 1.6% to 5.7% of the cases, depending on the surgical approach. The most frequent major complication with laparoscopy was unintended major surgery due to unexpected bleeding, hematoma formation or stomach/bowel perforation. The major complications reported with laparotomy were fever morbidity and re-hospitalization due to pelvic abscess, pulmonary abscess, pulmonary embolus and bowel obstructions.

      In addition to the CDC study, published reports of randomized trials involving the three FDA-approved devices for tubal occlusion, Filshie Clip, Hulka Clip and the Tubal Ring, cited overall complication rates of 11.2% to 24.0%, depending on the surgical approach. The complications reported in these studies included surgical injuries, primary incision complications and infections. Incision complications were the most frequent and could be eliminated with a non-incisional approach. The complication rates in these studies were higher than reported in the CDC published reports because the CDC study focused only on major complications.

      In addition to the complications reported in the public research literature, a report entitled Summary of Safety and Effectiveness for the Filshie Clip PMA, which was prepared and distributed by the FDA, also noted the following complications: pelvic pain (35.7%), menstrual pattern changes (12.2%), back/shoulder pain (6.0%), nausea/vomiting (4.3%) and headache (3.0%).

      Vasectomy. Vasectomy is a highly effective method of male birth control that is performed in a doctor’s office with local anesthesia and typically takes about 20 minutes. The vas deferens is ligated or resected and the cut ends are typically cauterized or clipped. Patients are observed for approximately 20 minutes before release and are encouraged to use an ice pack for approximately 4 hours to reduce swelling. Support devices are recommended for two days. Before relying on the vasectomy for birth control, men are encouraged to be tested 12 weeks after the procedure for the presence of sperm and to use alternate forms of birth control during the 12 week period. Side effects of vasectomy include bleeding, infection and chronic pain syndrome.

Other Available Temporary Birth Control Methods

      Oral contraceptives and drug delivery systems. Birth control pills and other hormone delivery systems offer temporary birth control to women. Birth control pills contain female hormones and require a daily pill-taking regimen in order to stop the ovaries from releasing eggs. According to Contraceptive Technology, 17th revised edition, the birth control pill has a “perfect use” failure rate of 0.1% but a “typical use” failure rate of 5.0% in the first year of use. This method has a relatively high failure rate because of imperfect user compliance, an inherent problem with many methods of temporary birth control. Many physicians will not prescribe birth control pills to women over the age of 35 who smoke cigarettes because of the potential for

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      Other forms of temporary hormonal birth control include injectable hormones, such as Depo-Provera and Lunelle, implantable hormones, such as Implanon, vaginal rings, such as NuvaRing, and patches, such as OrthoEvra. All work to inhibit ovulation and/or inhibit sperm from entering the uterus. All have high effectiveness rates, but some, such as the ring and the patch, still require a high level of user compliance, and injectables require periodic re-injections. All have undesirable side effects, such as menstrual cycle changes, weight gain, headache, nausea and breast tenderness. Those containing estrogen, such as Lunelle, NuvaRing and OrthoEvra, may increase the risk of blood clots, heart attack and stroke.

      Condoms and diaphragms. Condoms are male contraceptives that may also protect against sexually transmitted diseases. Diaphragms are soft, flexible, cup-shaped products that are placed inside of a woman’s vagina and over the cervix in order to prevent the sperm from entering the uterus and fertilizing the egg. Although condoms and diaphragms have very limited side effects, these methods have relatively high first-year failure rates primarily due to imperfect user compliance. According to Contraceptive Technology, 17th revised edition, the first-year “typical use” failure rates are 14% for condoms and 20% for diaphragms.

      Intrauterine devices (IUDs). IUDs are small devices that are placed in a woman’s uterus to prevent fertilization of the egg. They contain either copper, as in Paragard, or hormones, as in Mirena, which is also known as an intrauterine system. According to Contraceptive Technology, 17th revised edition, IUDs have a first year failure rate of 0.1% to 0.8%. However, the use of IUDs among United States women has been low in recent years, representing only approximately 1% of contraceptive users. Potential side effects from IUDs include menstrual cycle changes, infection, cramping, expulsion and uterine perforation.

      We developed Essure in response to what we perceived as a market need for a permanent, less invasive and less costly alternative to tubal ligation.

