STAAR Surgical third quarter total net sales increases 6% to $13.2 million

STAAR Surgical Company (Nasdaq: STAA), a leading developer, manufacturer and marketer of minimally invasive ophthalmic products, today reported results for the third quarter ended October 1, 2010.  Revenue for the period grew 6% to $13.2 million reflecting core product (IOLs and ICLs) revenue growth of 10% and a 44% decrease in defocused product revenue as compared to the third quarter of 2009.  Foreign currency exchange favorably impacted sales by $404,000.  The Company generated cash from operations in the third quarter of $470,000 and ended the quarter with cash, cash equivalents, and restricted cash of $8.6 million compared to $8.0 million as of July 2, 2010.  

“Revenue from our core IOL and ICL products continued to grow in the third quarter, driven by record Visian ICL revenues with a 21% growth rate and increased market penetration of the nanoFLEX IOL,” said Barry G. Caldwell, President and CEO.  “We began the launch of our expanded range of Visian ICLs in late September to countries that accept CE Mark Certification.  With this expansion the Visian ICL has the broadest approval of any other refractive surgical option as virtually all myopic, hyperopic and astigmatic patients can now be treated.  Visian ICL units also established a new record with 34% growth reflecting accelerated market share gains. A higher percentage mix of ICLs compared to Toric ICLs resulted in an overall decline in average selling price.  Sales of the nanoFLEX IOL remain strong with a 26% increase over the prior year’s quarter.

“We are positioned to take advantage of the growth opportunities in our core product offerings,” continued Mr. Caldwell.  “We have increased the U.S. sales and marketing organization to more aggressively promote our ICL and IOL products.   Yesterday we launched the first phase of a direct-to-consumer marketing campaign that will focus on the benefits of Visian ICL over competing technologies for vision correction. It is designed to drive more potential refractive patients to schedule an appointment with an ophthalmologist to ask about the Visian ICL technology.  The campaign consists of a series of seven humorous one-minute videos that compare the Visian ICL to contacts, glasses and LASIK - the first video is now available on: www.visianinfo.com or.   The remaining six videos will be released individually in the coming weeks. The availability of each new video will be announced through our social media sites; www.facebook.com/VisianICL and www.twitter.com/VisianICL as part of our initial viral campaign.  We will also be testing more traditional direct to consumer methods in select markets, which will include television and radio.”

Additional highlights in the third quarter of 2010 include:

• There were several highlights at the 2010 Congress of European Society of Cataract and Refractive Surgeons (ESCRS) held in Paris during September, including:
  • The Visian ICL was featured in over 40 presentations by leading ophthalmologists, based on studies conducted all over the world during the Expert’s Symposium sponsored by the Company.  These studies confirm that Visian ICL offers superior visual results over a wide range of myopic and hyperopic refractive errors and confirmed its safety and efficacy over a period of 17 years.  
  • In addition, Dr. Kenneth Lipstock, a member of STAAR’s CAST (Collamer Accommodating Study Team), presented data on his experience with the nanoFLEX™ IOL demonstrating that results at near and intermediate vision with the nanoFLEX IOL were superior to standard IOLs on the market.  
• The Asia-Pacific Academy of Ophthalmology Congress (APAO) held in Beijing during September included the following highlights:
  • During the General Conference Presentation Sessions there were 7 ICL presentations and 15 ICL Posters.  In the STAAR booth there were 22 ICL presentations and 8 IOL presentations from local physicians.
  • Dr. Kimiya Shimizu, one of the foremost ophthalmic surgeons in Asia, presented a paper showing refractive instability and decreased visual performance after six years with LASIK. He has abandoned LASIK in his practice and implants the Visian ICL to correct greater than five diopters of myopia.  
• The American Academy of Ophthalmology (AAO) Conference in Chicago during October, included the following highlights:
  • The Company sponsored a Visian ICL Symposium attended by 150 surgeons with presentations by 30 surgeons from nine countries.  
  • The Company sponsored training courses led by Dr. Scott Barnes and Dr. Butch Harton on Toric ICL for over 100 surgeons.  
  • Dr. Greg Parkhurst, Major in the U.S. Army, presented his findings of a study comparing night vision and contrast sensitivity in patients with the Visian ICL and LASIK.  His conclusion was that the improvements in night vision were greater in ICL patients.
• On August 2nd, the Company responded to the FDA’s questions concerning its submission for approval of the Visian Toric ICL.  Since that response there have been 20 additional questions which have mainly focused on the astigmatic results and most of those questions have come with a deadline for response.
• The Company also responded on August 20th to questions from PMDA in Japan on its submission for approval of the Visian Toric ICL.  The Company is currently working on an additional request from September 28^th and expects to respond in early November.

