STAAR Surgical's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: STAAR Surgical (STAA)

STAAR Surgical Company (NASDAQ:STAA)

Q1 2014 Results Earnings Conference Call

April 28, 2014, 04:15 PM ET

Executives

Barry Caldwell - President and CEO

Stephen P. Brown - VP and CFO

Analysts

Matthew O’Brien - William Blair

Jason Mills - Canaccord Genuity

Jan Wald - Benchmark Partners

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the STAAR Surgical First Quarter 2014 Earnings Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the call will open for questions. (Operator Instructions). This call is being recorded today, Monday, April 28, 2014.

At this time I would like to turn the conference over to [Li Salver] of EVC Group.

Unidentified Corporate Participant

Thank you, operator and good afternoon everyone. Thank you for joining us for the STAAR Surgical conference call being broadcast live today from the exhibition hall of the American Society of Cataract and Refractive Surgery Symposium. Our call today will review the company’s financial results for the first quarter which ended on April 4, 2014.

The news release announcing the first quarter results crossed the wire just after 4'o clock Eastern Time and it's now available on STAAR’s website at www.staar.com. In addition to the call a live video webcast and slide presentation are accompanying our remark. To access both the video webcast and the presentation slides go to the Investor Relations section of STAAR’s website at www.staar.com. In addition an archived replay of the event will be available on the STAAR website.

Before we get started, 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 corporation’s projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analyses 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.

These 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 including the discussion in the Risk Factors section of our 2013 Annual Report on Form 10-K. Investors or potential investors should read these risks. 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 that excludes manufacturing consolidated expenses, same distribution transition expenses, gains or losses on foreign currency, fair market value adjustments for warrants, stock-based compensation expense and FDA TICL panel expenses. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release which is available on our website and in our slide presentation.

Now I’d like to turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical. Barry?

Barry Caldwell

Thank you, Li and good afternoon everyone. Thank you for joining us on the call, on the video and a special welcome to all of you here live, in person at the American Society of Cataract and Refractive Surgery Symposium here in Boston or better known as ASCRS. Steve Brown our CFO will be presenting with me today as well.

I'd like to start our agenda this afternoon with some of the highlights of the ASCRS event which began on Friday and will conclude tomorrow. Then I'll provide an overview on the first quarter results against our five key metrics that we established at the beginning of the fiscal year. Steve will then offer a detailed look at the key quarter financial results and then I'll come back and discuss some of the key operating milestones including a review of the potential for the Toric ICL in the U.S. once we're able to commercialize recent new product developments and upon the conclusion we will open the call for your questions.

This has been a very positive ASCRS meeting. This slide shows our exhibit booth in 2010 on the left. And on the right is our booth here today in Boston as we stand. Of course companies can pay for space and big booths, but I’d say we have earned this. We’ve earned it by the progress we’ve made over the past several years. We are all very proud of our position today and our future going forward. I applaud our employees who have worked so hard to get us to this position and some of those employees are right here on the floor today.

We had a very high level of interest in our booth regarding the TICL and the ICL the CentraFLOW technology, the preloaded ICL, our preloaded acrylic IOLs and new interest in our work on our V6 ICL products.

The recently published Market Scope data of global refractive procedures for last year in 2013 validates what we’ve been saying from the past few years. The ICL continues to gain share in the refractive market. In our 12 target markets as you can see, refractive procedures declined 4.6% while the Visian ICL reported gains of 25.5% and this is procedure growth.

For example if you look at all 12 of those target markets there is green behind the ICL. We gained market share in all of those, a couple of examples to pull out; Korea at 12.4% last year, the Middle East at 9.3% and both Spain and India close to 5% overall. I’ll get into more detail on our ICL growth in a minute but I wanted to highlight this proof point upfront as I believe this key set of research best reflects our competitive position in the refractive market today.

These are the five key annual metrics, annual that we discussed on our fourth quarter call: Revenue growth of 8% to 10%; ICL growth of 20%; our gross margin expansion of 300 basis points that ended 72.7% for the year; profitability on a GAAP basis for the year and to successfully complete our Project Comet which is our manufacturing consolidation by mid-year.

Let’s review each one separately. We are already off to a very good start for 2014 with revenue of $20.2 million in the first quarter, representing a growth of 12% as reported and 15% growth in constant currency. Our growth was driven by record Visian ICL sales as well as increased IOL product sales.

The revenue growth of 12% during the quarter was higher than our annual growth range metric. In constant currency the revenue would have been $20.8 million which would have been 15% growth. 25% of our sales during the quarter were in Japan where you can see we had a continued headwind of the weakened Yen values. Visian ICL revenue was 60.7% of our total revenue in the quarter as compared to 59.1% in the first quarter of last year. Low margin Other sales increased by 29% and negatively impacted our gross margin in the quarter as you will hear.

One could argue that this start against our revenue metric and it proves that our metric might be a little bit too conservative. But let me just say we are very pleased where are after the first quarter, but let’s give it another quarter before we consider any changes. Perhaps at that point we’ll have additional product approvals which we can also roll in to that output.

