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STAA > SEC Filings for STAA > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for STAAR SURGICAL CO


1-Nov-2013

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, including statements about any of the following: any projections of earnings, revenue, sales, profit margins, cash, effective tax rate or any other financial items; the plans, strategies, and objectives of management for future operations or prospects for achieving such plans; metrics for 2013; statements regarding new products, including but not limited to, expectations for success of new products in the U.S. or international markets or government approval or commercialization of new products; future economic conditions or size of market opportunities; expected IOL backorder position; expected costs of Monrovia facility expansion; expected costs and savings from business consolidation plans and the timetable for those plans; statements of belief, including as to achieving 2013 growth plans or metrics; expected regulatory activities and approvals, product launches, and any statements of assumptions underlying any of the foregoing. 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 28, 2012. 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 (near-sightedness), hyperopia (far-sightedness) and astigmatism (irregular shape of cornea causing blurred vision). 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®, Visian®, Collamer®, STAARVISC®, Elastimide®, nanoFLEX® nanoPOINT™, CentraFLOW®™, AquaPORT®™, Epiphany® and AquaFlow™ are trademarks or registered trademarks of STAAR Surgical Company 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 28, 2012, 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 - Implantable Collamer Lenses for Refractive Surgery. Sales of refractive lenses make up over half of our total sales. Made from our proprietary biocompatible Collamer material, highlights of STAAR's family of Visian ICL products are as follows:

· 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 in the U.S. in 2006.

· The Visian Toric ICL or TICL, treats myopic and hyperopic patients with astigmatism. STAAR has been selling the Visian TICL outside the U.S. since 2002. STAAR remains in dialogue with the FDA regarding its PMA Supplement submission seeking approval to sell the TICL in the U.S. This matter is further discussed below under, "Status of Regulatory Submission."

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

· 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
(i) Collamer, STAAR's proprietary biocompatible collagen copolymer lens material and (ii) from silicone. Aspheric IOLs are designed to improve the patient's quality of vision when compared to earlier spherical IOL designs. The aspheric silicone lenses are available in the U.S. and are sold preloaded in certain markets outside of the U.S., predominately in Japan. 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 primarily marketed and sold in the U.S.

· The Preloaded Injector, a silicone or acrylic IOL preloaded into a single-use disposable injector is currently available outside the U.S. The acrylic IOL Preloaded Injector uses an acrylic lens sourced from a third party manufacturer. The KS-SP (single-piece) and KS-Xs (three piece) preloaded acrylic IOLs that can be implanted through a micro-incision with a single-use disposable injector system is available in Japan and on a limited basis in Europe. The third party supplier of these acrylic lenses is currently unable to meet STAAR's demand for the new KS IOL products, thus the company experienced approximately $800,000 in backorders from its European customers at the end of the third quarter of 2013. We are seeking alternative suppliers but cannot predict whether our efforts will prove successful.

· 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. A Collamer version of our toric IOL -nanoFLEX Toric has CE mark approval and initial shipments began to Europe late in the second quarter.

Other Surgical Products. We also sell other instruments and devices 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. In addition, we report sales of low margin injectors to our third party supplier of IOLs under this category. In recent periods, these sales have increased due to the parties' launch of their respective pre-loaded IOL systems, which are currently experiencing backorder due to high demand and the limited supply of third party IOLs.

Operations

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

STAAR is implementing a project to consolidate its manufacturing into a single site at its Monrovia, California location, which we expect to yield significant savings in cost of goods, lower our global administrative and regulatory costs and reduce income taxes. The transition of manufacturing from Japan to the U.S. is complete. The expected completion date for the consolidation of our Swiss manufacturing facility is the middle of 2014. This project, which is subject to significant risks, is further described under Note 12, "Manufacturing Consolidation Project and Tax Strategy."

Strategy and Key Operational Metrics

STAAR's strategy is to be valued as a leading global provider of innovative intraocular lens system technologies. STAAR employs a commercialization strategy that focuses on achieving sustainable profitable growth.

STAAR's key operational metrics for 2013 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 aligned its business initiatives during 2013 along four key operational metrics used to gauge its success during the year. Those metrics are as follows:

· Increase total revenue by 12% to 14% (increased on July 31, 2013 from the previous 8% to 10% metric).