      The Essure micro-insert is designed to be placed into each fallopian tube during a single procedure using a hysteroscope, an instrument that allows visual examination of the cervix and uterine cavity, and our minimally invasive tubal access delivery system. The delivery system is a disposable plastic handle with a thumb-wheel that is connected to our proprietary guidewire and catheter system. The micro-insert is constructed of medical grade materials, a stainless steel inner coil, a dynamic outer coil made from a nickel titanium alloy, called Nitinol, and a layer of polyethylene terephthalate, or polyester fibers, wound between the inner and outer coils. All of these materials have been used in the body for a variety of different applications, including cardiovascular surgery, for many years. Nitinol, a shape-memory metal, has been used in cardiovascular and peripheral vascular stents. Polyester fiber, proven to promote tissue in-growth, has been used in a variety of other medical applications, including artificial heart valves and vascular grafts. Stainless steel has been used in numerous long-term medical applications. An Essure micro-insert is deployed into each of the woman’s fallopian tubes using a hysteroscope. Using the hysteroscope for guidance, the delivery catheter is guided through the uterus and the opening of the fallopian tube. Once the physician has properly positioned the delivery system in the fallopian tube, the physician releases the micro-insert. When released, the micro-insert automatically expands to the contours of the fallopian tube. Over a three-month time frame, the polyester fibers within the micro-insert elicit a localized, benign tissue in-growth that occludes, or blocks, the fallopian tubes, thereby preventing pregnancy.

      On July 17, 2003, we announced introduction of a new delivery catheter for the Essure system, the “coil catheter,” in the United States, Australia and Canada. A clinical study, performed in Australia, demonstrated a higher placement rate with the coil catheter than with the previous delivery catheter. In the clinical study, 101 of 103 patients achieved bilateral placement. These placements were performed by 5 investigators, most of whom had extensive experience with Essure. This translates to a statistical bilateral placement rate, at appropriate confidence levels, of 95%. The Essure system will be marketed with this new claim in Australia and, once approved, in Canada and the European Union. Any claim in the United States that would change the 86% first procedure bilateral placement rate, which was based on the original delivery catheter studies in

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      Based on clinical trial data filed with the FDA in October 2002, Essure has been demonstrated to be 99.8% effective at two years of follow-up. As of November 2003, we have accumulated sufficient patient follow-up data from the Phase II and Pivotal clinical trials for a three-year effectiveness claim and have filed a PMA supplement with the FDA for a three-year effectiveness claim consistent with the one and two-year claim.

      Essure has proven to have high patient satisfaction in our clinical trials. Clinical data submitted to FDA in our Annual Report to PMA shows that Phase II study patients’ tolerance to wearing Essure up to four years was rated as “good” to “excellent” in 99% of women at all visits to November 2003. Among women from our Pivotal trial who have worn the micro-inserts up to three years, at least 97% reported their comfort with Essure as “good” to “excellent” at all visits. Satisfaction was rated “somewhat” to “very satisfied” in at least 98% of visits through two years. At three-year follow-up (reporting as of November 2003), 92% of women reported their overall satisfaction as somewhat to very satisfied. Excluding the day of the Essure placement procedure, 92% of women in our clinical trials who were employed returned to work in one day or less.

      We did not perform a comparison to laparoscopic tubal ligation in our Pivotal trial. We believe, however, based on current data from our Pivotal trial and published reports on laparoscopic tubal ligation, that the Essure placement procedure has the following key advantages over laparoscopic tubal ligation:

*	Excluding the day of procedure

      We believe that Essure and the Essure placement procedure offer the following important benefits to patients, physicians, hospitals and payors:

	•	No risks associated with incisions and use of general or regional anesthesia.
	•	Rapid return to regular activities of one to two days as compared to four to six days for laparoscopic tubal ligation.
	•	Two-year effectiveness rate of 99.8%.
	•	No risks associated with hormones used with hormone-based contraception.
	•	No recurring management of contraception usage as compared to non-permanent contraception methods, such as the birth control pill, implants and injectables.

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	•	Short and relatively easily performed procedure.
	•	No risks associated with incisions and use of general or regional anesthesia. Although currently, the majority of Essure placement procedures are performed using conscious sedation, such as IV sedation with a local anesthesia, general anesthesia is not typically used unless required by hospital protocol, if requested by the patient. We believe over time, as the experience and comfort level of the physicians increase, the majority of Essure procedures will be done in an ambulatory surgical center or physician office without a conscious sedation.
	•	May be performed in a less resource-intensive environment. Essure procedures are currently performed in various settings including hospital operating rooms, ambulatory surgery centers and physician offices.
	•	Elimination of costs related to the use of general or regional anesthesia and post-operative hospital stays.

     Benefits to Payors

	•	Elimination of costs related to the use of general or regional anesthesia and post-operative hospital stays. Currently, the majority of Essure placement procedures are performed using conscious sedation, such as IV sedation with a local anesthesia. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician.
	•	Potential to reduce unplanned pregnancies, which are costly to payors.