Our second target metric for the year is Visian ICL revenue growth of 20%. We achieved our budget number for the first quarter, so we believe we are on track to complete this annual metric throughout the year. Global ICL procedure growth in the fourth quarter was 14%, representing a 15% growth in those 12 target markets. Growth in Europe was 24%, in our Asia Pacific region 15% while North America declined 19%.

Global ICL revenue growth in the quarter was 15% representing 16% growth in our target markets, revenue growth in Europe was 27%; Asia Pacific, 17% and a 15% decline in North America. Total global revenues for our Visian ICL during the first quarter represented 61% of our total revenues at $12.2 million another new quarterly record. First quarter revenues of the ICL with the CentraFLOW technology represented 62% of total ICL revenue and 85% of all the ICLs in the market in which CentraFLOW is approved. To-date there have been more than 55,000 successful implants of the ICL with the CentraFLOW technology. In the more than 60 markets where we have Toric ICL available first quarter revenue grew 14% and represented 46% of total ICL revenues.

Turning to our IOLs, global revenue for the quarter grew 4% to $6.6 million and represented 33% of total sales. The negative impact of foreign exchange on IOLs was $500,000 during the quarter. If not for that, our IOL revenue would have been $7.1 million representing an increase of 12% year-over-year. Global IOL units increased 16% during the quarter. IOL growth was driven by the expansion of our KS IOL products in the European markets and growth of our preloaded silicone IOL sales in Japan. Increased supply of the KS IOL products allowed us grow revenue in our European markets and start to return to consigned account levels in Japan where we were a year-ago from today.

We now can say we feel more confident about our supply levels for the rest of the year which as you know was a major headwind for us all of last year. We did begin to rebuild the number of consigned accounts during the first quarter in Japan and we may look to expand to new markets in Europe during the second half of the year, though we still ended the quarter with approximately 500,000 in back orders of our preloaded acrylic for Europe, which is slightly down from our number at year-end.

Let me drill into regional IOLs just a bit. First of all IOL revenue in Japan which is our largest market represented 54% of our global IOL sales. IOL revenue in local currency increased 15% in Japan during the quarter. IOL units increased 22% and that’s after recording a 16% increase in IOL units in Japan during all of last year.

Sales in Europe, which represented 19% of total IOL sales increased by 64%, while units increased 59% during the quarter due to our increased supply of product. Europe recorded a 16% unit increase last year, so good back-to-back performance. Sales in China decreased by 46% as our supply of KS IOL has not yet been restored. Supply to this market you may recall was suspended during the second quarter of last year. IOL sales in the U.S. market declined by 6% during the quarter.

Now let’s turn to our third key metric, gross margin expansion by a minimum of 300 basis points. Gross profit for the quarter was 68.8% compared to 70.3% in the first quarter of 2013. Our gross margin expansion was limited somewhat during the quarter primarily by the higher ICL production cost due to manufacturing transition from Switzerland to the U.S. and a higher mix of low margin injector part sales. Steve will discuss this in more detail in his remarks and he will also show the pathway to achieve our annual metric for the year.

Our fourth key metric is GAAP profitability for the full year. We were not profitable in the first quarter. We had a GAAP net loss for the first quarter of $1.4 million or $0.04 a share compared with a net income of $471,000 or $0.01 a share in the prior year first quarter. The net loss was basically driven by the expanded cost for the FDA panel meeting which was postponed and rescheduled during the quarter. We expect to be profitable for the year and Steve will go into more detail about these expenses.

Our fifth key metric was to complete the consolidation project by mid-2014 and we’re on target to do that. Let me share some numbers with you. We plan to close our manufacturing facility, as you know, in Switzerland at the end of June and we have given official notification to all of our employees there.

Manufacturing yields of the ICL and Toric ICL in the U.S. continued to improve during the first quarter. At the end of first quarter the company had approximately 26,500 ICLs and finished goods inventory compared to 17,100 at the end of the fourth quarter. So you can see we are purposely increasing that inventory. That’s a 55% increase over the end of the year just during the quarter while approximately 41% of the first quarter ICL units that ended up being shipped and invoiced were actually manufactured in the U.S. during the quarter.

There is also approximately 18,000 Toric ICLs in inventory at the close of the quarter. A part of this inventory is a build in anticipation of commercial launch in the U.S. These inventory builds on both products is consistent with management’s plan to ensure adequate supply in all products throughout this consolidation project process.

Overall I am quite pleased with our performance so far this year. Only one quarter ago we successfully continued the execution of our plans and I am encouraged by the sales momentum our products are gaining globally with another record quarterly sales for ICLs and achieving our growth targets for IOLs. Customer adoption of the CentraFLOW technology continued to drive growth with new markets opening up globally including the approval we received in Japan during the quarter and the experts meeting which is scheduled next month by the CFDA in China for a review of that technology.

Our Toric ICL received a positive vote on the three questions related to safety and effectiveness presented to the FDA ophthalmic Device Panel that was on March 14th. A significant amount of our resources went into preparing for this meeting and we are very pleased to have received a favorable outcome.

Finally we continue to make progress towards completing the manufacturing consolidation by mid this year and expect to see margin and expense improvement during the second half of the year.

