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STAA > SEC Filings for STAA > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for STAAR SURGICAL CO


5-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our Annual Report on Form 10-K for the fiscal year ended December 30, 2011. 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 ("we," "us," the "Company," and "STAAR")designs, develops, manufactures and sells implantable lenses for the eye and injector devices used to deliver these lenses into the eye through a small incision. We are the world's leading manufacturer of intraocular lenses used in corrective or "refractive" surgery, and we also make lenses for use in surgery to treat cataracts. All of the lenses we make are foldable, which allows the surgeon to insert them into the eye through a small incision during minimally invasive surgery. Refractive surgery is performed to treat the type of visual disorders that have traditionally been corrected using eyeglasses or contact lenses. We refer to our lenses used in refractive surgery as "implantable Collamer® lenses" or "ICLs" and market them under the Visian® brand name. The field of refractive surgery includes both lens-based procedures, using products like the Visian ICL®, and laser-based procedures like LASIK. Successful refractive surgery can correct common vision disorders such as myopia, hyperopia and astigmatism. Astigmatism is a condition that causes blurred vision when an irregular shape of the cornea prevents light from focusing properly on the retina. Cataract surgery is a common outpatient procedure where the eye's natural lens that has become cloudy with age is removed and replaced with an artificial lens called an intraocular lens (IOL) to restore the patient's vision.

STAAR Surgical Company, Visian®, Collamer®, STAARVISC®, Elastimide®, nanoFLEX® nanoPOINT®, CentraFLOW™, AquaPORT™, Epiphany® and AquaFlow® 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.

Products

A detailed description of STAAR's business appears in our Annual Report on Form 10-K for the fiscal year ended December 30, 2011, along with a glossary explaining many of the specialized terms used in describing our products and our business. We recommend that readers unfamiliar with STAAR refer to that description.

ICLs - Visian Implantable Collamer Lenses. Sales of refractive lenses make up over half of our total sales. Made from our proprietary biocompatible Collamer material, STAAR's range of Visian ICL products includes the following:

· The Visian ICL treats refractive disorders such as myopia (near-sightedness) and hyperopia (far-sightedness). STAAR began selling the Visian ICL outside the U.S. in 1996 and inside the U.S. in 2006.

· The Visian Toric ICL®, or TICL®, treats myopic and hyperopic patients with astigmatism. STAAR began selling the Visian TICL outside the U.S. in 2002. The TICLs are available for sale in outside the U.S.

· STAAR currently sells several versions of the Visian ICL and Visian TICL; the original V4, the V4b, which expands the population of eligible patients to individuals in the lower diopter range (from -3.0 to +3.0), and the V4c, which includes the proprietary CentraFLOW technology (a port in the center of the myopic ICL and TICL) that eliminates the need for a peripheral iridectomy or irodotomy procedure prior to implanting the ICL.

· STAAR's goal is to position the Visian ICL and TICL products throughout the world as primary choices for refractive surgery.

IOLs - Intraocular Lenses for Cataract Surgery. Our range of foldable IOLs for patients undergoing cataract surgery includes the following:

· Aspheric IOLs, available in single-piece and three-piece designs made from Collamer, STAAR's proprietary biocompatible collagen copolymer lens material and from silicone. Aspheric IOLs are designed to improve the patient's quality of vision when compared to earlier spherical IOL designs. The three piece aspheric silicone lens is available in all major markets globally and is sold preloaded in markets outside of the U.S. The Collamer three piece lens is only marketed and sold in the U.S.

· The nanoFLEX IOL, a single-piece Collamer aspheric IOL that can be implanted through a micro-incision with a single-use disposable nanoPOINT injector system is available in the U.Sand territories that accept the CE Mark.

· The Preloaded Injector, a three-piece silicone or acrylic IOL preloaded into a single-use disposable injector and currently available outside the U.S. The acrylic IOL Preloaded Injector uses an acrylic lens sourced from another manufacturer. The KS-SP, a single-piece preloaded acrylic IOL that can be implanted through a micro-incision with a single-use disposable injector system became available through a limited launch in Europe during the third quarter of 2012.

· STAAR Toric IOL is a single piece silicone toric IOL, used in cataract surgery to treat preexisting astigmatism and is currently only marketed in the U.S and Canada. A Collamer version of our toric IOL -nanoFLEX Toric has CE mark approval and should be available in markets covered by CE during the fourth quarter of 2012.

Because most cataract patients are elderly, government agencies or government sponsored entities generally pay the cost of IOLs in our major markets, including the U.S. As a result, cataract procedures volumes will likely remain relatively stable even under adverse conditions in the general economy. However, changes in reimbursement policy under these agencies and entities can reduce our selling prices or reduce the volume of cataract procedures.

