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| STAA > SEC Filings for STAA > Form 10-Q on 12-Aug-2009 | All Recent SEC Filings |
12-Aug-2009
Quarterly Report
The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and STAAR can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of STAAR. These factors include, without limitation, those described in this report and in our Annual Report on Form 10-K for the fiscal year ended January 2, 2009 under the heading "Risk Factors." STAAR undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.
The following discussion should be read in conjunction with STAAR's interim
condensed financial statements and the related notes provided under "Item
1 - Financial Statements" above.
Overview
STAAR Surgical Company develops, manufactures and sells visual implants and other innovative ophthalmic products to improve or correct the vision of patients with cataracts and refractive conditions. We manufacture products in the U.S., Switzerland and Japan and distribute our products worldwide.
Originally incorporated in California in 1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the context indicates otherwise "we," "us," the "Company," and "STAAR" refer to STAAR Surgical Company and its consolidated subsidiaries.
STAAR Surgical Company, Visian®, Collamer®, STAARVISC®, Elastimide®, nanoFLEXTM, nanoPOINTTM, EpiphanyTM, SonicWAVETM and AquaFlowTM are trademarks or registered trademarks of STAAR in the U.S. and other countries.
Collamer® is the brand name for STAAR's proprietary collagen copolymer lens material.
Principal Products
Intraocular lenses
We generate a substantial portion of our revenue by manufacturing and selling foldable intraocular lenses, known as IOLs, and related products for cataract surgery. STAAR pioneered the foldable IOL, a flexible prosthetic lens used to replace a cataract patient's natural lens after it has been extracted in minimally invasive small incision cataract extraction. STAAR makes IOLs out of silicone and out of our proprietary Collamer lens material. STAAR's IOLs are available in both three-piece and one-piece designs. STAAR's range of IOLs includes the following:
• three-piece IOLs, available in silicone or Collamer;
• single-piece IOLs, available in silicone or Collamer;
• The silicone Toric IOL, used in cataract surgery to treat preexisting astigmatism; and
• The Preloaded Injector, a silicone or acrylic IOL preloaded into a single-use disposable injector, which is currently available outside the U.S.
Most of STAAR's IOLs sold worldwide feature aspheric optics, an advanced design intended to provide a clearer image than traditional spherical lenses, especially in low light. STAAR has developed a proprietary aspheric design (patent pending) that is optimized for the naturally curved surface of the retina and certain other anatomical features of the human eye, and that provides outstanding image quality even if accidentally moved off center.
Because the majority of cataract patients are elderly and qualify for Medicare, most of STAAR's U.S. cataract revenue derives indirectly from reimbursement payments by the Center for Medicaid and Medicare Services, or CMS. CMS has granted to STAAR's aspheric lenses "New Technology Intraocular Lens" status,
which provides an additional $50 reimbursement to doctors or hospitals that use these lenses in ambulatory surgical centers, enabling STAAR to increase the average selling price for these lenses.
Outside the U.S. as well, government agencies or government sponsored entities generally pay the cost of IOLs for cataract patients. As a result, STAAR believes that IOL revenues are likely to remain relatively stable even under adverse conditions in the general economy.
Sales of IOLs during the three and six months ended July 3, 2009 were $8.5 million and $16.7 million and represent approximately 45% of total net sales.
Visian ICL
Manufacturing and selling lenses used in refractive surgery is an increasingly important source of revenue for STAAR. We have used our proprietary biocompatible Collamer material to develop and manufacture implantable Collamer lenses, or ICLs. STAAR's VISIAN® ICL and VISIAN® Toric ICL, or TICLTM, treat refractive disorders such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism. These disorders of vision affect a large proportion of the population. Unlike the IOL, which replaces a cataract patient's cloudy lens, these products are designed to work with the patient's natural lens to correct refractive disorders. The surgeon implants the foldable Visian lens through a tiny incision, generally under local anesthesia. STAAR began selling the Visian ICL outside the U.S. in 1996 and inside the U.S. in 2006. STAAR began selling the Visian TICL outside the U.S. in 2002. These products are sold in more than 50 countries. STAAR's goal is to establish the position of the ICL and TICL throughout the world as one of the primary choices for refractive surgery.