- As discussed below in "Results of Operations," our total revenue increased by 8% in the third quarter of 2013. Total revenue increased by 13% in the first nine months of 2013.

· Increase gross profit margins by 250 basis points for the full year.

- As discussed below in "Results of Operations," our gross profit was 70.5% in the third quarter of 2013 compared to 70.4% in the third quarter of 2012, and increased to 70.1% for the first nine months of 2013, compared to 70.0% for the first nine months of 2012.

· Achieve profitability in each quarter of 2013.

- As discussed below in "Results of Operations," we achieved net income of $0.5 million in the third quarter of 2013 and $1.3 million for the first nine months of 2013.

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

- The Company's consolidation efforts are proceeding substantially according to plans. On July 31, 2013, we revised this metric by extending the transfer of Swiss operations until the middle of 2014 to assure that we can meet higher than anticipated demand for the Visian ICL. By the end of 2013, we expect to have 100% of all IOL production, two thirds of ICL's and one third of TICL's manufactured in the U.S.

Other Highlights

In the third quarter of 2013, Visian ICLs grew in Europe, Middle East and Africa (EMEA) by 40% in revenue while units increased 30% and price 8%; in Asia Pacific (APAC) an increase of 10% in revenue, while units increased 10% and price was unchanged; in North America (NA) an increase of 9% in revenue, while units increased 10% and price declined 2%. We experienced growth in ten of our eleven target markets including growth in our top three markets as follows: Korea +13%; China + 22%;, and the U.S. +7%. Spain grew 23% and the third quarter was the first quarter that reflected a true direct to direct distribution model comparison. Other notable markets experiencing growth were: India +18%; the Middle East + 39%; Latin America + 30%; Germany +154%; and Italy +53%. Japan decreased 24% due to a significant decline in Lasik procedures that impacted refractive procedures in general. We believe growth in EMEA is due to growing acceptance of the CentraFLOW technology and new sales personnel hired in 2012. Regarding China, we believe we will continue to see growth during the remainder of the year, followed by the anticipated approval of the Visian ICL with CentraFLOW technology during the first half of 2014.

Backorders of our preloaded acrylic IOLs in Europe were approximately $800,000 at the end of the third quarter, due to demand for our KS-SP and KS-Xs products and the supply constraints we continue to experience from a third party supplier. This backorder position is expected to continue to limit IOL sales for the entire year and we are evaluating potential options to meet this demand. Our overall gross margins were limited by the weakened value of the Japanese yen and by an increased mix of low margin IOL injector system sales. IOL units sold in Japan increased 6%, although average selling prices decreased 16% driven by the weakened value of the yen. IOL sales in Japan represented 52% of worldwide IOL sales. IOL sales in China declined by $503,000 during the third quarter due to our need to suspend allocation of KS IOL products available for sale due to the supply constraints.

STAAR continued its manufacturing consolidation efforts in the third quarter of 2013 in preparation of transferring Swiss manufacturing activities to our Monrovia facility. In the third quarter of 2013, the Company spent $490,000 in consolidation costs and expects to spend an additional $260,000 during the remainder of 2013. At the end of the third quarter the Company has approximately 11,400 ICLs in inventory in both Europe and the U.S. This inventory build is consistent with management's plan to assure adequate supply and quality of product throughout this consolidation project.

Status of Regulatory Submissions. The Company received regulatory approval to sell and market the Visian ICL with CentraFLOW technology in India during the third quarter of 2013. The Company currently anticipates approval of the Visian ICL with CentraFLOW for China and Japan during the first half of 2014. In addition, the Company expects to receive CE Mark approval for the Visian ICL V5, which is preloaded and offers a larger optical zone, before the end of 2013 and to begin commercialization in the first quarter 2014.

