STAAR Surgical Company (STAA) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the STAAR Surgical Inc., Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Mr. Doug Sherk. Sir, you may begin.

Thank you, [Michelle] and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to review the Company’s financial results for the second quarter which ended on July 03, 2015. Joining me on the call today are Caren Mason, President and CEO of STAAR Surgical and Steve Brown, Chief Financial Officer. The news release detailing the second quarter results was issued just after 4:00 PM Eastern Time and is now available on STAAR's website at www.staar.com. Before we get started, let me quickly remind you that during the course of this conference call, the Company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the Company’s projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the Safe Harbor statement in today’s press release as well as STAAR’s public periodic filings with the SEC. STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and diluted net income per share information. We believe these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. Also in order to compare our performance from period-to-period without the effect of currency fluctuations, we apply the same average exchange rate application to the prior period or constant currency rate to sales. A table reconciling the GAAP information to the non-GAAP information is included in today’s financial release, which is available on our website. Now, I would like to turn the call over to Caren Mason, President and Chief Executive Officer of STAAR Surgical.

Thank you, Doug and good afternoon everyone. I will begin our discussion with general commentary on the state of the business and our progress on major strategic initiative. Steve will then review key second quarter fiscal year 2015 financial results before we open the call for your questions. As you know STAAR's franchise is built around its Collamer material and ICL. Over the past several years, the company has largely been focused upon securing permission and preparing to market the Toric ICL in the U.S. and highly involved in transferring its ICL production operation from Nidau, Switzerland to West Monrovia, California headquarters facility. Other significant initiatives included developing new lenses, delivery systems and direct outreach to patients globally. In the midst of those pursuits, the company was found not to be in compliance with FDA quality system requirements, which we believe ultimately led to the further delay of the introduction of the Toric ICL in the U.S. In addition, several million dollars have been allocated to remediate areas of noncompliance and to build a much stronger and robust quality system. Today, the introduction of the Toric ICL into the U.S. market remains a highly desired outcome that is not the primary strategic focus of our business. Along those lines the transfer of ICL production to Monrovia were most likely not delivered the totality of net operating income envisions with NOL tax credits are filed against the U.S. income in the allotted years. In addition, the move itself caused our on-time delivery performance to split from our traditionally high service levels. As such we have been laboring to get our production yields and on-time delivery metrics back on track, which I am happy to report, have continued to improve nicely in the second quarter. I have often been asked what we will be focusing upon to offset and mitigate these recent disappointments and challenges and how we plan to achieve the promise of STAAR. I have communicated that over the next 18 months to two years we will certainly be fundamentally rebuilding our quality system and business processes as well as investing in our infrastructure. In parallel, we are committed to accomplishing a number of key objectives to build a foundation for strong and consistent growth. I will provide a short update on three of those strategic initiatives today. First, developing a global clinical validation and clinical utility competency. On July 23, I announced the exciting addition of Dr. Jon Hayashida as Vice President of Global Clinical and Medical Affairs. He will head-up our strategic initiative to develop global clinical validation and clinical utility excellence. We have a very admirable and compelling track record in Europe and Japan with several retrospective clinical studies having been conducted and papers published in important Journals highlighting the outstanding performance of the ICL with regard to the safety, efficacy, visual acuity and positive patient experience. We believe these papers provide both singular validation and then certain of these papers very positive comparisons to other refractive procedures such as LASIK. Every year we conduct a very extensive and impressive experts meeting ahead of the ESCRS and much as learned there and reported upon as well. Our goal now is to add depth of analysis, prospective clinical studies, patient registries and significant front and process leadership and managements with all regulatory governing and approving bodies for our newly developed lenses and delivery systems. Dr. Hayashida along with his team will work to create an exceptional clinical library and clinical database to support FDA and all global regulatory submissions and post-market evaluations. In addition, as Head of Medical Affairs Dr. Hayashida will work closely with our field Medical Monitor, Dr. John Vukich to provide exceptional service to our surgeons who