Recent Visian Implantable Collamer® Lens (ICL) Highlights

• Third quarter Visian ICL sales hit a record $6.0 million which was an increase of 21% as compared to $5.0 million for the third quarter of 2009.  The increase reflected growth of total unit volume at 34% during the quarter which also established a new quarterly high. Mix changes generated by a 39% growth in ICL units compared to a 21% increase in Toric ICL units resulted in a slower rate of growth in Visian ICL revenue increases as compared to unit increases.
• The Visian Toric ICL, which is available in 45 markets, accounted for 41% of ICL sales in those markets during the quarter as compared to 44% for the first nine months of 2010.  Visian Toric revenues in those markets increased by 14% during the quarter while the ICL increased by 47%.
• In Korea, revenues for the Visian ICL products increased 59% during the third quarter, partly reflecting the shipments that had been previously delayed in Q2 due to the opening of a new ICL distribution center.  Units increased by 68% in the quarter.  Korean revenues have increased by 18% year to date.
• In the U.S., Visian ICL sales decreased 9% primarily due to a change in purchasing patterns of a large customer.  Overall, refractive procedures continue to be adversely affected by the economy as LCA-Vision, reported that their same store procedures declined by 19% during the quarter and the two leading companies providing LASIK technology have reported what appear to be weak quarters.  Year to date, sales in the U.S. were down 3%.  For both the quarter and the first nine months, military sales have increased slightly, while civilian sales decreased slightly.
• Other key markets continued to demonstrate strong growth as they have since the beginning of the year, including:
  • Sales in India grew 80% during the third quarter while units increased 74%.  India represented the product line’s fourth largest market during the period.  Sales in India for the first nine months of the year increased by 55%.
  • In China, the third largest ICL market during the quarter and second largest refractive surgery market, sales grew by 72% compared to the third quarter of 2009 with units growing 94%.  Sales for the first nine months of the year increased by 87%.
  • ICL sales in Singapore were up 102% in the quarter and 128% year to date.
  • Sales in the Mideast grew 18% during the quarter and 54% through the first nine months of the year.

Recent Intraocular Lens (IOL) Highlights

• Third quarter IOL sales increased 2% to $6.6 million from the third quarter of 2009. Sales of the nanoFLEX IOL grew 26% during the quarter.
• Quarterly sales of IOLs in the U.S. increased for the first time in four years and only the second time in seven years.  The trends look promising for continued growth.
  • Average selling prices increased 12% in the third quarter.
  • Collamer and Toric lenses represented 72% of total sales.
• Overall IOL sales in Europe decreased by 22% in the quarter however year to date, IOL sales in Europe are up 39%.  The decrease is primarily due to inventory launch purchases of the Preloaded KS-X in the prior year period.
• In Japan, IOL sales increased 8% in the third quarter compared with the third quarter of 2009.  The quarter ended with no backorders to direct customers in Japan, though there were still backorders of about 1800 IOLs to distributors.  These represent lower margin sales and this level is within the normal range of a quarter end position.
• Aaren Scientific, formerly Ophthalmic Innovation International, received FDA approval for their hydrophobic acrylic IOL, which uses a proprietary material owned by STAAR under a license.  Hydrophobic acrylic IOLs represent the majority of the IOLs sold in the U.S. market.  The lens design incorporates a square edge to reduce PCO rates and the ultra-high-purity material eliminates glistening which has been an issue with the leading hydrophobic acrylic IOL.   STAAR has the right to market these IOLs in the U.S. and also receives a royalty on all sales by Aaren.  The Company is currently evaluating market entrance in the U.S. with this product.
• The Company continues to work with the FDA on its submission for the CAST II clinical protocol and the  Preloaded Silicone IOL.  Additionally, the Company is pursuing CE Mark approval for the nanoFLEX IOL.