Patient Considerations

      There are, however, certain key factors that a woman must consider when she selects Essure.

	•	The woman must be certain that she desires permanent birth control, because Essure is not reversible.
	•	Like all methods of birth control, the Essure procedure should not be considered 100% effective. There have been pregnancies related to improper placement of the Essure device, failure to follow proper Conceptus protocol by either physicians or patients and luteal phase pregnancies (pregnancies occurring prior to Essure micro-insert placement). One or more of these may also be due to product failure and we expect that in the future patients may report pregnancies from time to time.
	•	For three or more months after the Essure placement procedure, a temporary method of birth control must be used in combination with Essure.
	•	Three months post-procedure, U.S. patients are required to return for a hysterosalpingogram, or HSG, which calls for contrast dye to be injected into the uterus and fallopian tubes to confirm occlusion and micro-insert location. Outside of the U.S., patients are required to return for a pelvic X-ray at three months post-procedure.
	•	Not all women who undergo the Essure placement procedure will achieve successful placement of both micro-inserts. Approximately 1 out of every 7 women in the Essure clinical studies did not achieve successful placement of both micro-inserts during the first placement procedure. Some of these women who chose to undergo a second placement procedure achieved successful placement of both micro-inserts during the second procedure, and subsequently were able to rely on Essure for contraception. We have subsequently introduced a new delivery catheter for the Essure system, the “coil catheter”, which demonstrated a higher placement rate in our clinical study performed in Australia. In the clinical study, 101 and 103 patients achieved bilateral placement which translated to a statistical bilateral placement rate, at appropriate confidence levels, of 95%. We will perform additional clinical evaluation, in the course of the existing U.S. Post Approval Study, before seeking approval claim in the United States.

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	•	The Essure procedure is newer than other procedures and therefore does not yet have long-term safety and effectiveness data as compared to other procedures.
	•	Removal of the Essure micro-inserts requires surgery; and removal is not intended for procedure reversal since Essure is not reversible.

      As with all medical procedures, there are risks associated with Essure and the Essure placement procedure. Because there are no abdominal incisions or punctures and general or regional anesthesia is typically not required, the risks associated with the Essure placement procedure are more typical of hysteroscopic procedures and are of a lesser severity than those of procedures that require invasion of the abdominal cavity. This is typified by the minor nature of most of the adverse events reported in our clinical trials to date. The most frequent risk with the Essure placement procedure is the inability to rely on the micro-insert for contraception, due primarily to lack of micro-insert placement and less frequently to misplacement of the micro-insert. Based on data gathered in our clinical trials, adverse events, which prevented reliance on Essure for contraception, were reported as follows: failure to place 2 micro-inserts in first procedure (14%), initial tubal patency (3.5%), expulsion (2.2%), perforation of fallopian tube (1.5%), or other unsatisfactory device location (0.6%). All of the patients who experienced tubal patency at the 3-month HSG were found to have bilateral occlusion at a repeat HSG performed at approximately 6 months after Essure placement. In addition, all of the patients who choose to undergo a second Essure placement procedure following a micro-insert expulsion achieved successful micro-insert placement and were subsequently able to rely on Essure for contraception. The majority of women report mild to moderate pain immediately after the Essure placement procedure. The most frequent adverse events and side effects reported as a result of the hysteroscopic procedure to place the micro-inserts were as follows: cramping (29.6%), pain (12.9%), nausea/vomiting (10.8%), dizziness/fainting (8.8%) and spotting/vaginal bleeding (6.8%). Hypervolemia occurred in <1% of cases. During the first year of reliance on Essure for contraception (approximately 15 months after micro-insert placement), the following episodes were reported as at least possibly related to the Essure micro-inserts: back pain (9.0%), abdominal pain (3.8%), and dyspareunia (3.6%). All other events occurred in less than 3% of women. In addition, most women reported spotting for an average of three days post-procedure, and one-third reported pain on the day following the procedure, with little pain reported on subsequent days. Also, occurrences of back/abdominal/other pain, headache, gas/bloating and transient menstrual changes were reported. Persistent pain was not reported by any women, and persistent menstrual changes were reported in less than 2% of women, with virtually equal percentages of women reporting heavier than normal menstrual flow and lighter than normal menstrual flow.

     Our Clinical Progress

      We commenced a Phase II clinical study of safety and preliminary effectiveness of Essure in November 1998 and a Pivotal, or Phase III, trial of Essure in May 2000. The number of women in whom at least one Essure micro-inserts were placed totaled 682 between the two clinical trials. At three month follow-up, 647 women began relying on Essure as method of permanent birth control. The clinical endpoints of the study include safety, effectiveness and patient satisfaction.

