STAAR Surgical Company
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Second Quarter 2016 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the will be open for questions. [Operator Instructions] This call is being recorded today, Wednesday, August 3, 2016. At this time I would like to turn the conference over to Mr. Brian Moore with EVC Group.

[Brian Moore:]

Thank you, Michele, 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 01, 2016. Joining me on the call today are, Caren Mason, President and CEO of STAAR Surgical and Steve Brown, CFO. The news release detailing the second quarter results was issued just after 4

[Caren Mason:]

Thank you, Brian and good afternoon, everyone. I will begin our discussion with general commentary on the state of the business. Steve will then review key second quarter 2016 financial results, before we open the calls for your questions. Q2 2016 results signified solid growth and a broadening momentum for the company. For the second quarter, we achieved record net sales of $21 million and record ICL sales of $15.4 million. We also achieved record ICL units, which brought our total implant to ICL since introduction to well over 600,000 lenses. We are also pleased to report that the strategic priorities we have committed to achieve in 2016 are on track and delivering value to STAAR. I will spend a few moments highlighting our progress on selective key initiatives. FDA remediation and continuation of quality systems overhaul remains at the top of the list of our strategic priorities. The achievement of remediation and quality system plan commitments has submitted to the FDA and assuring that our global quality certifications are maintained remain as essential goals. In Q2, our internal goal achievement was on target. We expect not to exceed our remediation budget of $2.2 million for 2016. Two major areas of emphasis for the remediation plan and quality system builds include the acquisition of a new quality management system and building monitoring system. Both have been acquired and qualification and implementation is progressing well. Creating the visual freedom market for implantable lenses is an essential strategic priority and we have made great strides so far this year. STAAR successfully introduced its new global branding at the ASPRS Meeting in May as reported during our last earnings call. The evolution in visual freedom initiative includes the introduction of the new EVO + line of expanded optic ICLs to our international surgeons. We have received positive reports thus far and will be highlighting the surgeon and patient experience with EVO + at our ESCRS Meeting and the European Congress in September. One of our most prominent and prolific ICL surgeons implanted the EVO + lenses as the birthday gift for his daughter. He was compelled to write to us expressing in his words that father and daughter are both over the mood. The approval of our EVO lenses in Canada in mid-May resulted in our first EVO implant surgery in the North America which were well received with high surgeon and patient satisfaction. As we are anticipating the EVO Toric approval for Canada, we expect that the implant momentum will pick up in Q3 and especially in Q4. We are planning high profile digital and media campaigns for major markets in Canada in the months ahead. The global growth statistics regarding myopia which I have routinely shared and continue to update, now includes a new study regarding the rate of myopia in the United States. The Journal of the American Academy of Ophthalmology published a study in its June 21 issue and issued a news release announcing the publication of the study with the headline and I quote “nearly 10 million adults found to be severely nearsighted in the United States. Largest US study of this kind using the American Academy of Ophthalmology’s National Ophthalmic Database also finds women at a higher risk of blinding complications”. This study was conducted jointly by AAO, Genentech, NIH and UC Davis. Among the findings, nearly 9.6 million people in the US have high myopia at minus 6 diopters and above. This challenging statistics further reinforces the opportunity for their prescriptive and visual freedom value of our implantable Collamer lenses. The significant investment we are making in clinical validation and clinical utility, medical affairs expansion significant meta analysis of all published data, upgrading of our own safety and effectiveness database and continued expansion of our myopia implantable lens line including delivery systems is an intense news in anticipation of the essential pick up of the ICL as a premium and primary refractive vision enhancement and choice for surgeons and their patients globally. Significant strategic priorities for 2016, which also advanced during the quarter include the finalization of four additional strategic cooperation agreements in the Asia-Pacific region. These new partners are comprised of large clinics and hospitals which we anticipate will help to create a foundation for meaningful sales growth in the coming years. We now have six strategic cooperation agreements and several others are in development. These agreements include a strong collaboration with a strategic partner where STAAR provides certified surgeon training, marketing and pricing support, in exchange for specified unit growth of our products, as well as potential participation in our patient registry, clinical data and new product development efforts. We are very pleased with these transformational partnerships and what they can achieve for our partners, their patients and for STAAR. The clinical study agreements for our first in man implants at the presbyopic ICL were finalized and we are on schedule to provide lenses for surgeries scheduled during the third quarter. We will conduct a presbyopia working group with outstanding implant surgeons to continue to advice us regarding their requirements for the first bilateral presbyopic ICLs with EDOS or extended difficile. We plan to share and evaluate the findings from our first in man implants during this working group session. As previously announced, we have been reviewing the commercial fitness of certain cataract lens offerings and evaluating our approach to the cataract care market. As a result of these activities, we have decided to focus on Collamer IOL lens implants and to – manufacturing of our Silicone IOL products from the North America market. We will continue to manufacture and market our preloaded Silicone IOLs which have higher technological differentiation in overseas markets. Silicone IOL usage has been declining globally for years and market scope has forecasted that Silicone IOLs will garner less than 5% of global IOL units for 2016. Collamer material is proprietary to STAAR and is used in both our ICL and certain IOL lines. Key features of Collamer include, 20 years of proven history with over 1 million nanoFLEX Collamer IOL lens implants worldwide. Collamer is a biocompatible material inhibiting inflammatory responses to achieve a post-operative quiet eye. Collamer has inherent anti-reflection properties enabling sharper vision and less higher order aberrations. We believe there is growth potential for nanoFLEX Collamer IOLs as potential applications of Collamer materials for other cataract IOL technologies such as lenses for the treatment of presbyopia. Several Collamer IOL product expansion projects are under consideration, further elements of our cataract care strategy will be determined as previously discussed by the end of 2016. And finally, during the quarter, we strengthened our cash optimization strategy and increased our cash at the end of Q2 to $12.7 million. We are also pleased we have generated $2.5 million in operating cash flow for the quarter. I will now turn over the call to Steve for a review of our second quarter 2016 financial results. Steve?