require educational and procedural assistance before during an after lens implantation. And finally, we expect to introduce this year in the U.S. and next year internationally and enhance surgeon web portals for many aspects of ordering and ophthalmic surgery practice support. Second, building R&D continuum we call EV3, CentraFLOW, Presbyopia and Cataract Care. We intentionally have not addressed the R&D aspects of the business accepted a very high level as we are recruiting a new Head of R&D and our building enhanced research capabilities and development project discipline. However, I have introduced the EV3 previously as our strategic initiative which builds or improves upon three vision correction classifications requiring an extraordinary vision solution. Myopia which we are successfully addressing with the continuing advancement of our ICL CentraFLOW lenses, presbyopia where we are currently in development with both an ICL and IOL solution and cataract care which is an entire category of further exploration for us which we will begin an earnest in 2016. One development project which have been delayed is moving forward. We announced in our international meeting in June that we would be introducing the enhanced CentraFLOW lens with a larger optic zone. Our leading ICL implant surgeon have told us they would like to provide a larger optical zone to patient. In the June 2015 issue of the Journal of cataract and refracted surgery a paper submitted by a research team from the University of Valencia in Spain reported the results of an experimental study comparing the current CentraFLOW lens and a larger optic zone lens we will be introducing. They concluded that “both Phakic IOL” showed good and comparable in-vitro optical quality similar to that of a perfect lens and that they should not affect visual performance after implantation. Patients with larger pupil diameters could benefit from the Phakic IOLs with the larger optic diameter because it showed better in-vitro optical quality than the previous design with a smaller optic diameter. Our new CentraFLOW lens will benefit patients with larger pupil; mostly [Milano miles] we usually have larger pupils and more needs for improved night vision. At night our pupil dilate and quality of vision maybe reduced when the patient pupil is larger than ICLs optical zone. Ideally a larger optical zone would be very beneficial and considered a key advantage. This enhancements should enable the ICL to be more competitive versus other refractive procedures with more limited diopter range coverage. We expect to announce the early 2016 availability of the CentraFLOW lens with larger optics for the European market yet this year pending review and approval of the CE Mark submission. We are moving forward with determining the requirements for clinical study protocol for regulatory approval and all other markets for this enhanced CentraFLOW lens. Third, the surgeon and patient experience establishing the value of the ICL. This afternoon we reported in our earnings release our intention to raise prices effective October 1. This decision was and is based upon establishing the essential performance value of the ICL and related services and will be reinforced in many markets where price for performance adjustments are overdue. As part of the price setting process the currency translations are taken into account when determining the final price points for market or country. The commercial growth and strength we are working to build includes a very strong commitment and investment and significantly improving the surgeon and patient experience. Our price value relationship can thus be demonstrated by exemplary work in the field that we will package appropriately globally. During our international sales and tough distributor meeting in Lisbon for example I came away exceptionally impressed with one of our distributors who has invested with us in a very large customer opportunity. The distributor STAAR team strategy includes providing test marketing of new price value and patient experience strategies and selected clinics of a large vision care provider. The team trains the office staff to educate patients seeking vision correction, certifies young surgeon with STAAR’s clinical staff support provides all the most recent clinical proof and patient testimonials assist with language translation, supports website development and social media interfaces. The distributor STAAR team proves that a commitment to the ICL is the backbone of practice changes significantly the surgeons confidence in performing the ICL implant, the surgeons compensation and return on investment and the patients experience from introduction to implant. The test market resulted in clinics increasing procedures from 100% to 500% with a significantly better ROI. The expectation is that this partnership with our distributor will involve a significant increase in additional lenses per year just with this one large vision care provider. Investing and enhancing the surgeon and patient experience and pricing the lens appropriately to reflect this investment, is a cornerstone of what we seek to accomplish as the STAAR strategic imperative. We believe this upgrade and commitment in our commercial strategy should significantly benefit adoption and profitable growth. Along with new plans for branding, exceptional clinical validation, new products and patient outreach we are working to build a high-growth and much stronger STAAR. I will now turn over the call to Steve for a review of our Q2 financial results.