ICL sales internationally increased by 12% in the second quarter as compared to the same period in the prior year while in the U.S. sales declined 15% due to the continued decline of refractive procedures in the U.S. during 2009. Despite the current decline in refractive procedures the ICL has grown in market share in each of the top ten refractive markets. Refractive surgery is an elective procedure generally not covered by health insurance. Patients must pay for the procedure, frequently through installment financing arrangements. Patients can defer the choice to have refractive surgery if they lack the disposable income to pay for it, they do not feel their income is secure, or they cannot obtain credit. As a result, if the current recession continues it may reduce sales of ICLs.
Sales of ICLs during the three and six months ended July 3, 2009 were $5.7 million and $10.7 million and represent approximately 29% of total net sales.
Other surgical products
We offer a number of other products used in ophthalmic surgery that complement our IOL and Visian ICL product lines. We market STAARVISC II, a viscoelastic material which is used as a protective lubricant and to maintain the shape of the eye during surgery. We also manufacture Cruise ControlTM, a single-use disposable filter used in phacoemulsification, which is the process of removing a cataract patient's cloudy lens through a small incision using ultrasound and suction. Cruise Control allows for a faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment. We also make the AquaFlow Collagen Glaucoma Drainage Device, an implantable device used for the surgical treatment of glaucoma. We also sell other instruments, devices and equipment that we manufacture or that others in the ophthalmic industry manufacture.
Sales of other surgical products during the three and six months ended July 3, 2009 were $5.0 million and $10.0 million and represent approximately 26% of total net sales.
Operations
STAAR has significant operations both within and outside the U.S., and receives the majority of its revenue from its activities outside the U.S. STAAR's principal business units and their operations are as follows:
• United States. STAAR operates its global administrative headquarters and a manufacturing facility in Monrovia, California. The Monrovia manufacturing facility principally makes Collamer and silicone IOLs and injector systems for IOLs and ICLs. STAAR also manufactures the Collamer material in the U.S.
• Switzerland. STAAR operates an administrative and manufacturing facility in Nidau, Switzerland under its wholly owned subsidiary, STAAR Surgical AG. The Nidau manufacturing facility makes all of STAAR's ICLs and TICLs. STAAR Surgical AG handles distribution and other administrative affairs for Europe and other territories outside North America and Japan.
• Japan. Through its wholly owned subsidiary, STAAR Japan, Inc., STAAR maintains executive offices and distribution facilities in Shin-Urayasu, Japan and a manufacturing facility in Ichikawa City. All of STAAR's preloaded injectors are manufactured at the Ichikawa City facility. STAAR Japan is also currently seeking approval from the Japanese regulatory authorities to market in Japan STAAR's Visian ICL and TICL, Collamer IOL and AquaFlow Device.
• Germany. STAAR's wholly owned subsidiary, Domilens Vertrieb Für Medizinische Produkte GmbH, is headquartered in Hamburg, Germany. Products sold by Domilens include implantable lenses, related surgical equipment, consumables and other supplies. Domilens sells custom surgical kits that incorporate a surgeon's preferred supplies and consumables in a single ready-to-use package, and services phacoemulsification and other surgical equipment. Domilens distributes and services products of third party manufacturers and distributes STAAR's ICLs, IOLs, and Preloaded Injectors.
The global nature of STAAR's business operations subjects it to risks, including the effect of changes in currency foreign exchange rates, differences in laws, including laws that protect intellectual property or regulate medical devices, political risks, and the challenge of managing foreign subsidiaries. These risks are discussed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2009 under Item 1.A - Risk Factors, under the headings "The global nature of our business may result in fluctuations and declines in our sales and profits" and "The success of our international operations depends on our successfully managing our foreign subsidiaries."
Strategy
During 2009, STAAR is focused on the following five strategic operational goals:
• to improve cash flow;
• to increase gross profit margin;
• to continue cost reduction efforts;
• to secure key regulatory approvals;
• to increase the ICL's share of the refractive market in key territories.
Improve cash flow. For several years STAAR has not generated enough cash to sustain its operations and has relied on financing activity to supplement cash from operations. Through a combination of cost cutting and enhanced product mix STAAR has reduced its use of cash significantly in recent periods. In the second quarter of 2009, STAAR achieved a positive cash flow from operations as a result of these efforts. If recent trends continue, STAAR expects to generate positive cash flows from operations for the remainder of 2009. While STAAR's ultimate goal is to achieve profitability, achievement of positive cash flow this quarter was an important milestone for the Company, and if it continues will enhance STAAR's ability to obtain financing on favorable terms, and will permit STAAR to further invest in expansion of its business.