[Steve Brown:]

Thank you, Caren, and good afternoon everyone. From my prepared remarks today and consistent with feedbacks from shareholders, I’ll touch on the more significant aspects of our second quarter 2016 results. I’ll start with a summary of the top-line results and then provide more details by product and markets. STAAR achieved record sales of $21 million in the second quarter of 2016, an increase of 12% over the $18.7 million of sales reported in the second quarter of 2015. The sales increase was driven by ICL revenue and unit growth of 26% and 18% respectively with strong double-digit unit growth in all of the Asia-Pacific markets and in Germany. These increases were partially offset by lower IOL revenues and lower injector part sales. For the first half of 2016, ICL revenue and unit growth was 17% and 9% respectively. For our ICL product line total sales were $15.4 million for the second quarter of 2016, increasing 26% from the prior year period with units increasing 18% compared to the prior year period. Asia-Pacific ICL sales were $8.4 million during the second quarter, an increase of 40% compared to the prior year period driven by strong double-digit unit growth in each of the region’s markets as follows

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Raymond Myers of Benchmark. Your line is open.

[Raymond Myers:]

Thanks for taking the questions and congratulations on a successful quarter.

[Caren Mason:]

Thank you.

[Raymond Myers:]

If I could ask about the strength you had in Asia, particularly in China, was that related to these new partnerships that you’ve been signing? Or is that the underlying growth of the business that has been there?

[Caren Mason:]

It’s a combination that is definitely being led by the strength of the strategic cooperation agreement with Aier followed by the addition of other agreements that have been signed. But our success with Aier is beyond our expectations in terms of growth and I would say that, we are more than doubling our growth with them through the successful aspects of the partnership and we see the momentum continuing going forward.

[Raymond Myers:]

That’s great and the growth in Japan of 81%, that was really high, what’s driving that one?

[Caren Mason:]

In Japan, we have had a resurgence, we actually added marketing and sales support in our Japanese business. We have signed a strategic cooperation agreement in Japan with a large clinic. Some of that came to fruition. We also have had some very nice growth in our IOL product line in Japan.

[Raymond Myers:]

That’s all great. Now help us understand whether some of this resurgence is one-time stocking shipments or is this truly a new base that we can build from?