Thank you, Caren and good afternoon everyone. I’ll start the financial overview with topline results by product end-markets. First for our ICL product line total sales were $12.2 million for the second quarter of 2015 increasing by 1% from the prior year period with units increasing 2%. The results were mixed with strong double-digit ICL unit growth in EMEA and China offset by the weakening euro and yen and continuing softness in Korea. EMEA ICL sales were $4.7 million during the second quarter an increase of 3% compared to the prior year period with strong unit growth of 24%. The disparity between the increase in sales in units is attributable to the weakening of the euro and it’s impact on average selling prices. Asia-Pacific ICL sales were $6 million during the second quarter a decrease of 1% compared to the prior year period due to Korea and the impact of the MERS scare in Korea resulting in fewer patients in clinics and cancel surgeries during what is traditionally the second highest procedure season of the year. Excluding Korea Asia-Pac sales increased 16% led by China, which increased 33% in sales and 13% in units we’re 97% of all ICL shipments were the CentraFLOW technology. Korea ICL unit growth is recovery, average monthly units in the first half of this year have doubled from the average in the second half of 2014, but it’s still approximately 20% below the average in the first half of 2014, which was the period that preceded the negative media coverage in the third quarter of last year. North America ICL sales were $1.5 million during the second quarter down 3% from the prior year period. For our IOL product line total IOL sales were $5.2 million for the second quarter of 2015 and down 19% from the prior year period as expected with units down 3%. The decline was due to the weakening yen and euro the discontinuation of IOL sales to our former German distributor and higher than usual distributor stocking of the KS-IOL preloaded acrylic product in the second quarter 2014, which followed an extended period of backorders. So cumulatively for the second quarter 2015 our sales were $18.7 million a decline from $20 million of sales reported in the second quarter 2014. The total currency impact on sales from the strengthening U.S. dollar against the euro and the yen was $2.1 million in the quarter. Turning the discussion now to margins and the spending. Our gross margin declined 190 basis points to 66.3% compared to the prior year period of 68.2%. Average unit costs improved a 170 basis points that were offset by 200 basis point decrease due to the impact of the weaker euro on average selling prices on favorable geographic and product mix of 70 basis points and 90 basis points in a higher other cost of sales. Second quarter operating expenses declined 6% to $14.1 million compared to $15.1 million in the prior year period. This was primarily due to lower general and administrative expense and lower marketing and selling expense in the prior year. General and administrative expense was $4.7 million and approximately $632,000 lower than the prior year due to decreased stock-based compensation, travel and tax consulting costs. Marketing and selling expense was $5.8 million and approximately $1.2 million lower than the prior year due to decreased stock-based compensation, travel and international marketing costs and optimization of North American selling costs. Research and development expense, which includes remediation and other FDA expenses was $3.5 million and approximately $1 million higher than the prior year due to approximately $1.1 million in FDA remediation expenses in the second quarter of 2015 compared to less than $100,000 in the second quarter of 2014. Remediation costs for the first half of 2015 are on budget. Turning our attention now to the bottom line, the net loss for the second quarter 2015 was $1.6 million or $0.04 per share compared with a net loss of $1.8 million or $0.05 per share in the second quarter 2014. The lower net loss in the second quarter of 2015 versus the prior year period was primarily due to lower operating expenses, higher other income and expense and a lower income tax provision partially offset by lower gross profit, which was driven by the weakening euro and yen against the U.S. dollar. On a non-GAAP basis adjusted net income for the quarter was $167,000 or breakeven per diluted share as compared to adjusted net income in the prior year period of $291,000 or $0.01 per diluted share. These adjusted figures exclude non-recurring expenses such as manufacturing, consolidation and FDA remediation and gains and losses on foreign currency transactions and stock-based compensation costs. Now turning to the balance sheet, cash and cash equivalents at July 3, 2015 totaled $15.3 million compared to $10.8 million at the end of the first quarter of 2015 and $13 million at year-end 2014. The company added $4.5 million in cash during the second quarter of 2015 which includes $800,000 provided by operating activities, $2.8 million from an exercise of warrants and $1.5 million from the exercise of stock options partially offset by $600,000 in other uses of cash which was primarily purchases of property and equipment. This concludes my comments and with that we’re ready to take your questions. Operator, please open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Chris Cooley. Your line is now open.