      Based on clinical trial data, Essure has been demonstrated to be 99.8% effective at two years of follow-up. As of November 2003, we have accumulated sufficient patient follow-up data from the Phase II and Pivotal clinical trials for a three year effectiveness claim and we have filed a PMA supplement with the FDA for a three-year effectiveness claim consistent with the one and two-year claim.

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      The following table summarizes placement procedure data from our two clinical trials as of October 2002:

*	Does not include the nine women who were able to rely on Essure after a successful second placement procedure.

      In April 2002, based on data from our trials, we submitted our PMA application to the FDA, which was granted an expedited review. In November 2002, we received formal notification from the FDA for the approval of Essure.

      As a condition of the PMA approval, we are required by the FDA to follow our clinical trial patients for a five-year period following reliance on Essure for contraception. The information from this planned long-term post-approval study will provide relevant information for our U.S. commercialization, as well as allow us to publish data at the conclusion of the follow-up period. In addition, we are required to conduct a post-approval study to evaluate placement rates among newly trained physicians. This study involves the first 20 cases performed by 40 physicians in major metropolitan areas after physician training is completed. As of March 1, 2004, over 300 Essure placement procedures have been performed by participating physicians. Results will not be reported until appropriate statistical analyses are performed and data from a positive outcome will be used to support an improved placement rate claim with FDA.

      On July 17, 2003, we announced introduction of a new delivery catheter for the Essure system, the “coil catheter,” in the United States, Australia and Canada. A clinical study, performed in Australia, demonstrated a higher placement rate with the coil catheter than with the previous delivery catheter. In the clinical study, 101 of 103 patients achieved bilateral placement. These placements were performed by 5 investigators, most of whom had extensive experience with Essure. This translates to a statistical bilateral placement rate, at appropriate confidence levels, of 95%. The Essure system will be marketed with this new claim in Australia, Canada and, once approved, in the European Union. Any claim in the United States that would change the 86% first procedure bilateral placement rate, which was based on the original delivery catheter studies in the Pivotal Trial, would be subject to approval by the FDA. We expect to perform additional clinical evaluation, in the course of the existing U.S. Post Approval Study, before seeking approval of the claim in the United States.

      Our clinical trials are still ongoing, and the clinical trial statistics presented may change as longer term follow-up data from the women participating in the trials is gathered, audited and analyzed, or if the FDA requests that calculations be performed in a different manner than presented in our PMA application.

     Other Studies and Regulatory Activities

      On October 30, 2003, we announced the signing of an exclusive U.S. co-promotional agreement with GYNECARE, Worldwide division of Ethicon, Inc., involving Essure and the GYNECARE THERMACHOICE Uterine Balloon Therapy System, a treatment for menorrhagia (heavy menstrual bleeding) in pre-menopausal women. ThermaChoice is a minimally invasive, outpatient treatment for menorrhagia due to benign causes in pre-menopausal women for whom childbearing is complete. The device uses a balloon catheter with heated fluid to ablate the endometrial lining of the uterus during an 8-minute therapy cycle. The procedure can be performed under local anesthesia in less than 30 minutes. Endometrial ablation (“EA”) procedure is a treatment option only advised for women who are finished with their

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      In addition, three months post-procedure and consistent with our pivotal trial protocol, physicians are required to perform an HSG, which calls for contrast dye to be injected into the uterus and fallopian tubes to confirm occlusion and micro-insert location. Because an HSG can be uncomfortable for women, we are working with the FDA to approve a less-invasive alternative, such as a pelvic x-ray. Our regulatory and clinical representatives, along with an advisory physician, are scheduled to meet with the FDA on March 28, 2004 to discuss a plan to substitute alternative(s) to the HSG requirement.

Sales and Marketing

      On November 6, 2002, we received FDA approval to market Essure in the United States. The achievement of this major milestone enabled us to begin an aggressive marketing and sales campaign in the United States. We are distributing Essure in the United States through our direct sales force.

      Our sales and marketing strategy is to market Essure primarily to gynecologists while building interest and awareness among consumers and general practitioners. Through the use of public relations and targeted advertising, we intend to increase awareness of Essure among consumers, general practitioners and the broader medical community. In April 2003, we presented Essure at the annual conference of the American College of Obstetricians and Gynecologists. At this meeting, we had two presentations and there was a Continuing Medical Education, or CME, accredited symposium with Essure as the main topic. In early June 2003, we commenced a direct mail campaign to 500,000 women in the Atlanta and Chicago areas, with the goal of encouraging these women to contact our call center for additional information. In turn, our call center has the ability to offer a referral to a practicing Essure physician in a consumer’s area. We had also conducted regional advertisement in a variety of magazines, such as Parents and Self.