[Caren Mason:]

No, this is a base that we can build from and we are looking at other ways to expand our business in Japan as well. And so, as we get closer and have a determination of what those partnerships will be, we will speak to them. And just by the way, some of the strategic partners prefer to not have press around them or to be followed by our investors on a case-by-case basis. Where we can and we do get approval, we definitely will make sure that our investors understand how we are doing in these major new accounts.

[Raymond Myers:]

That makes sense. Now shifting gears to the remediation budget. Is there you are on track and on plan there? Can you remind us how much you spend year-to-date in remediation?

[Steve Brown:]

Yes, sure, year-to-date, just to touch over $1 million.

[Raymond Myers:]

Okay, so, about half way. Where do you expect that to trend there or maybe better said, at what quarter do you expect that to peak and when can we think about that expenditures starting to decline?

[Caren Mason:]

Well, at this point in time, we are not going to determine whether there will be continued remediation expense in 2017. As soon as we have clarity on that, we will make sure to release that information. But, our expectation on comfortable saying will be that in 2017 we will spend less than we have spent in 2016.

[Raymond Myers:]

That’s great. Next, shifting gears to the silicone IOL discontinuation. How much revenues do you currently generate in the United States in that business? And I assume that’s all potentially to be less or how much do you think you can ship to Collamer?

[Steve Brown:]

Well, we will continue shipping the silicone through the end of this year. The business has been in decline and this year, it was only about $1 million.

[Caren Mason:]

In terms of the Collamer IOL, we are putting together an aggressive plan and actually slotting the Collamer IOL as kind of a basic plus entry into the IOL cataract market. We know it performs very, very well as we said, we had 1 million implants of this lens in the IOL patient Collamer material and our expectation is that by right pricing and right positioning the nanoFLEX, we will be able to put it in this place with much higher market share than we were able to enjoy with a declining material in terms of perception which is silicone.

[Raymond Myers:]

That’s great. And then, remind us of the margin profile of the two products and they are just staying where they?

[Caren Mason:]

No, no, no, the silicone IOL had a surprisingly positive margin for in terms of the acceptance in the marketplace. It was profitable for us. Our expectation is that the advantage with the nanoFLEX, the expansion of the nanoFLEX and on a net basis, we will have more margin dollars from that product over the silicone.

[Raymond Myers:]

Okay, good, good. And then, last on the regulatory front, you made a mention recently that you would – you requested a pre-IDE meeting of the FDA for the EVO ICL. Can you elaborate on that and just what is the implications of that request?

[Caren Mason:]

Well, fundamentally, the way it works to that, you have an opportunity should you choose to schedule a meeting with the Office of Device Exemption to speak to them about the parameters of what a clinical study would need to comprise in order to meet what they believe they need to understand about the safety and effectiveness of the EVO lens. So, we did submit a – what’s called a pre-IDE package and that package was accepted for review. We have had informal communications regarding a potential pre-IDE meeting with the Device Review Division and we understand that several issues should we go forward with the meetings could be discussed including even our manufacturing. So, at this time, we kind of limit our comments to just that, it is improvement for us to comment any further.

[Raymond Myers:]

That makes sense. Thank you for taking the questions and congratulations on the great progress.

[Caren Mason:]

Ray, we look forward to the Non-Deal Road Show with you coming up in mid-August.

[Raymond Myers:]

Okay.

[Caren Mason:]

Okay.

[Operator:]

[Operator Instructions] Our next question comes from Jim Sidoti of Sidoti & Company. Your line is open.

[Jim Sidoti:]

Good afternoon. Can you hear me?

[Caren Mason:]

Yes.

[Jim Sidoti:]

Great. I am sorry, I missed the first part of the call, so I am sorry if am going to ask things that you’ve already said, but, in the past, most of the communication with the FDA has been pretty one-sided you reporting your remediation efforts to them and has that changed in the quarter? Have you heard anything back from them during the quarter?

[Caren Mason:]

We have not had any formal communications with the FDA regarding the warning letter or our remediation activities. No change there.

[Jim Sidoti:]

All right. And the presbyopia and you said in the press release you are going to begin shipments in the third quarter it sounded like. So does that mean that that product is approved?