Other Surgical Products. We also sell other instruments, devices, and equipment used in cataract or refractive surgery, which we either manufacture or have manufactured for us. However, we have been deemphasizing these products since 2009 because of their lower overall gross profit margins.

Operations

STAAR operates its global administrative headquarters and a manufacturing facility in Monrovia, California, and also maintains manufacturing facilities in Nidau, Switzerland, Chiba Prefecture, Japan, and Aliso Viejo, California.

STAAR is implementing a project to consolidate its manufacturing into a single site at its Monrovia, California location by the end of 2014, which we expect to yield significant savings in cost of goods, lower our global administrative and regulatory costs and reduce income taxes. During September 2012, 75% of all non-sterile silicone IOLs for Japan were manufactured in the U.S. We expect to build the first Visian ICLs in the U.S. during the first quarter of 2013. This project, which is subject to significant risks, is further described under Note 13, "Manufacturing Consolidation Project and Tax Strategy."

On August 17, 2012, STAAR entered into a commercial lease for the real property located at 1941 S. Walker Avenue, Monrovia, California, including a commercial building of approximately 26,000 square feet. The lease begins on November 1, 2012 and has an initial term of eight years. The Company has two options to extend the lease, each for a period of five years. The Company expects to spend approximately $700,000 on tenant improvements during the fourth quarter of 2012. The premises adjoin STAAR's headquarters at 1911 S. Walker Avenue.

Strategy and Key Operational Metrics

STAAR's strategy is to be a leading global provider of innovative intraocular lens system technologies. STAAR employs a focused commercialization strategy, consisting of direct and indirect sales personnel in over 60 markets, including eleven targeted markets that enables sustainable profitable growth.

STAAR's key operational metrics for 2012 are guided by two principal strategic goals: to achieve and maintain profitability and to lay the groundwork for further growth. In pursuit of these goals, STAAR has aligned its business initiatives during 2012 along five key operational metrics it uses to gauge its success during the year. Those metrics are as follows:

· Increase total revenue by high single digits (on August 1, 2012, we changed this metric from its original metric of 15% for 2012).

-The Company is expecting its year-over-year fourth quarter growth to exceed its third quarter growth rate. However, it would be beyond our current expectations to be in high single digit growth for the year.

· Grow Visian ICL sales by 25% for the second half of 2012 and 20% for the year (on August 1, 2012, we changed this metric from its original metric of 32% or greater for 2012).

-The Company is expecting strong ICL revenue growth during the fourth quarter. However, without a solid rebound in Asia Pacific markets, this metric would be beyond our current expectations.

· Increase gross profit margins to achieve a level of 71% for the full year.

-Based upon the Company's performance during the three months ended September 28, 2012, and the Company's estimates for the fourth quarter, the Company is expecting to achieve this metric for the fourth quarter and for the full year.

· Achieve profitability in three quarters of 2012 (on August 1, 2012, we changed this goal from achieving profitability in all four quarters of 2012).

-Though the Company was unprofitable during the three months ended September 28, 2012 based upon the Company's estimates for the fourth quarter, we are expecting to achieve this metric for the fourth quarter and for the full year.

· Manage the manufacturing consolidation with no material disruption to customer supply requirements.

-The Company's consolidation efforts are proceeding according to plans and the Company expects this to continue during the fourth quarter.

Other Highlights

STAAR continues to strengthen its direct sales and marketing business in Spain. We hired an additional employee in Spain and hosted a series of events during the Spanish Annual Ophthalmic Meeting in Barcelona, Spain in September. We incurred $0.4 million in selling expenses related to the change in distribution in Spain, and we expect the expense associated with the transition in Spain will continue through February 2013, at which time the normal logistics costs of being direct in a market will beginThe on-going weakness and uncertainty in the Spanish economy may affect the magnitude and timing of future benefits from our direct model in Spain.

Status of Regulatory Submissions. Regarding our PMA Supplement submission to the FDA seeking approval for the TICL, by a letter dated April 30, 2012 the FDA rejected our most recent proposed approach to respond to the FDA's concerns regarding timing of follow-up visits for certain patients in the study cohort at certain sites. STAAR remains in dialogue with the agency to find a resolution to the timing concerns and will submit a response to the FDA by November 16, 2012. STAAR believes that these issues do not affect the scientific integrity of the data in establishing the safety and effectiveness of our TICL product. STAAR cannot predict when, or if, the FDA will grant approval of the TICL for use in the United States.

On October 9, 2012, STAAR submitted to the FDA a 180 day PMA Supplement regarding the V4c version of the Visian ICL. To date, STAAR has not received a response from the FDA. We'll continue to seek approval for our key products in our target markets.

Organizational Developments.

