STAAR Surgical second-quarter total net revenue increases 3.7% to $13.6 million

STAAR Surgical Company (Nasdaq: STAA), a leading developer, manufacturer and marketer of minimally invasive ophthalmic products, today reported results for the second quarter ended July 2, 2010.  Revenue for the period grew 3.7% to $13.6 million with the revenue from core products, IOLs and ICLs, increasing by 7%.  For the first half of 2010 core product revenues increased by 11% reflecting market share gains by STAAR.    In addition STAAR generated cash from operating activities after excluding the effect of a legal settlement payment in the quarter, and concluded the quarter with a much stronger balance sheet.  The Company ended the quarter with $8.1 million in cash and restricted cash, and the Company is essentially debt free except for an ongoing line of credit in Japan.  The Company also accrued two one-time non-cash charges for the quarter totaling approximately $1million: one for an executive severance expense and the second for the early extinguishment of the debt on the Broadwood note.

"While our year to date core product revenue continues to reflect double-digit growth over prior year, two factors impacted our second quarter growth," said Barry G. Caldwell, President and CEO.  "First, in Korea, our distribution partner has formed a new legal entity to focus exclusively on marketing the Visian product line.    They were not prepared to receive an order for 1,000 Visian ICLs that had been manufactured for them.  This order has now shipped and the revenue has been recorded in the third quarter.    The second factor was an increase beyond expected demand for certain pre-loaded silicone IOL models.  We finished the quarter with about 4,000 IOLs on backorder.  We currently expect to achieve double digit core product line growth in the third quarter and for the full year," Mr. Caldwell added.

"We continued to make progress during the quarter on our plan to generate increased shareholder value," continued Mr. Caldwell.  "We accomplished several key objectives toward this end including:

• Repaying the $5.0 million Broadwood promissory note early and retiring 1.7 million of preferred shares at a cost of $4 per share.  We also paid the $4.0 million litigation settlement obligation.  These payments represented a total cash outlay of over $16 million, including interest and expense, during the quarter.  Interest in the second half of the year is expected to be reduced by approximately $530,000 as the quarterly expense charge should be approximately $50,000 during the second six month period.
• Initiating our new "go to market" organizational structure designed to provide more focus on key market growth in three regional areas.  We are starting to see the benefits and anticipate enhanced results as we expand our leadership team and focus.
• In the U.S. we implemented a planned increase in personnel to accelerate revenue growth.  As of today, we have added five new direct sales representatives selling core products and two new marketing associates focusing on the professional and consumer market segments for the Visian ICL products.
• Gaining approval for an expanded Visian ICL product offering in European markets, which effectively doubles the available market opportunity there.  Launch of the approved products is on track for September.  Our sales team and distributors were trained on the product last month.  
• The response to the FDA on the Company's submission for approval of the Visian Toric ICL has been submitted and the Company expects to have a face-to-face meeting with FDA in the coming weeks.