[Caren Mason:]

No, no, no. Of that we have in our efforts as far as developing a presbyopic ICL which has to go through all of the evaluation process and clinical study et cetera going forward, what you want to make sure of is that the way that you’ve designed and powered the lenses in effect actually working in a human and so as a result of that it’s called first in man. So those first in man implants are usually very few and then you study the effects and make a determination whether you are at the point of design free, post. What you learned from that clinical evaluation. And so what we are saying is, we are far enough along now that we are ready for that testing as a lens.

[Jim Sidoti:]

Okay, so you start to go through a clinical trial?

[Caren Mason:]

Absolutely, yes.

[Jim Sidoti:]

Right, so it’s probably more like a 2018 kind of product. Is that the feel we can get?

[Caren Mason:]

Well, we don’t predict because there is so many moving parts. We were just really happy to be at this point.

[Jim Sidoti:]

Okay, all right. And what countries had the best growth for the ICL in the quarter? And then what prompted that?

[Steve Brown:]

Well, Japan had the highest growth, but it’s on a relatively small base. The strongest growth is in China where we…

[Jim Sidoti:]

How much was it up in China?

[Steve Brown:]

So, China, revenue growth as we recorded was – what’s the – in China alone…

[Caren Mason:]

48%.

[Steve Brown:]

Yes, 48% in China, Jim.

[Jim Sidoti:]

And is that with new agreements that prompted that or?

[Steve Brown:]

It’s largely driven by the strategic cooperation agreement we have with Aier. But it’s also our other businesses in China.

[Jim Sidoti:]

All right, and how was Korea?

[Steve Brown:]

The Korea business was also up 31%.

[Jim Sidoti:]

And is that attributed to some of the direct to consumer campaigns you were doing or any new agreements in Korea?

[Steve Brown:]

No new agreements in Korea. It’s just the business there.

[Jim Sidoti:]

Are you continuing with the direct to consumer campaign in Korea?

[Steve Brown:]

Well, if you recall, we weren’t conducting that direct to consumer campaign. Our distributor was doing that. And don’t know what the future plans are for the distributor, but currently, there is not the DTC that the distributor was running several months ago.

[Jim Sidoti:]

All right. Thank you.

[Caren Mason:]

Welcome.

[Operator:]

Our next question comes from Chris Cooley of Stephens. Your line is open.

[Chris Cooley:]

Good afternoon, Caren, Steve. Thanks for taking the questions.

[Caren Mason:]

Hi, Chris.

[Chris Cooley:]

Just a couple for me, there is a lot of already been asked. Just, when I think about the growth in the quarter, really strong there of almost 12.5%. Help me think about the contribution to reported sales, both from the conversion of the German distributor to direct and higher ASPs that we started really in the first quarter in the Asia-Pac region? And then I’ve got one other follow-up.

[Steve Brown:]

Sure. In the quarter, for Germany, revenue growth for ICLs was up 132%. The unit growth was up 20%. So it was – in Germany, both a combination of good unit growth and also the distributor to direct conversion.

[Chris Cooley:]

And higher ASPs in Asia-Pac?

[Caren Mason:]

Yes.

[Steve Brown:]

Yes, Asia-Pac in total, higher ASPs but as we reported strong unit growth in Asia-Pac.

[Chris Cooley:]

But I guess, I am – if I heard you probably not willing to teeth out kind of a contribution to growth in pricing versus underlying volume.

[Steve Brown:]

Well, if you look at Asia-Pac, and I give it to you for the quarter, we had a overall 40% increase in ICL units – I am sorry 38% increase in ICL units, a 40% increase in sales. So it was mostly unit growth in Asia-Pacific.

[Chris Cooley:]

Okay. And then just lastly noticed that looking at the balance sheet here, inventories came down sequentially. Just curious if you could give us an update, I remember in the prior quarter’s call, you had an IOL pullback there from a quality standpoint. Has that issue been resolved with those shipped or are those still, maybe just give us a general update there?