Third Quarter Financial Highlights

• Total net sales in the third quarter grew 6% to $13.2 million from $12.5 million in the third quarter of 2009.   Foreign currency changes favorably impacted sales by $404,000.
• Gross margin increased to 62.8% of revenue from 60.3% of revenue in the third quarter of 2009.   The increase is primarily due to improved manufacturing cost, increased average selling prices of IOLs and a decrease in royalty expense resulting from the 2009 expiration of a patent licensed to STAAR which was offset by a one-time charge of $160,000 due to raw material issues related to the Collamer material.  This is not expected to repeat as the issue with the supplier has been resolved.  
• Total operating expenses were $9.5 million, an increase of 9.4% over the third quarter 2009 total of $8.6 million.  The effect of unfavorable exchange rate changes was approximately $295,000.
  • General and administrative (G&A) expenses increased by 9% to $3.6 million over $3.3 million in the third quarter of 2009 increased payroll and related expenses.   The unfavorable effect of foreign exchange rate changes was approximately $90,000.
  • Sales and marketing expenses were up 20% to $4.5 million as compared to $3.8 million during the third quarter of 2009 due to an investment to increase headcount in the U.S. sales and marketing team, an increase in trade show expenses and an unfavorable effect of exchange rate changes which was approximately $150,000.
  • R&D expenses decreased by 15% to $1.3 million due to decreased headcount and other expenses in Japan, partially offset by the $58,000 unfavorable effect of exchange rate changes.
• Other income, net during the third quarter was $390,000 compared with other expenses, net of $511,000 in the prior year’s third quarter.  The $901,000 difference is primarily due to exchange gains recorded during the quarter and a decrease in interest expense as a result of the repayment of debt.
• For the quarter ended October 1, 2010, loss from continuing operations and net loss was $1.2 million or $0.03 per share.  For the quarter ended October 2, 2009, loss from continuing operations was $1.8 million, or $0.05 per share, loss from discontinued operations was $134,000 or $0.01 per share, and the net loss was $2.0 million or $0.06 per share.
• Cash and cash equivalents and restricted cash totaled $8,624,000 compared with $13,726,000 as of January 1, 2010 and $8,032,000 as of July 2, 2010.  STAAR generated cash from operating activities of $470,000 during the third quarter of 2010.  

Nine Month Results

• Total net sales in the first nine months of 2010 grew 7% to $40.6 million from $37.8 million in the first nine months of 2009.  Core product revenues increased by $3.6 million or 10.3%, while defocused product revenues declined by $780,000 or 25%. The effect of exchange on net sales was favorable by approximately $892,000.
• Total Visian ICL sales were $17.8 million, up 16% from $15.3 million reported for the first nine months of 2009.  Volume increased 18%.
• Total IOL sales were $20.4 million, up 6% from $19.4 million reported during the first nine months of 2009.  For the nine month period, nanoFLEX IOL sales increased 22%.  Preloaded IOL sales grew 11% year to date, due to a 52% increase in KS-X Hydrophobic Acrylic Preloaded IOL sales reflecting the launch to expand market presence. Low price silicone IOLs decreased 19% as the Company focuses on more premium IOLs.  
• Total other product revenue of $2.4 million was 25% below $3.2 million in other revenue for the nine months of 2009.
• Gross margin increased to 63.5% of revenue from 61.3% of revenue for the first nine months of 2009.   The increase was primarily due to improved manufacturing costs, higher average selling prices and royalty expense reduction, partially offset by higher inventory provisions.
• Total operating expenses were $27.7 million, a 2% increase over the first nine months 2009 total of $27.1 million.  The unfavorable effect of exchange rate changes was approximately $551,000.
  • General and administrative (G&A) expenses decreased by 10% over the first nine months of 2009, primarily reflecting a decline in legal expenses which was partially offset by the $150,000 unfavorable effect of exchange rate changes.
  • Sales and marketing expenses were up 10% over the first nine months of 2009 due to an investment in headcount in the U.S. sales and marketing team, an increase in trade show expenses and the unfavorable effect of exchange rate changes of approximately $300,000.
  • R&D expense decreased 4% over the first nine months of 2009, reflecting lower salaries and patent legal expenses, partially offset by the $100,000 unfavorable effect of exchange rate changes.
• The results for the first nine months ended October 1, 2010, as compared to the first nine months ended October 2, 2009 are:
  • Loss from continuing operations was $3.4 million or $0.10 per share, as compared to a loss of $5.4 million or $0.17 per share in the prior year.
  • Income from discontinued operations was $4.2 million or $0.12 per share, as compared to income of $715,000 or $0.02 per share.  
  • Net income was $744,000 or $0.02 per share, as compared to a net loss of $4.7 million or $0.15 per share.

All reported results reflect STAAR’s March 2, 2010 divestiture of its German distribution subsidiary, Domilens GmbH.  Operating results reported for both the first nine months of 2010 and for the comparative prior year periods include only results from continuing operations and exclude any contribution from Domilens, which the Company has presented in all reported periods as discontinued operations in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP).  

Except where otherwise stated, all financial comparisons in this press release are comparing corresponding periods of 2010 and 2009.