Steve can you hear me, okay.

Yes, we can.

Okay, super. I’ll be brief on my two, I guess first and foremost is there any additional color that you might provide to us either regarding the warning letter or the inventory that you will set aside some quarters back now just in terms of your dialogue with the FDA and kind of how you see that progressing? And then similarly as it maybe as a follow-up you touched in your prepared remarks in terms of the EV3 initiatives in particular on the presbyopia side a new IOL solution in addition to the ICL. Just kind of curious where you are in that development and along those same lines you talked about it in early 2016 launch for the enhanced version of CentraFLOW in Europe, but any thoughts on timing there in particular in the Asia-Pac region, and then I’ll get back in queue. Thanks so much.

Thanks, Chris. With regard to the FDA warning letter there are no updates to provide. We continue to meet the schedule of submissions that we initially provided to the FDA with the answer to the warning letter. We also have consolidated our submissions now for the observations from the second inspection and we continue as I said to meet our objectives in terms of staying on track as committed, but at this time we have nothing further to report.

I think Chris with regard to the inventory on voluntary hold you might recall that we put the product on hold to go through further testing to ensure that meets our quality standards. The product was made during production runs where deposits were found on the product during inspection and this product was rejected and scrapped. The remainder of the product from these production runs all passed final inspection and the root cause of the deposits was identified. To make a cautious product quality decision, we voluntarily put that product on hold and took advantage of the FDA being onsite during their inspections and presented test protocols to verify that the product meets our standards for quality. We are testing these lenses pursuant to the protocol submitted to the FDA and we will present the FDA with our results when testing is complete and in the meantime we anticipate that will be able to fill demand from current inventory that is not on hold and also current production.

Chris, with regard to your EV3 question and presbyopia, we continue our development a bilateral solution with our Collamer material for presbyopia patients. We want to provide a really terrific reading glass solution including extended that’s a field within those lenses. Now, as we are doing our development we are also taking a look at the fact that there are some market entrance in the IOL space that are talking about presbyopia solutions and we at the same time believe that our Collamer material may have an application as well for our presbyopia lens. So when I say that that is the major focus for us on EV3, it is, we are looking at it little differently than we have in the past and we believe that the new VP of R&D will have significant role to play. We are very close to hiring a new VP of R&D and since we are able to make the announcement we will. In terms of and Asia-Pac, the CentraFLOW larger optic obviously Dr. Hayashida will have that as a high priority as he puts together the appropriate regulatory submission to support the quickest Asia-Pac approval we can get. We have already in previous submissions had the lens formerly known as V5 seek and obtained the CE Mark in a preloaded configuration. Our goal now is to reach the net for the lens only.

Thank you.

You’re welcome.

Thank you. And our next question comes from Jason Mills of Canaccord Genuity. Your line is now open.

Hi Caren and thanks for taking the question. You made several important hires. I’m wondering if you could walk us through objectively as you can. What else you need to do in terms of executive leadership across the country both domestic and internationally over the next couple of years. I know it’s a difficult subject perhaps and there is not maybe something you would be willing to say, but what can you say with respect to where your organization is today relative to where you expected to be a year or two from now?