      In an effort to expand our business rapidly and effectively, we have established marketing and distribution relationships with other companies. On October 30, 2003, we announced the signing of an exclusive U.S. co-promotional agreement with GYNECARE, Worldwide division of Ethicon, Inc., involving Essure and the GYNECARE THERMACHOICE Uterine Balloon Therapy System, a treatment for menorrhagia (heavy menstrual bleeding) in pre-menopausal women. ThermaChoice is a minimally invasive, outpatient treatment for menorrhagia due to benign causes in pre-menopausal women for whom childbearing is complete. The device uses heat to ablate the endometrial lining of the uterus during an 8-minute therapy cycle. The device is used in a procedure that can be performed under local anesthesia in less than 30 minutes. The endometrial ablation procedure is a treatment option only advised for women who are finished with their childbearing. However, since pregnancy is still possible, women are advised to still use contraception. The co-promotional agreement between Conceptus and GYNECARE will offer physicians the option of combining the

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      In order to promote use of the Essure device in a concomitant procedure with the GYNECARE Thermachoice system, we have conducted a study and filed a PMA supplement with the FDA in order to modify a warning label in the Essure physician labeling. We expect, following FDA approval, to be able to state that the GYNECARE Thermachoice endometrial ablation procedure can be performed immediately following Essure micro-insert placement. The FDA has completed its initial review of the PMA supplement and discussed the results of its review with us and GYNECARE representatives in February 2004. We are in the process of submitting a response to the FDA’s questions that will include collecting additional clinical data. We expect to have the additional study completed in early April 2004 and submit the final results and conclusion to the FDA by mid-April 2004.

      Under the terms of the agreement, a group of physician consultants specifically hired and trained by Conceptus will become preceptors in the Essure procedure. This group of physician preceptors will then train ThermaChoice physician users in the Essure procedure over a two-year period, commencing on and subject to the approval of a Conceptus PMA supplement. This group of physician consultants is separate and in addition to our existing sales and training team, who will continue to train additional physicians. The combined sales and training teams are expected to significantly increase the rate of physician training for Essure over this two-year period.

      We believe this agreement will provide us with the ability to substantially increase awareness, gaining market presence and credibility, accelerating our ability to train doctors, as well as expand our market opportunity by driving adoption among a group of physicians not previously targeted by our marketing programs. During January 2004, we trained 80 GYNECARE sales representatives, and have designated 20 trainers, who are physicians previously trained on Essure. The designated trainers will help us to train physicians who wish to perform Essure procedure in combination with ThermaChoice procedure.

Physician Training

      We have identified, educated and trained qualified gynecologists in the Essure placement procedure through a combination of presentations at major medical conferences, hands-on simulation and proctored procedures with a clinician experienced in our Essure placement procedure. In order to complete training, we proposed and the FDA agreed that we have a professional trainer in attendance during a physician trainee’s initial cases, usually three to five, to observe appropriate technique and to sign off the physician for the procedure.

      In early 2003, we targeted large-group gynecological practices with the goal of training, inclusive of preceptorship, approximately 700 physicians by the end of 2003. During the second quarter of 2003, we started to focus on one-on-one training sessions to new physicians who have pre-scheduled Essure cases. This is to accelerate the training process and to control training costs. As of December 31, 2003, we have a total of 792 doctors that have either completed or are in the process of completing preceptorship. Our accomplishment in obtaining the number of physicians trained provides us with a strong referral base within major metropolitan areas we have targeted, and we believe also creates the leverage to help us gain additional reimbursement coverage.

      We understand that a strong base of trained physicians does not necessarily correlate to an increase in revenue proportionately. Another important factor is the average procedure performed per physician per month, or utilization. During 2003, our utilization rates declined from a high of over 3 in the first quarter to a utilization of slightly less than one in the fourth quarter of 2003. In 2004, we intend to focus our internal resources on improving our utilization rate. We believe that our alliance with the GYNECARE group will help us to continue signing new, interested physicians while we focus our effort on increasing utilization within our current physician base. In order to accomplish our objective, we have built marketing programs which include staff training, patient and referring physician awareness seminars and mailings, billing models for reimbursement, media outreach kits, hospital marketing tools and advertising, including radio. We will also increase the frequency of call patterns by our field sales and training force to our existing physician base. Since

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Reimbursement

      Obtaining physician fee and device reimbursement for Essure will be an important step toward commercialization of Essure in the United States and internationally. Regardless of the country and its type of reimbursement system, physician advocacy of our product, together with studies demonstrating clinical and cost effectiveness will be required to obtain adequate reimbursement.