STAAR generated $286,000 of cash from operations during the second quarter of 2009 and used $162,000 of cash in operations during the six months of fiscal year 2009 compared to $2.8 million of cash used during the second quarter of 2008 and $6.1 million of cash used for the six months of fiscal year 2008. The improved cash flow in the second quarter continues a trend established in fiscal year 2008, when STAAR used $3.4 million of cash in operations in the first quarter of 2008 and $8.2 million of cash used during fiscal year 2008. Approximately $3.2 million of the total cash used in operating activities in 2008 was used by STAAR Japan in assuming the IOL distribution business acquired from Canon Marketing Japan, Inc. and for payments on inventory purchased from Canon Marketing.
STAAR seeks to further improve cash flow by cutting costs and increasing profit margins, which are separately discussed in greater detail below. STAAR's cost-cutting efforts in the U.S., described in greater detail under the heading Continue Cost Reduction Efforts yielded savings in operating expenses during the second quarter of 2009 of approximately $1.8 million, or 27%, when compared to the second quarter of 2008. For the first six months of 2009, these savings in the U.S. were $2.7 million, or 21%, when compared to the first six months of 2008.
During fiscal year 2008 and early 2009 STAAR's cash flow has been negatively affected by the cost of defending two lawsuits brought by former independent regional manufacturer's representatives. On March 2, 2009, in the first of these cases (Parallax), a jury rendered a verdict against STAAR for a total of $4.9 million in actual and punitive damages and on May 11, 2009, the court entered final judgment in that amount. On June 22, 2009, the Company posted with the court a $7.3 million deposit required to stay enforcement of the judgment while it is on appeal. The Court will maintain complete control of and access to this deposit, including the final disbursement of any and all amounts upon the final outcome of the Parallax appeal or prior settlement, if any. See "Liquidity and Capital Resources" below.
STAAR believes its cash management plans are achievable and continues to seek ways to reduce spending; however, STAAR cannot provide assurance that it will achieve the level of intended savings. Factors affecting the success of STAAR's cash management plans include the outcome of the Moody trial and our degree of success in increasing the amount of cash generated by our business through increased sales and improved profit margins.
Increase gross profit margins. U.S. IOL sales revenue has continued to decline, but the rate of decline has slowed as STAAR has begun replacing older lens designs with higher priced NTIOL lenses. In the second quarter of 2009, U.S. IOL sales were relatively flat compared to the same quarter in the prior year and sequentially IOL sales increased approximately 8%, while in the first quarter of 2009 U.S. IOL sales declined 8% year-over-year and the rate of decline was 16% in 2008 and 20% in 2007. If our new IOL product introductions are successful, U.S. IOL sales may resume growing in 2009, but if this does not occur, STAAR may find it necessary to reduce spending in its U.S. operations more deeply.
While expanded market share and increased gross revenue remain key goals, STAAR believes that it can achieve profitability even at modest growth levels by increasing its profit margin through the following means:
• Increasing ICL sales as a percentage of STAAR's overall product
mix. ICLs and TICLs generally yield high margins and are STAAR's most
profitable products. ICLs continue to represent the fastest growing
product line of STAAR's business and are the largest contributor to
enhanced profit margins. Bringing ICL and TICL to new markets, and
expanding market share in existing markets, will improve STAAR's
profitability. This initiative is described in greater detail under
"Other Highlights - ICL Sales" below.
• Shifting to higher value IOLs. In 2007 and 2008 STAAR began converting its U.S. IOL product offering from lower value spherical products to newer aspheric designs that are eligible for enhanced CMS reimbursement as NTIOLs. STAAR has now added aspheric optics to all of its IOL platforms. While STAAR hopes to regain lost U.S. IOL market share through new product introductions, the enhanced profitability of these designs should significantly improve the performance of the U.S. IOL business even if market share gains are minimal. As a result of the conversion of STAAR's silicone product offering to NTIOL lenses, STAAR's silicone IOL sales increased 19% in the second quarter year-over-year, and were up 9% for the first six
months of 2009. With the third quarter launch of nanoFLEXTM, a one-piece Collamer NTIOL that can be delivered through a 2.2 mm incision using STAAR's nanoPOINTTM injector, and launch of the EpiphanyTM injector for the three-piece Collamer NTIOL, STAAR believes that similar gains may be achievable in the Collamer IOL sector. In addition, STAAR believes it can significantly improve gross margins in 2009 through continued growth in sales of its preloaded IOL offering, especially in Japan, where selling prices for IOLs are relatively high.