Regarding our PMA Supplement submission to the FDA seeking approval for the TICL, on November 15, 2012, STAAR submitted to the FDA (1) clinical data showing no statistical difference in the clinical outcomes with or without the patient data that was obtained outside the study windows, (2) engineering data regarding the lens design, and (3) a validation report for the Toric ICL power calculation software. STAAR remains in dialogue with the agency regarding our PMA Supplement, and hosted inspection visits from the FDA, which included reviewers of the TICL submission at our Nidau, Switzerland and Monrovia, California facilities during the third quarter of 2013. The Company has been told by the FDA that the current intent is to take the TICL submission to the Advisory Panel. On October 30, 2013, the Company received a technical question from the FDA with a response due date of November 6, 2013. The Company expects to respond prior to that due date. There are no other pending questions. A date for the advisory panel has not been established and the Company is preparing the information needed for the Panel Package. 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. On February 12, 2013, in response to a request by the FDA, we submitted a Pre-Submission for the PMA Supplement. On June 17, 2013, the FDA responded to our proposal with suggestions for revision. During the third quarter of 2013, we submitted our revised proposed protocol and the FDA scheduled a face-to-face meeting with the Company for December 12, 2013 in Washington, D.C.

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 27, 2013 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 28, 2012.

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.

                                    Percentage of Net Sales for      Percentage of Net Sales for
                                            Three Months                      Nine Months
                                     September        September       September        September
                                        27,              28,             27,              28,
                                       2013             2012            2013             2012
Net sales                                  100.0 %          100.0 %         100.0 %          100.0 %
Cost of sales                               29.5             29.6            29.9             30.0
Gross profit                                70.5             70.4            70.1             70.0

General and administrative                  24.2             21.7            22.5             23.1
Marketing and selling                       32.3             34.7            30.9             32.8
Research and development                     9.8             10.0             8.9              9.8
Medical device tax                           0.3                -             0.3                -
Other general and administrative
expenses                                     2.9              4.6             3.8              4.2
                                            69.5             71.0            66.4             69.9
Operating income (loss)                      1.0            (0.6)             3.7              0.1
Other income, net                            1.9              1.4             0.4              0.9
Income before provision
(benefit) for income taxes                   2.9              0.8             4.1              0.9
Provision (benefit) for income
taxes                                      (0.1)              1.4             1.7              1.6
Net income (loss)                            3.0 %          (0.6) %           2.4 %          (0.7) %

* Denotes change is greater than +100%.

Net Sales

                                                                Fav/                                 Fav/
                                                              (Unfav)                               (Unfav)
                                  Three Months Ended          % Change       Nine Months Ended      % Change
                            September 27,     September 28,     2013       September   September     2013
                                2013              2012        vs. 2012     27, 2013    28, 2012    vs. 2012
Net sales                 $        17,106   $        15,866        7.8 % $    53,271      47,316        12.6 %

ICL                                10,725             9,111       17.7        32,616      26,321        23.9
IOL                                 5,322             6,052     (12.1)        17,533      19,185       (8.6)
Other                               1,059               703       50.8         3,122       1,810        72.5

Net sales for the three months ended September 27, 2013 were $17.1 million, an increase of 7.8% compared to the $15.9 million reported during three months ended September 28, 2012. Net sales for the nine months ended September 27, 2013 were $53.3 million, a 12.6% increase compared with $47.3 million reported during the nine months ended September 27, 2012. The increase in net sales for the three and nine month periods was due to increased sales of ICLs and Other surgical products, partially offset by a decrease in IOL sales. The effect of foreign exchange had a negative impact on sales of $1.0 million and $2.7 million, respectively, for the three and nine months ended September 27, 2013.

Total ICL sales for the three months ended September 27, 2013 were $10.7 million, an increase of 17.7% compared with $9.1 million reported during the three months ended September 28, 2012. Total ICL sales for the nine months ended September 27, 2013 were $32.6 million, an increase of 23.9% compared with $26.3 million reported during the nine months ended September 28, 2012. ICL sales increased 16% and 24%, respectively, in the Company's top 11 markets during the three and nine months ended September 27, 2013. ICL sales represented 62.7% and 61.2%, respectively, of our total sales for the three and nine months ended September 27, 2013, compared to 57.4% and 55.6% for the three and nine month periods ended September 28, 2012.