      We have been working diligently with third-party payors to make sure they understand the benefits of Essure. As of December 31, 2003, U.S. physicians and facilities using Essure have been reimbursed for the procedure under existing Current Procedural Terminology, or CPT, codes. Currently, many of the nation’s leading hospitals have physicians on their medical staffs that now offer Essure to patients who are seeking permanent birth control. During 2003, the National Blue Cross/ Blue Shield Association issued a positive recommendation to its local members to cover the Essure procedure. Additionally, Aetna U.S. Healthcare, the largest U.S. health insurance provider have also joined a list of leading health insurance companies who have established a coverage policy for Essure, making Essure available to women and couples seeking an alternative to tubal ligation or vasectomy in the United States. As of December 31, 2003, we estimate that we have payor coverage of 124 million lives or 59% of the total insured, non-Medicare U.S. population.

      In 2004, we will continue to focus on gaining additional insurance coverage of the Essure procedure, which despite our success in 2003, remains a significant barrier to fast paced growth. We believe that many doctors are reluctant to perform the Essure procedure given the uncertainty of reimbursement. Gaining reimbursement is a difficult and lengthy process over which we do not have complete control. Physician demand and patient awareness also act to exert pressure on insurance carrier to consider reimbursement. We have established tactical programs, such as hot lines to aid our physicians in navigating reimbursement issues, to facilitate the process and ultimately convince major payers the benefits of Essure for patients, physicians and the payor community.

      In March 2004, the American Medical Association accepted our application for a level one CPT code, which may be effective as early as January 2005, subject to the completion of certain processes. Category I codes are reserved for those procedures that have demonstrated clinical efficacy, widespread use and have FDA approval. By having a CPT code specific to the Essure procedure, it is expected that coding for reimbursement will become considerably easier for doctors and facilities and that there will be fewer incidents of doctors being reimbursed incorrectly. We expect that the new code, once the process to establish it is complete, will significantly ease the burden on a physician’s office in obtaining reimbursement for Essure, and accelerate the coverage of Essure by private insurance companies and Medicaid.

      Health care providers in the United States typically rely on third-party payors, specifically private health insurers, and government programs such as Medicare and Medicaid, to reimburse all or part of the cost of procedures in which medical devices are used. Access to these funds is based on coding systems that are specific to procedure type and typically separate physician fees and fees paid to the facility. In most cases, facility fees include payment for the medical device and are generally paid at rates negotiated between the providers (e.g., hospitals) and third-party payers. We have hired a group of reimbursement specialists who are actively working with physicians, facilities and payors to establish reimbursement for Essure. Payor reimbursement affects the pace of physician adoption of the Essure procedure because facilities habitually check with payors to determine the patient’s applicability of coverage and the payor’s policy of reimbursement for the costs of a new procedure. We expect that once a facility has established a track record of claims paid by third-party payors, the pace of adoption for subsequent physicians will be more rapid than that of the initial physicians.

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

      In Australia, we obtained approval in 1999 from the appropriate government agency to use the existing tubal ligation reimbursement code for Essure and the Essure placement procedure, and numerous procedures were reimbursed in 2000 using this code. In March 2001, however, we received oral notification from the government agency that the continued applicability of this particular code for Essure and the Essure placement procedure would be reviewed. The review by the Medicare Service Advisory Committee commenced in September 2001 and includes an examination of the clinical and economic outcomes data. The conclusion of this review will determine the future level of reimbursement in Australia for Essure and the Essure placement procedure. We anticipate a response to the MSAC submission sometime in the first quarter of 2004. We have experienced no interruption of sales in either the private or public hospitals.

      In Europe, consultants are assisting us in developing a strategic plan to obtain reimbursement in a number of European countries, and we are conducting a clinical reimbursement study in France.

Manufacturing

      We have limited experience manufacturing our product in the volumes that will be necessary to achieve significant commercial sales. To achieve our production volume objectives, we are planning to outsource our manufacturing activity to external contract manufacturers.

      Currently, manufacturing processes are performed in our facility in San Carlos, California. As part of our outsourcing effort, we are in the process of moving our manufacturing activities to a third party contract manufacturer, Venusa, whose manufacturing facilities are located in Mexico. We are currently working with the FDA to obtain approval of Venusa’s facility, and we expect to receive approval by the end of the first quarter of 2004. Once we obtain FDA approval of the manufacturing facility, we intend to transition to where we maintain only limited manufacturing activity in our facility in San Carlos, California.