• Improve product mix and pricing of other surgical products. STAAR distributes a variety of complimentary products used in ophthalmic surgery as a service to its customers. In an effort to improve margins of other surgical products, STAAR is reviewing all pricing to determine if products are priced appropriately and is discontinuing product lines with lower than average margins.
• Implement Centers of Excellence Program. STAAR believes that it has an opportunity to reduce costs while continuing its history of innovation by rationalizing its business among its worldwide operations through its Centers of Excellence program. The first initiative in this area has begun in 2009, as STAAR begins making its U.S. facility the center of excellence for optical design and manufacturing of IOLs and Japan the center of excellence for design and manufacturing of delivery systems. By moving all IOL manufacturing to STAAR's Monrovia facility STAAR expects to significantly reduce costs by increasing volume without significantly increasing fixed costs. Similarly, the transfer of delivery system development and manufacturing to Japan is expected to lead to cost savings and a greater focus on STAAR Japan's more advanced lens injector designs. STAAR expects to see margin expansion in 2010 as a consequence.
Continue Cost Reduction Efforts. While STAAR's international operations, outside of Japan, have generally generated cash or been cash flow neutral in recent periods, losses from U.S. operations have been the principal cause of cash use on a consolidated basis. To reduce these losses, STAAR implemented cost-cutting measures, including targeted reductions in the U.S. workforce. Beginning in December 2007, STAAR began a process to closely rationalize and evaluate its spending levels. These initiatives included streamlining STAAR's U.S. organization by reducing spending levels in all areas of the business, renegotiating or eliminating certain obligations, and eliminating all executive bonus opportunities until STAAR showed positive trends toward achieving profitability. During the second quarter of 2009, operating expenses declined $2.2 million from the second quarter of 2008, mainly due to decreases in marketing and selling and research and development expenses; for the first six months of 2009, operating expenses have declined $7.2 million compared to the first six months of 2008, however, this decline partly reflects $3.8 million in acquisition costs related to STAAR Japan that we incurred in 2008. The reduction in expense was nevertheless significant and continued the trend established in 2008, when STAAR achieved a $4.5 million reduction in U.S. annual operating expenses over the prior year. STAAR continues to seek to identify opportunities for savings in its global operations.
Secure Key Regulatory Approvals. Regulatory approvals of high margin products in significant markets can yield rapid growth in sales and improvements in profitability. The principal approvals pursued by STAAR at this time are the U.S. approval of the TICL and the approval of ICL and TICL in Japan.
STAAR's TICL corrects both myopia and astigmatism, and has been shown to be highly effective in treating individuals affected by both conditions. When STAAR has introduced the TICL in international markets it has generally experienced rapid growth, and the TICL may also lead to increased ICL sales by making the product family a more complete solution that physicians can offer to patients. STAAR has applied for approval of the TICL in the U.S., but the FDA had suspended review of the application pending resolution of concerns regarding STAAR's oversight of the TICL clinical study. On July 21, 2009 the FDA informed STAAR that this "integrity hold" had been removed. Although the removal of the integrity hold should not be construed as approval of any conditions that may be found in the future, nor should it be construed as clearance to market the Visian Toric ICL, the removal of the integrity hold enables the FDA to resume scientific review of the STAAR application for the Toric Implantable Collamer Lens (TICL(TM)) for Myopic/ Astigmatic patients. This agency action, and STAAR's progress is discussed below under the caption "Other
Highlights: Medical Device Regulatory Compliance, Clinical Oversight and TICL Approval." Based on experience in international markets, STAAR believes that U.S. sales of the ICL will generally increase over time even if TICL approval continues to be delayed. Nevertheless, STAAR believes that approval and introduction of the TICL would significantly enhance refractive sales in the U.S. Obtaining approval remains a part of STAAR's long-term strategy.
In June 2009, STAAR received CE Mark approval for its KS-X Preloaded Hydrophobic Acrylic Injector for use in minimally invasive cataract surgical procedures. The CE Mark allows STAAR to market this foldable intraocular (IOL) KS-X lens delivery system in the European Union as well as other countries that recognize the CE Mark. STAAR has been offering the KS-X system, which mates a preloaded delivery system manufactured by STAAR Japan with an independently sourced acrylic lens, in the Japanese market for two years. The STAAR system enables lens delivery into the eye through a 2.8 millimeter incision and is compatible with the most commonly used small incision cataract extraction procedures. It is the only preloaded lens delivery system in the world that provides single or bi-manual injection options in one single design, allowing for the smoothest IOL injection methods compared with traditional delivery systems. First shipments of the product in key European and Australian markets began in late June. STAAR's preloaded injectors are not approved for sale in the U.S.