That’s a great question because when we really take a look at our focus on our top executive leadership they have some real strength here today if we want to continue to add to that. We also are putting people, process and paces kind of the 3P's that we’re looking at in terms of making some significant changes and achieving these initiatives. So I’ll start outside the U.S. and we previously announced that we had moved Hans Blickensdoerfer to head international that now includes EMEA and Asia-Pac. He is doing a really excellent job and as he is getting more familiar obviously are refamiliarizing himself with our Asian markets. We are looking at what the right organizations are there as well. So directionally when I would tell you is that we are assessing each of the major markets we serve, we’re making decisions as to whether we retain our current distributor partnerships and or seek to potentially go direct. We've already you know a few years ago we announced Spain, this year we announced Germany and we’re looking at other markets where this makes sense. When we’re building the structures with distributors or direct we’re adding clinical affairs excellence, IT excellence in terms of setting up the right web portals for ordering and calculating and sizing and aftermarket support. All of that becomes part of what it is to have an excellent surgeon and patient experience in each of those major markets. So we’ll either be adding more country managers or potentially expanding some of our executive roles on the full clinical and medical affairs team by major market is going to be reviewed by Dr. Hayashida for its competency and its opportunity to add more excellence. We have in Europe right now and outstanding medical affairs global directors and we will look to continue to add more when necessary. In the United States and we already had made the moves for North America in terms of our sales organization and here we have now added obviously our VP of clinical affairs we are bringing on the VP of R&D and there are two or three other additions that we’re looking at, then I’ll talk about in future calls.

Okay.

So I would say in terms of building the team we’re probably 80% there.

Okay. It is helpful, great color thanks. And then more specific question the price increase I’m sorry [I’ve asked really] a couple of things here. So I may have missed more commentary on this, but what is the feedback thus far from your customers I am sure no one likes to find out they are going to have pay higher price for a product they were getting in a lower price, but what has been the feedback, what do you think the rollout will look like, will there be impact near-term and maybe feeling subsiding and things are smoother or longer-term and how should we be thinking about, how that progresses? Thanks.

The company has been very aggressively looking into and researching price and the value of the ICL especially. And as we did that we started to take a look at all the major markets and when they lasted a price increase and what’s the level of service has been, what the level of satisfaction has been, what the distributor has been charging for our lenses, what the surgeon has been charged for our lenses and what the patient experiences in terms of the total not only value what they’ve received with the cost and what they paid. And when we looked at all of that we decided we needed to immediately address it more aggressively. And so what we've done is we've setup a standard price increase over the next four months, some price increases have already been announced and are in play in certain markets. Other markets where preparing the appropriate notification we’re expecting somewhere between when you average all the increases some are double-digits, some are low single-digits and the average is 5% to 7%. So our focus is to make sure that we are doing this on a more routine basis and that we are communicating with our customers about what’s the value has been in terms of our investment in supporting the distributorship and the surgeons themselves.

Thank you.

Thank you. And our next question comes from Brian Weinstein of William Blair. Sir your line is now open.

Hi, good afternoon. This is Matt Larew for Brian.

Hi, Matt.

Hi, first question for Steve last quarter you coursed out within IOL the impact of – so the number of moving partsthere the weakening euro and yen. I wonder if you could help us do that again this quarter kind of understand what the underlying dynamics are in the IOL market with all those things going on?

To make sure I understand the question you wanted to know the dynamics in the IOL market?

Yes, you just [indiscernible] underlying growth you said discontinued sales to the former Germany distributor higher stocking prior year weakening euro and yen I am just trying to get out that underlying growth rate.

Okay. Yes, so in IOLs, if you strip out the currency impact, it was a decline of 7% and that is a decline that we expected. And we expected it because we knew that we had a higher comparable in the prior period due to fulfilling some of the pent-up demand for the preloaded acrylic, and we knew that we were no longer going to have the distributor business in Germany. So we’re able to plan for that. Where we are focusing our efforts on IOLs like Japan, we had good unit growth and where we were pulling back, we did a little bit better than what we expected.

Okay, thanks for that Steve. And then you mentioned in your remarks what [sounded like] some rationalizations within sales and marketing and G&A, but you’ve also announced a number of new hires and certainly some new initiatives that are important strategically to the company. Just curious to know how to prioritize those strategic initiatives with limited capital resources and then will there be additional rationalization within the broader operating expense structure? Thanks.

Well, we shifted our spending, for example, we optimized the sales force in North America and also some of the marketing spend in North America and in Europe so that we could prioritize spending in clinical validation and clinical utility as an example. And also within the R&D budget prioritize some of the projects there. So it’s a shifting of spend all the while making room for the remediation expenses that we projected for the year and that have been on budget.