Recent Visian Implantable Collamer® Lens (ICL) Highlights

• Second quarter 2010 global Visian ICL sales increased 9% to $5.9 million from $5.4 million for the second quarter of 2009.  Total unit volume increased 6% during the quarter and average selling prices increased by 2% as a result of an increase in Visian Toric ICL sales.
• The Visian Toric ICL, which is available in 45 markets, accounted for 44% of ICL sales in those markets during the quarter as compared to 34% for the second quarter of 2009.  Visian Toric sales in those markets increased by 48% during the quarter.
• In Korea, revenues for the Visian ICL products decreased 28% during the second quarter of 2010 as compared to the prior year second quarter due to shipments that were delayed into Q3 concurrent with the opening of a new ICL distribution center.  Korea is one of the few markets where STAAR's distributors carry inventory.  Their shipments to customers for implantation increased by 34% during the quarter.
• In the U.S., which is still the largest refractive surgery market, Visian ICL sales decreased 6% due to continued negative trends in the overall growth rate of refractive procedures.
• Other key markets continued to demonstrate strong growth as they did during the first quarter including:
  • In China, which is the fourth largest ICL market and second largest refractive surgery market, revenues grew by 123% compared to the second quarter of 2009 and 98% during the first half of the year.  
  • India recorded a 77% ICL growth rate during the second quarter and was the product line's fifth largest market during the period.  Sales there for the first half of the year increased by 44%.
• There is also a group of markets emerging which create an opportunity for expanded growth this year.  These markets demonstrated good growth during the quarter and have increased at higher than double-digit rates for the first half of the year.  For the quarter: Spain increased 30%, the Middle East increased 62%, Singapore 182%, France 39% and the United Kingdom 136%.
• In Japan the Company has gotten off to a slower-than-expected start due to the current requirements for proctoring of new physicians.  Revisions to the process are anticipated to allow for a quicker and easier training cycle.
• As noted above, during the quarter the Company received approval to sell an expanded range of Visian ICL products, which more than doubles the current Visian-addressable market in Europe.  Included in the CE Mark approval was the STAAR Hyperopic Toric ICL, which is designed for patients with both hyperopia and astigmatism.  

Recent Intraocular Lens (IOL) Highlights

• Second quarter 2010 global IOL sales increased to $7.0 million a 5% increase from the second quarter of 2009 due to increased average selling prices. As previously noted, the quarter ended with 4,000 IOLs in backorder.
• Global nanoFLEX™ IOL sales increased 15%.   Preloaded IOL sales increased by 12% driven by the launch of the KS-X Hydrophobic Acrylic Preloaded IOL to expand market presence.
• France again led in IOL market increases for the Company during the second quarter.  Sales in France increased more than fourfold during the quarter.
• Overall IOL sales in Europe increased by about 35% for the quarter and about 80% for the first half of the year.
• Despite continued pricing pressures in Japan, IOL sales grew 8.5% over the second quarter of 2009.
• In the U.S., overall IOL sales declined by 7% due to decreased sales of lower priced silicone IOLs.  This decline was offset somewhat by an 11% increase in average selling price driven by a 17% increase in nanoFLEX™ IOL sales.  This change in product mix helped to increase gross margins in the U.S. by 350 basis points.  
• The second submission of the clinical protocol for the CAST II study was submitted to the FDA over 60 days ago and the Company awaits a pending response from FDA.

Second Quarter Financial Highlights

• Total net revenue in the second quarter of 2010 grew 3.7% to $13.6 million from $13.2 million in the second quarter of 2009.   Total Visian ICL revenue was $5.9 million, up 9% from $5.4 million during the second quarter of 2009.  Total intraocular lens (IOL) sales were $7.0 million, up 5% from $6.7 million during the second quarter of 2009.  Foreign currency changes favorably impacted total sales by $258,000.  
• Gross margin increased to 63.6% of revenue from 61% of revenue in the second quarter of 2009.   A significant portion of the year over year increase is due to a decrease in royalty expense resulting from the 2009 expiration of a patent licensed to STAAR.   Royalty expense in Q2 2009 was $203,000.  In addition, gross margins were favorably impacted by higher IOL and ICL average selling prices and improved mix of higher margin products.
• Total selling, general, and administrative expenses (including research and development (R&D)) were $9.5 million, an increase of 5.5% or $490,000 over the second quarter 2009 total of $9.0 million.  
• General and administrative (G&A) expenses decreased by 14.5% over the second quarter of 2009.    The decrease was mainly due to lower legal expenses.  In addition, sales and marketing expenses were up 10.9% over the second quarter of 2009 due to the timing of trade show expenses and the expansion of the U.S. sales team to foster higher growth in the later part of 2010 and 2011.  R&D expenses declined by about 4.5% due to decreased salaries and decreased patent legal expense.  
• Other operating expense reflects the $700,000 charge for executive severance costs recorded in connection with the non-renewal of an executive employment agreement. These costs are expected to be paid out over 15 months beginning September 2010.
• Other expenses, net, were $920,000 compared with $74,000 in Q2 2009.  The increase is due primarily to exchange losses recorded during the quarter due to a weakened Euro, but also due to the approximate $267,000 write-off of the remaining unamortized note discount as a result of the early Broadwood note repayment, and a decrease in royalty income.  
• For the quarter ended July 2, 2010, loss from continuing operations and net loss was $1.6 million or $0.05 per share.  For the quarter ended July 3, 2009, loss from continuing operations was $1.4 million, or $0.04 per share, income from discontinued operations was $281,000 or $0.01 per share, and the net loss was $1.1 million or $0.03 per share.
• Cash and cash equivalents and restricted cash totaled $8,032,000 compared with $13,726,000 as of January 1, 2010 and $23,806,000 as of April 2, 2010.  Net cash used in operating activities during the three months ended July 2, 2010 was $3,698,000 and included the $4.0 million in cash used, as anticipated, to pay the lawsuit settlement.  Net cash provided by investing activities was $7.0 million, and included the release of the $7.3 million bond posted for litigation.  Net cash used in financing activities was $11.9 million resulting primarily from the $5.0 million early repayment of the Broadwood note, originally due in December 2010, and the $6.8 million redemption of the Canon preferred shares.