Total IOL sales for the three months ended September 27, 2013 were $5.3 million, a decrease of 12.1%, when compared with $6.1 million for the three months ended September 28, 2012. Total IOL sales for the nine months ended September 27, 2013 were $17.5 million, a decrease of 8.6%, when compared with $19.2 million for the nine months ended September 28, 2012. IOL sales represent 31.1% and 32.9% of sales for the three and nine months ended September 27, 2013, compared to 38.1% and 40.5% for the three and nine month periods ended September 28, 2012. The decrease in IOL sales was due to the effect of foreign exchange which reduced IOL sales by $0.8 million and $2.2 million, respectively, for the three and nine months ended September 27, 2013.

Other product sales for the three and nine months ended September 27, 2013 were $1.1 million and $3.1 million, an increase of 50.8% and 72.5%, respectively, when compared with $0.7 million and $1.8 million for the three and nine months ended September 28, 2012. The increase in other product sales was due to an increase in injector part sales to a third party supplier.

Gross Profit

                                                               Fav/                                   Fav/
                                                             (Unfav)                                 (Unfav)
                                 Three Months Ended          % Change        Nine Months Ended      % Change
                           September 27,     September 28,     2013       September     September     2013
                               2013              2012        vs. 2012     27, 2013      28, 2012    vs. 2012
Gross Profit             $        12,059   $        11,176        7.9 % $    37,332   $    33,122       12.7 %
Gross Profit Margin                 70.5 %            70.4 %                   70.1 %        70.0 %

Gross profit for the third quarter was $12.1 million, or 70.5% of revenue, compared with $11.2 million, or 70.4% of revenue, in the prior year period. During the first nine months of 2013, gross profit was $37.3 million, or 70.1% of revenue, compared with $33.1 million, or 70.0% of revenue, in the prior year period. Gross profit margin for the three and nine month periods was negatively impacted by foreign exchange rates and the increased sales mix of low margin injector system sales. These factors negatively impacted margins by 290 basis points for the quarter and 250 basis points year to date in 2013.

General and Administrative

                                                                    Fav/                                             Fav/
                                                                   (Unfav)                                          (Unfav)
                                      Three Months Ended          % Change             Nine Months Ended           % Change
                                September 27,     September 28,     2013        September 27,      September 28,     2013
                                    2013              2012        vs. 2012           2013              2012        vs. 2012
General and Administrative    $         4,140   $         3,450      (20.0) % $         12,021   $        10,942       (9.9) %
Percentage of Sales                      24.2 %            21.7 %                         22.5 %            23.1 %

General and administrative expenses increased by 20.0% to $4.1 million in the third quarter of 2013 from the $3.5 million reported in the third quarter of 2012. General and administrative expenses for the nine months ended September 27, 2013 were $12.0 million, an increase of 10% when compared with $10.9 million reported last year. The increase is due to an increase in bonus accruals based upon performance to date and the incremental cost associated with the expanded facility in Monrovia. General and administrative expenses were favorably impacted by foreign currency exchange by approximately $0.1 million during the quarter and by approximately $0.3 million for the nine month period.

Marketing and Selling

                                                                Fav/                                   Fav/
                                                              (Unfav)                                (Unfav)
                                  Three Months Ended          % Change        Nine Months Ended      % Change
                            September 27,     September 28,     2013       September     September     2013
                                2013              2012        vs. 2012     27, 2013      28, 2012    vs. 2012
Marketing and Selling     $         5,527   $         5,507      (0.4) % $    16,471   $    15,536      (6.0) %
Percentage of Sales                  32.3 %            34.7 %                   30.9 %        32.8 %

Marketing and selling expenses were $5.5 million in the third quarter of 2013, flat when compared with the third quarter of 2012. Marketing and selling expenses for the nine months ended September 27, 2013 were $16.5 million, an increase of 6% when compared with $15.5 million reported last year. The increase is due to increased headcount and promotional activities to support the increased level of sales, partially offset by the timing of ESCRS which was held in the third quarter of 2013, and in the third quarter of 2012. Marketing and selling expenses were favorably impacted by foreign currency exchange by approximately $0.4 million during the quarter and by approximately $0.9 million for the nine month period.

Research and Development

                                                                 Fav/                                   Fav/
                                                               (Unfav)                                (Unfav)
                                   Three Months Ended          % Change        Nine Months Ended      % Change
. . .
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