Okay, thank you.

Thank you. And our next question comes from Jim Sidoti of Sidoti & Company. Sir, your line is now open.

Good afternoon. Can you hear me?

Yes, Jim.

Can you just go back to the initial comments you made regarding Toric. Are you saying that you think or your goal is to make the company grow and profitable regardless of whether you get the Toric approved in the U.S.? Is that what you were trying to say there?

When I was talking about is that strategically the company had a lot of its resources really zeroed in on preparing for a Toric approval in United States and all of the associated work involved. And where we’re headed now is that’s our desired outcome, yes for the Toric and we know that’s going to be the stigmatism of features of that lens are highly regarded by our current users of the MICL and their rating in the U.S. for it. We’re excited about that and when it’s able to be introduced, we will do it right. But we also just want to make it clear as we get a lot of questions from investor, shareholders about when is the Toric going to be available still and I just wanted to make it clear that that’s one piece of a multi-pronged strategic approach in terms of products we’ll be developing, how we’re going to actually be valuing those products in the marketplace, the clinical validation that’s so necessary for new products, so there are prospective clinical trials with studies are really appropriate that we can build patient registries. So there is so many other areas of wrapping value around our lenses and delivery systems. That I wanted to make it clear that Toric is still on the list, but our strategic initiatives include the CentraFLOW with larger optic, the presbyopia lenses and in 2016 we’ll be focusing also on the area of Cataract Care and what this company can do with its outstanding material.

Okay, and on the last call, it sounded like you had a plan with the FDA. I guess to resolve some of the warning the 43 issues was that plan accepted?

We have not heard from the FDA what their opinion is or plans are for their response to our submission. What we do is since February 27 when we submitted our plan, we have worked the plan. The FDA will reply to us on their own schedule.

Okay, thank you.

You’re welcome.

Thank you. And we have a follow-up question from Chris Cooley of Stephens. Sir, your line is now open.

Thank you for taking the follow-up. Just maybe some clarity you mentioned extensive registries and prospective studies as well as I guess investment in cataract care, so two-pronged question here. One, can you give us a feel for the size of these studies post market work that you plan to commence and when that will begin so we kind of think about one potential maybe growth associated with that, but also the costs of monitoring and following that up and then how you think about those costs relative to the current capital structure? Thanks so much.

Thank you. One of the areas of specialization is Steve adding to his team as financial planning and analysis and one of the areas we are putting at individual to work on who is starting with us next week is really focusing in on with Dr. Hayashida as he builds basically charting associated with the studies and what the potential requirements will be in terms of size of cohort. I can't give you an answer yet I'll be able to give you an answer in the future. And the biggest reason why I want to hesitate is that I want to give Dr. Hayashida the opportunity to get a land and to be able to have the opportunity which he will be getting very soon at ESCRS as we have our experts meeting with over 250 surgeons in attendance as well as the ESCRS exhibited. So we have a really good opportunity for our new doctors to really get involved very aggressively with our lenses and with our most importantly clinical library, clinical database and current clinical proof. Because once we understand retrospectively what we've proven, we would certainly like to be able to place that in evidence as we do our pre-IDE planning for meetings with the FDA as well as regulatory planning for all of the clinical work that we will do outside the U.S. so that we can match those priorities, properly budget and plan and make sure that we can get as soon as possible more and more submission than and then be able to properly introduce these lenses into the market at the right price value relationship. So the answer to your question is we are working on it, give us little time and we’ll get back to you with what we expect in terms of the market size for these opportunities and the dollars associated with the investment in the clinical studies as well as the team. We expected to be significant, and we know that when it's done right that we can actually have market changing dynamics.

Understood. Thank you so much.

You are welcome Chris. End of Q&A

Thank you. And I am showing no further question at this time. And I’d now like to turn the call over to Ms. Caren Mason for closing remarks.

Thank you. Thank you for your presentation on our call today. We appreciate your interest and investment in our company. All the best to all of you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.