      Currently, we purchase various materials and components from qualified suppliers and inspect these materials and components in-house. Our agreement with Venusa provides that they will continue to use our suppliers, unless we agree otherwise. We conduct periodic quality audits of our key suppliers. Most components, including nickel titanium alloy, guidewires, the inner release catheter tubing and stainless steel wires, are available from more than one source and we intend to qualify at least two sources for certain components. One component, the delivery catheter tubing, was available from only one supplier in early 2003. This tubing was manufactured by our supplier using its proprietary intellectual property. In 2003, we have finished the clinical testing of an internally developed cathether that does not require third party license. Currently, we do not have any single source component except for the polyester fiber. The polyester fiber causes the necessary tissue in-growth, is made to our specifications and currently has only one qualified source. However, we have accumulated a quantity of this material that exceeds our anticipated production needs for the next several years. We are in the process of qualifying a second source for this fiber.

      Our manufacturing facility and Venusa’s manufacturing facility are subject to periodic inspection by regulatory authorities. Our quality assurance systems are subject to FDA regulations. These regulations require that we conduct our product design, testing, manufacturing and control activities in conformance with these regulations and that we maintain our documentation of these activities in a prescribed manner. Our manufacturing facility is licensed by the California Department of Health Services, Food and Drug Branch and is registered with the FDA. In addition our facility has received ISO 9001/ EN46001 certification and the European Union Device Directive 93/42/ EEC, allowing us to affix the CE Mark to our product after assembling appropriate documentation. ISO 9001/ EN46001 certification standards for quality operations have been developed to ensure that companies know the standards of quality on a worldwide basis. We are currently

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Research and Development

      Our research and development activities are performed by a product development, regulatory/clinical research staff of 18 employees. Research and development expenses for 2003, 2002, and 2001 were approximately $6.0 million, $8.2 million, and $8.0 million, respectively. We intend to continue to focus our research and development efforts on the development of new or alternative product designs and management of the on-going clinical trials.

Intellectual Property

      Our policy is to protect our proprietary position aggressively by, among other things, filing United States and foreign patent applications to protect technology, inventions and improvements that are important to the development of our business. In addition to the patent protection we have obtained in our license from Target Therapeutics, a division of Boston Scientific Corporation, we have filed device and method patents for the use of our product in new clinical applications and have pursued patents for several of our other inventions and developments. As of February 29, 2004, we had eight pending U.S. patent applications, 21 U.S. patents which have been issued to us, and 28 foreign and/or international patent applications are pending, with five issued foreign patents. Our issued patents include claims relevant to transcervical fallopian tube occlusion devices and methods, guidewire manipulation, a guidewire design, fallopian tube visualization, electrosurgical instruments and a delivery mechanism for a tubal occlusion device. The pending applications describe various aspects of our proprietary tubal access platform technology, including claims specific to our Essure tubal occlusion device. In January 2001, the United States Patent and Trademark Office, or PTO, issued a patent to us granting a number of claims directed to intrafallopian devices, including devices that are anchored by resilient coils. On March 4, 2003, the PTO issued a patent to us with method claims directed to expansion of a device inserted into a tubal ostium with subsequent tissue ingrowth, along with claims to conception-inhibiting devices having coils. These patents describe and claim a variety of techniques to enhance the effectiveness of these devices, including the use of polyester fibers attached to the device, and also discloses methods for deployment of these devices using a transcervical delivery system.

      On October 21, 2003 the PTO issued a patent to us with device and method claims directed to an expanding resilient structure to anchor and occlude the fallopian tube with the use of multiple materials and method, including polyester fiber, to promote at least one method of occluding the fallopian tube (scarring of the tubal tissues, ingrowth of the tubal tissues, and sclerosing of the tubal tissues). The contraceptive device comprising a narrow first diameter suitable for axial insertion into the fallopian tube and an expanded retention structure having a second diameter larger than the first diameter and adapted to engage the surrounding tubal wall and retain the contraceptive device within the fallopian tube while a portion of the fallopian tube is open around or through the retention structure. This patent also has claims for applying current through the resilient structure to desiccate a tubal wall thereby promoting the formation of scar tissue by electrically energizing the resilient structure within the fallopian tube.

      On January 20, 2004 the PTO issued a patent to us with method claims directed at non-surgical methods of sterilizing a female by inserting an instrument assembly into the patient’s fallopian tube and delivering electrical energy from the instrument to inner walls of the fallopian tube and leaving behind a device that is anchored within the fallopian tube by imposing a secondary shape on tubal wall, the secondary shape having a larger cross-section than the fallopian tube. Additionally, the patent stated the efficacy of the device may be enhanced by forming the structure at least in part from copper or a copper alloy.