On September 4, 2012, STAAR announced the hiring of James Francese as V.P., Global Marketing, the transition of Robin Hughes from V.P., Global Marketing to V.P., Research & Development, and the transition of Craig Felberg from V.P., Research & Development to the V.P., Business Development, a newly created role. These leadership transitions are designed to help fuel revenue growth in three ways: more effectively market STAAR products globally, bring new internally-developed products to market more quickly and evaluate additional new externally-developed technologies and business opportunities, which will allow us to grow within our area of strategic focus.

On September 13, 2012, STAAR announced the appointment of Charles Slacik, CPA, to the Board of Directors. Mr. Slacik has over 30 years of executive level experience in the health care industry, serving most recently as the Senior Vice President and Chief Financial Officer of Beckman Coulter Inc. His appointment brings the number of directors on the STAAR Surgical Board to seven. STAAR also announced that the current chairman of the Audit Committee, Don Duffy, has advised the Board he intends to retire at the end of his current term in May, 2013 after holding the position for 10 years. We expect Mr. Slacik to replace Mr. Duffy as chairman of the Audit Committee and the transition to go smoothly.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.

An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the nine months ended September 28, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 30, 2011.

Results of Operations

The following table shows the percentage of our total sales represented by the specific items listed in our statements of operations for the periods indicated, and the percentage by which these items increased or decreased over the prior period.

                                                                               Percentage                                              Percentage
                                                                                 Change                                                Change for
                                           Percentage of Net Sales for         for Three           Percentage of Net Sales for            Nine
                                                  Three Months                   Months                    Nine Months                   Months
                                         September            September           2012           September            September           2012
                                          28, 2012             30, 2011         vs. 2011          28, 2012             30, 2011         vs. 2011
Net sales                                      100.0 %              100.0 %            3.9 %           100.0 %              100.0 %            2.0 %
Cost of sales                                   29.6                 31.5             (2.6 )            30.0                 33.3             (8.1 )
Gross profit                                    70.4                 68.5              6.9              70.0                 66.7              7.1

General and administrative                      21.7                 24.1             (6.3 )            23.1                 23.7             (0.4 )
Marketing and selling                           34.7                 29.1             24.1              32.8                 28.2             18.6
Research and development                        10.0                  9.5              8.8               9.8                  9.2              8.4
Other general and administrative
expenses                                         4.6                  0.9               -*               4.2                  1.0               -*
                                                71.0                 63.6             16.0              69.9                 62.1             14.8
Operating  income(loss)                         (0.6 )                4.8               -*               0.1                  4.6            (98.9 )*
Other income (expense), net                      1.4                 (2.9 )             -*               0.9                  0.2               -*
Income (loss) before provision for
income taxes                                     0.8                  1.9            (55.7 )*            0.9                  4.8            (80.7 )*
Provision for income taxes                       1.4                  1.4              2.3               1.6                  2.1            (20.9 )
Net income (loss)                               (0.6 )%               0.5 %             -*              (0.7 )%               2.7 %             -*

* Denotes change is greater than +100%.

Net Sales



                                                                         Percentage                                      Percentage
                                                                           Change                                        Change for
                                                                         for Three                                          Nine
                                        Three Months Ended                 Months            Nine Months Ended             Months
                                 September 28,       September 30,          2012         September       September          2012
                                     2012                2011             vs. 2011        28, 2012       30, 2011         vs. 2011
Net sales                       $        15,866     $        15,266              3.9 %   $   47,316          46,385              2.0 %

ICL                                       9,111               7,902             15.3         26,321          23,091             14.0
IOL                                       6,052               6,571             (7.9 )       19,185          20,767             (7.6 )
Other                                       703                 793            (11.3 )        1,810           2,527            (28.4 )

Net sales for the three months ended September 28, 2012 were $15.9 million, an increase of 3.9% compared to the $15.3 million reported during the three months ended September 30, 2011. Net sales for the nine months ended September 28, 2012 were $47.3 million, a 2.0% increase compared with $46.4 million reported during the nine months ended September 30, 2011. As described below, the increase in net sales for the three and nine-month periods primarily resulted from increased sales of ICLs, which were largely offset by decreased sales of IOLs and Other surgical products.

Total Visian ICL sales for the three months ended September 28, 2012 were $9.1 million, an increase of 15.3% compared with $7.9 million reported during the three months ended September 30, 2011. Total Visian ICL sales for the nine months ended September 28, 2012 were $26.3 million, an increase of 14.0% compared with $23.1 million reported during the nine months ended September 30, 2011. The increase in Visian ICL sales for the three-month period is due to increased sales in China, Spain, Japan, India, Italy, Latin America, U.K., and the U.S., partially offset by decreased sales in Korea, Middle East and Germany. Sales in Europe, Middle East, Africa, and Latin America ("EMEA") grew by 17%. Visian ICL with CentraFLOW™ technology represented approximately 82% of total ICL sales in Europe, with over 7,000 implants in Europe since introduction and is performing as expected. Sales in North America increased by 11% during the three months ended September 28, 2012 due to increased promotional activities including initial benefits from social media activities. Sales to private sector accounts in the U.S. increased by 20%, while military sales of Visian ICLs declined 12%, due to a year-end military order during the third quarter of 2011. Sales in the Asia Pacific market increased 15% led by Japan (56% increase), China (52% increase) and India (24% increase); offset by a decline in our largest market, Korea (15% decrease). The increase in Visian ICL sales for the nine-month period was due to a 16% increase in sales in our top eleven refractive markets. Visian ICL sales represented 57% and 56%, respectively, of our total sales for the three and nine months ended September 28, 2012, compared to 52% and 50%, respectively for the three and nine months ended September 30, 2011.