[Caren Mason:]

Well, actually, it wasn’t quality-related. We had a silicone IOL hold. We were making a determination going forward of what we wanted to do with the line in terms of reinvesting for additional equipment and revalidation of that equipment for the silicone IOL line and made the decision not to go forward. So that was today’s announcement. In terms of billing, all of those units that during our manufacturing timeframe pre-August of last year that are in inventory as well as consignments that we are collecting and then redistributing as we can. All of our inventory we expect to move out in the silicone IOL by the end of December for the North American market.

[Chris Cooley:]

Okay. And – I’ll go back, I have to look at that. And then, I guess, just lastly from me on first in man, can you give us a little bit more color just in terms of maybe the total number of – obviously the first to man is the first, but will this be a set of five bilateral implants, ten, and just kind of give us an idea of maybe where this begin or occurring and kind of the initial follow-up period there? And then I’ll get back in queue. Thanks.

[Caren Mason:]

We do have two international locations where we plan to conduct our first in man studies. We are going to start with one of these locations by the end of the third quarter. We do have multiple patients that are being signed up and then as we go through on a consecutive basis, assuming that those first implants are successful are performing as we expect, we would continue on until we complete. So, fundamentally, you could talk about five patients, ten eyes, ten patients twenty eyes. It just really depends, but the protocol is very strict and stringent and the testing that we want to do not only in terms of the way that patient is prepared for the implant, but the procedure itself, we have a very successful surgeon who has a very great track record. And remember that the Presbyopic ICL is really EVO being powered with EDOS for a Presbyopic multi-focal experience. So, we also have the post-implant study where you need to determine, have we prepared this patient for what the new experience will be at all three correction levels and what was their experience post. So this is very critical and an important process for us. And we are really looking forward to the results which as I said in my prepared remarks, we plan to share with some of the most prominent refractive surgeons globally who sit on our Presbyopia working group to share the results with them.

[Chris Cooley:]

Understood. Thanks so much.

[Caren Mason:]

Thank you, Chris, very much.

[Operator:]

[Operator Instructions] I am showing no further questions. Like to turn the call back over to Caren Mason, President and CEO of STAAR Surgicals for closing remarks.

[Steve Brown:]

Operator, I think, we do have one person in queue.

[Operator:]

We do have one question from Brian Weinstein of William Blair. Your line is open.

[Matt Larew:]

Hi, good afternoon. This is Matt Larew. I appreciate you sneaking in. First, I just wanted to ask about EVO + have been launched in Europe, with the first launch in April in Spain I think, and then ongoing other geographies. Just wondering, Caren if you could maybe let us know if there are particular geographies where you are seeing lot of success with that launch?

[Caren Mason:]

Yes, the initial countries in Europe, Spain, Italy, Belgium, et cetera very good results and we’ve had some implants in the Middle East. We expect to open up Korea soon. And the feedback has been extraordinary. We are very excited about EVO + and the rejuvenation opportunity for example in Korea which we talked about earlier. We believe with our distributor who is equally excited that Korea will especially benefit from having this larger optic zone which also helps with any nigh aberrations et cetera associated with halo and glare. So there is a really great opportunity for us, I think with EVO + and we are real pleased with our initial rollout.

[Matt Larew:]

Okay, thanks. And then, just one more for Steve on gross margins, obviously, some pricing benefit, but also better since what you guys are doing internally led to nice sequential growth there. Should we expect that same level of sequential growth throughout, you obviously that the guide initially was to move up throughout the year, but if you can just help us with how to think about sequential gross margins that you are getting with what you guys are doing?

[Steve Brown:]

Well, we continue to expect the gross margin expansion and it’s going to come from the favorable mix to ICLs and there is still yet some to come from quarter-over-quarter prime. And also, this is now the fourth straight quarter that our ICL unit cost have gone down quarter-over-quarter.

[Matt Larew:]

Okay, that’s all for me. Appreciate it. Thank you.

[Caren Mason:]

Thank you, Matt.

[Caren Mason:]

Okay, I’d like to close the call operator. I would like to thank everyone for their participation on the call today. One final note, during the third quarter, we look forward to attending the Canaccord Genuity Growth Conference in Boston and Non-Deal Road Show scheduled in Salt Lake City in the Midwest. We appreciate your interest and investment in our company. All the best to all of you.

[Operator:]

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