      On February 3, 2004 the PTO issued a patent to us with device and method claims directed at intrafallopian devices and non-surgical methods for their placement to prevent conception. The device being anchored within the fallopian tube by a resilient structure which has a helical outer surface, together with a portion of the resilient structure which is biased to form a secondary shape, the secondary shape having a larger cross-section than the fallopian tube. Optionally, permanent sterilization is effected by passing a current

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      We obtained an exclusive license in the field of reproductive physiology to technology developed by Target Therapeutics. In addition, we have granted to Target Therapeutics an exclusive license to our technology in certain fields of interventional medicine outside of reproductive physiology. Our exclusive license of Target Therapeutics’s technology encompasses certain technology developed by Target Therapeutics as of February 1, 1996. We do not have any preferential rights to technology developed by Target Therapeutics after that date. The license from Target Therapeutics includes patents which relate to the design of its micro-catheters (the initial patent for which expires in June 2006), certain aspects of guidewire design and other important aspects of micro-catheter, guidewire and micro-coil technologies. If these Target Therapeutics patents were invalidated, our proprietary position in the marketplace would be severely compromised. In addition, should any of our Target Therapeutics technology be found to infringe upon a third party’s patent rights, it may affect our ability to develop, market and sell additional products in the future. Finally, Target Therapeutics has the right to terminate our license if we materially breach the terms of the license. If the Target Therapeutics license were terminated, it might affect our ability to develop, market and sell additional products in the future.

      We believe that we are free to make and sell our product, and that our product and its intended use does not infringe any valid patent rights of any other party. However, a third party, Ovion, Inc. (“Ovion”), brought to our attention a patent and certain claims from a pending patent application owned by it. Ovion indicated it believes that the claims of its patent and application cover Essure and its use. On October 23, 2003, we entered into a settlement agreement with Ovion pursuant to which we received a sole, worldwide license to Ovion’s patent rights relative to the Essure system, and Ovion may not grant any additional such licenses to other parties. The settlement agreement provided for the payment of a royalty to Ovion that will be equal to 3.25% of the cumulative net sales of Essure in excess of $75.0 million for a period of no longer than ten years. In addition, the settlement agreement provided for a cash payment of $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and a license fee of $2.0 million payable in our common stock in equal installments in the first and second quarters of 2004. Ovion was not granted any rights to our intellectual property pursuant to the settlement agreement. The settlement agreement was approved by the U.S. District Court for the Northern District of California on November 6, 2003.

      Although we have reached a settlement agreement with Ovion, we still believe that some or all of Ovion’s claims should be included within our own patents. We requested that the PTO declare an interference. An interference is a proceeding within the PTO to determine which party was the first to invent, and which party is thereby entitled to ownership of, the claims. We believe that we filed our patent applications for Essure before Ovion filed the application that issued as its patent, and that we are entitled to any patentable claims now appearing in their patent that cover our product. We do not know whether the PTO will declare an interference, whether we invented our product prior to Ovion’s date of invention, or whether we will prevail in an interference proceeding if it is declared by the PTO. Future royalties might be avoided by a favorable interference ruling before the PTO, which might occur if interference is declared and if we are found to have priority of invention.

Government Regulation

      The research, development, manufacture, labeling, distribution and marketing of our product are subject to extensive and rigorous regulation by the FDA and, to varying degrees, by state and foreign regulatory agencies.

      The manufacture and sale of our product are subject to extensive regulation by numerous governmental authorities, principally the FDA as well as state and foreign agencies. In particular, the FDA regulates the research, clinical testing, manufacturing, safety, labeling, storage, record keeping, advertising, distribution, sale and promotion of medical devices in the United States. The FDA requires that all medical devices introduced

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      The FDA has the authority to require clinical testing of medical devices, including Essure. An Investigational Device Exemption, or IDE, application must be approved prior to commencement of clinical trials. An IDE application must be supported by data demonstrating safety for clinical use, typically including the results of laboratory and animal testing. If the IDE application is approved by the FDA, clinical trials may begin at a specific number of investigational sites with a maximum number of patients, as approved by the agency. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such costs do not exceed recovery of the costs of manufacture, research, development and handling. Clinical trials must be conducted in accordance with FDA regulations. We have received an IDE for each of our clinical studies of Essure.

      The FDA imposes numerous requirements with which medical device manufacturers must comply in order to maintain regulatory approvals. FDA enforcement policy strictly prohibits the promotion of approved medical devices for uses other than those for which the device is specifically approved by the FDA. We and our third party manufacturer, Venusa, will be required to adhere to applicable FDA and other regulations regarding Quality Systems, including testing, control and documentation requirements. Ongoing compliance with the Quality System Regulations and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health Services, as well as foreign health authorities. In July 1994, our San Carlos facility was inspected by the California Department of Health Services, and we were subsequently granted a California medical device manufacturing license. I