Six Month Results

• Total net sales in the first six months of 2010 grew 8% to $27.4 million from $25.3 million in the first six months of 2009.   Total Visian ICL sales were $11.7 million, up 14% from $10.3 million reported for the first six months of 2009.  Total IOL sales were $13.9 million, up 8% from $12.9 million reported during the first six months of 2009.  Foreign currency changes favorably impacted total sales by $487,000.  
• Gross margin increased to 64% of revenue from 62% of revenue for the first six months of 2009.   A significant portion of the year over year increase is due to a decrease in royalty expense resulting from the 2009 expiration of a patent licensed to STAAR.   Royalty expense in the first six months of 2009 was $427,000.  In addition, gross margins were favorably impacted by higher IOL and ICL average selling prices and improved mix of higher margin products.
• Total selling, general, and administrative (including research and development (R&D)) expenses were $18.2 million, a 1.5% decrease over the first six months 2009 total of $18.5 million.  
• General and administrative (G&A) expenses decreased by 17.8% over the first six months of 2009.  The decrease is due to decreased legal, insurance, and headcount costs.  
• In addition, sales and marketing expenses were up 5.5% over the first six months of 2009 due to the timing of trade show expenses and the expansion of the U.S. sales team to foster higher growth in the later part of 2010 and 2011.  R&D expense of $2.9 million was essentially flat year over year.
• Other operating expense reflects the $700,000 charge for executive severance costs recorded in connection with the non-renewal of an executive employment agreement.
• Other expenses, net, were $1,334,000 compared with $314,000 in first six months of 2009.  The increase is due primarily to exchange losses recorded during the year due to a weakened Euro, and also due to the approximate $267,000 write-off of the remaining unamortized note discount as a result of the early Broadwood note repayment, and a decrease in royalty income.  
• For the first six months ended July 2, 2010, loss from continuing operations was $2.3 million or $0.07 per share, income from discontinued operations was $4.2 million or $0.12 per share, and the net income was $1.9 million or $0.05 per share.  For the first six months ended July 3, 2009, loss from continuing operations was $3.6 million, or $0.12 per share, income from discontinued operations was $848,000 or $0.03 per share, and the net loss was $2.8 million or $0.09 per share.

These results reflect STAAR's March 2, 2010 divestiture of its German distribution subsidiary, Domilens GmbH.  Operating results reported for the first half of 2010 and for the comparative prior year period are based on results from continuing operations and exclude any contribution from Domilens, which we have presented in all reported periods as discontinued operations in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP).  

SOURCE STAAR Surgical Company