Total IOL sales for the three months ended September 28, 2012 were $6.1 million, a decrease of 7.9%, when compared with the $6.6 million reported for the three months ended September 30, 2011. Total IOL sales for the nine months ended September 28, 2012 were $19.2 million, a decrease of 7.6%, when compared with the $20.8 million reported for the nine months ended September 28, 2011. IOL sales represented 38% and 41% of sales for the three and nine months ended September 28, 2012, compared to 43% and 45%, respectively for the three and nine months ended September 30, 2011. We believe the decline in net IOL sales resulted from an overall global cataract procedure decline and delays in the launch of the KS-SP Preloaded IOL in Europe and Japan and the Toric Collamer IOL in Europe. The Company expects to launch the KS-SP during the fourth quarter of 2012 and the Toric Collamer IOL during the first quarter of 2013.

Other product sales for the three and nine months ended September 28, 2012 were $0.7 million and $1.8 million, a decrease of 11.3% and 28.4%, respectively, when compared with $0.8 million and $2.5 million for the three and nine months ended September 30, 2011. The Company expects to continue to see declines in its other product sales as it has deemphasized these products.

Gross Profit



                                                                         Percentage                                      Percentage
                                                                           Change                                        Change for
                                                                         for Three                                          Nine
                                        Three Months Ended                 Months            Nine Months Ended             Months
                                 September 28,       September 30,          2012         September       September          2012
                                     2012                2011             vs. 2011        28, 2012       30, 2011         vs. 2011
Gross Profit                    $        11,176     $        10,450              6.9 %   $   33,122     $    30,940              7.1 %
Gross Profit Margin                        70.4 %              68.5 %                          70.0 %          66.7 %

Gross profit for the third quarter was $11.2 million, or 70.4% of revenue, compared with $10.5 million, or 68.5% of revenue, in the prior year period. During the first nine months of 2012, gross profit was $33.1 million, or 70.0% of revenue, compared with $30.9 million, or 66.7% of revenue, in the prior year period. The increase in gross profit and gross profit margin is due to higher mix of ICLs and improved manufacturing cost on ICL's. IOL gross margin was 60% for both the three and nine months periods of 2012, respectively, compared with 59% for the three months and 58% for the nine months periods of 2011.

Marketing and Selling



                                                                          Percentage                                      Percentage
                                                                            Change                                        Change for
                                                                           for Three                                         Nine
                                          Three Months Ended                Months             Nine Months Ended            Months
                                  September 28,        September 30,         2012          September       September         2012
                                      2012                 2011            vs. 2011        28, 2012        30, 2011        vs. 2011
Marketing and Selling            $         5,507      $         4,439            24.1 %   $    15,536     $    13,098            18.6 %
Percentage of Sales                         34.7 %               29.1 %                          32.8 %          28.2 %

Marketing and selling expenses increased by 24.1% to $5.5 million in the third quarter of 2012, compared with $4.4 million in the third quarter of 2011. Marketing and selling expenses for the nine months ended September 28, 2012 were $15.5 million, an increase of 18.6% when compared with $13.1 million for the nine months ended September 30, 2011. The increase for both periods is due to increased headcount, increased stock-based compensation, and increased costs associated with the move to a direct distribution model in Spain.

Research and Development



                                                                            Percentage                                      Percentage
                                                                              Change                                        Change for
                                                                            for Three                                          Nine
                                           Three Months Ended                 Months            Nine Months Ended             Months
                                   September 28,        September 30,          2012         September       September          2012
                                       2012                 2011             vs. 2011        28, 2012       30, 2011         vs. 2011
Research and Development          $         1,582      $         1,454              8.8 %   $    4,640     $     4,279              8.4 %
Percentage of Sales                          10.0 %                9.5 %                           9.8 %           9.2 %

Research and development expense increased in the third quarter of 2012, by 8.8% to $1.6 million, compared with $1.5 million in the third quarter of 2011. Research and development expense for the nine months ended September 28, 2012 was $4.6 million, an increase of 8.4% when compared with $4.3 million reported last year. The increase for both periods was primarily due to increased salaries and associated stock-based compensation. . . .

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