In addition, on June 11, 2009, the FDA granted 510(k) clearance for the Company's Epiphany Injector System for use with the Affinity Collamer Three-Piece NTIOL and the Elastimide Silicone NTIOL. The Epiphany is a manually loaded version of STAAR's preloaded injector designed for smooth, controlled delivery of the three-piece Collamer IOL. It is the first insertion device available in the U.S. using injector technology developed at STAAR Japan and will pave the way for the future introduction of a preloaded injector for the U.S. market. Epiphany has been designed to combine both ease of use with controlled delivery. The Epiphany injector system is intended for single use and offers the flexibility of either twist or push insertion techniques - a unique feature of STAAR's IOL delivery systems. First shipments of the product began in July with full release to the market in the August timeframe.
Approval of ICL and TICL by Japanese regulators is pending. Like other Asian countries, Japan has a high mean rate of myopia, which is often accompanied by astigmatism. As a result STAAR believes that the Japanese market for ICL and TICL is promising. STAAR Japan's preloaded IOL injectors have established a presence in the Japanese cataract IOL market that could also help establish a market for the Collamer IOL.
Increase the ICL's Share of the Refractive Market in Key Territories. While the ICL and TICL are approved for sale in over 50 countries, a smaller group of countries where we have achieved significant sales volume and market share yields the bulk of our ICL and TICL sales revenue. STAAR currently views the following as its key markets for the ICL and TICL:
• United States
• China
• Germany
• India
• Korea
• Spain
• Latin America
To date, the highest penetration rate achieved by STAAR for ICL and TICL within any particular refractive surgery market has exceeded 5% but is less than 10%. STAAR believes it has the opportunity to achieve significant profits if it can achieve a 5% or greater penetration rate in all of its key markets, and during 2009 will concentrate its international sales efforts on key markets to achieve that goal.
Other Highlights
U.S. ICL Sales. We consider ICL sales growth in the U.S. market to be essential because of the size of the U.S. refractive surgery market and the perceived worldwide leadership of the U.S. in adopting innovative medical technologies. The Visian ICL was approved by the FDA for treatment of myopia on December 22, 2005.
Visian ICL sales in the U.S. were relatively flat in the first six months of 2009 compared to prior year, and grew 18% in 2008 when compared to 2007 levels.
STAAR believes that the continued global recession represents the largest challenge to increased growth in U.S. ICL sales. Refractive surgery is an elective procedure generally not covered by health insurance. Patients must pay for the procedure, frequently through installment financing arrangements. Overall ICL sales grew during 2008 but were relatively flat in the first six months of 2009 compared to the same period in 2008. However, quarter over quarter, STAAR has seen a 15% decline, and sequentially to the first quarter of 2009 a 10% decline which we believe is due to significantly lower volume of patients seeking refractive surgery, which reduces the number of patients to whom the ICL is offered. While ICL sales have been much more resistant to the recession than laser-based procedures, if severe recession conditions continue for a prolonged period, ICL sales may decline further until consumer spending levels begin to recover. STAAR believes that its share of the U.S. refractive market has grown during the past years, which will position the ICL for strong sales growth when conditions improve.
Other challenges to sustained growth in U.S. Visian ICL sales include the following:
• the U.S. refractive surgery market has been dominated by corneal laser-based techniques, which continue to be better known than the Visian ICL among potential refractive patients;
• other newly introduced surgical products will continue to compete with the Visian ICL for the attention of surgeons seeking to add new, high value surgical products, in particular multifocal and accommodating IOLs;
• negative publicity about complications of LASIK could reduce interest in all refractive surgical procedures; and
• FDA approval of the TICL, which STAAR sells in international markets for treating patients severely affected by both myopia and astigmatism, has been delayed.
On April 25, 2008, the FDA Ophthalmic Devices Panel held a public meeting to discuss issues of medical complications and customer satisfaction following refractive surgery. While the panel also discussed phakic IOLs such as the Visian ICL, most of its discussions centered on LASIK and testimony regarding customer dissatisfaction following LASIK surgery. The Panel recommended enhanced patient warnings of possible complications for LASIK and created a task force to study methods of better identifying those patients who are more likely to have . . .
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