Now I’d like to turn the call over to Steve for a more thorough review of the first quarter financial highlights. Steve?

Stephen P. Brown

Thanks, Barry and good afternoon everyone. There are several areas on which I’ll focus my comments; our GAAP and Non-GAAP P&L results, gross margins, operating expenses and our tax provision expectations for the year.

Let’s first review the P&L results. As Barry said revenue increased by 12% as reported and increased 15% in constant currency. Gross profit increased by 10%. I’ll review the gross margin profile and operating expenses in a moment.

The GAAP net loss for the quarter -- first quarter 2014 was $1.4 million or $0.04 on a per diluted share basis compared with a net income of $471,000 or $0.01 on a per diluted share basis in the first quarter of 2013.

To provide investors with a better basis on which to compare results and understand our business we are also reporting net income on an adjusted basis, which excludes manufacturing consolidation expense, Spanish distribution transition expense, gains and losses on foreign currency transactions, fair value adjustment on warrants, non-cash stock based compensation expense and the FDA Toric ICL Panel expenses. Excluding these items adjusted net income for the quarter was $1.6 million or $0.04 per diluted share as compared to adjusted net income of $3.2 million or $0.08 per diluted share reported in the first quarter of 2013.

Gross profit margin for the quarter was 68.8% compared to 70.3% in the first quarter of 2013. The additional cost associated with the start-up of ICL production in U.S. while the Nidau, Switzerland facility remained operating for approximately 140 basis points of that difference during the quarter, as well the increase in sales of low margin IOL injectors to our third party manufacturer of the preloaded acrylic product had a negative impact of 90 basis points, and the overall average selling prices of IOLs declined due to geographic mix for a negative impact of 77 basis points.

Increased average selling prices on ICLs had a positive impact on gross margins and this is expected to continue and expand during the year. I’d like to provide a bit more color on our first quarter operating expenses. Operating expenses for the first quarter of 2014 were $15.2 million, up 32% from $11.6 million in the prior year. This includes a $2.1 million increase in R&D expenses driven by the cost of the FDA Ophthalmic Device Panel meeting, which was originally scheduled for February ’14 and postponed to March 14. This resulted in higher than anticipated expenses in the quarter.

The cost of the panel were approximately $1.4 million excluding the cost and expenses associated with STAAR employees in the process. Basically we had to pay for two panel meetings during the quarter.

Investments in sales and marketing increased by $900,000 which includes some costs related to the expansion of the U.S. sales team in anticipation with the potential launch of the Toric ICL and increased promotional selling. Generally -- general and administrative expenses increased $1.4 million primarily due to compensation and recruiting costs.

The income tax provision was $219,000 during the first quarter of 2014 compared to a provision of $314,000 during the first quarter of 2013. Tax benefits from manufacturing consolidation are being partially realized during the year. The provision for the year is projected on an annual basis and is expected to be approximately 30%. It can be higher or lower during interim periods but would average 30% for the year.

Now let me provide some outlook for key financials for the remainder of the year. Our start-up cost of goods in the U.S. should continue to improve during the remainder of the year. With increased supply of the KS-IOL products we also expect to drive sales into the higher gross margin markets. When approved to commercialize the Toric ICL in the U.S., this will also contribute to the gross margin expansion. The lower gross margin injector sales will continue and expand during the second half of the year and this will be a drag on gross margin as it has been.

Our operating expenses are expected to be minimized and the FDA panel cost will not repeat. Our tax provision will be 30% for the year, as I mentioned but we do see some potential upside during the second half. This concludes my comments and I'd like to turn the call back Barry. Barry?

Barry Caldwell

Thank you, Steve. We're working with the FDA to finalize the process for the commercialization of the Toric ICL in the U.S., after that favorable vote on March 14. Assuming the launch in the U.S. is similar to that of other markets we would expect that our ICL sales would double, as in over the 60 markets in which we offer both approximately 40% of the units and 50% of the dollars are the Toric ICLs. Surgeons have reported a pent-up demand or a warehousing of procedures here in the U.S. but we will see how many of those are still interested after approval.

This slide is an interesting slide for me. I periodically, talking with investors, try to explain that these patients if they wake up in the middle of the night they have got to grab their glasses or contact lenses in order to do anything. And they can appreciate that but not as much as this slide. One of our engineers did this for me. This is an illustration of the kind of benefit the patients from the Toric ICL cohort in the FDA study experienced.

So the picture on the left shows how a normal eye with 20:20 vision would see the eye chart. The stimulation on the right is how the average eye in the Toric ICL study would see that same eye chart. The amazing part of the story is that after Toric ICL surgery 82% of those eyes could see the chart without glasses or contact lenses exactly as a 20:20 eye would see it. And even more amazing that even better is that over half could see 20:16 or better. These are life changing results. It's not likely any of these patients who were on those pent-up list would find any other technology or find any other option for vision correction.

Technical issues with the Visian ICL preloaded or V5 as we call it in the office have been resolved and we expect to have CE Mark approval for this product making them available to our European market [Technical Difficulty] of the need for reading glasses as these patients approach the age of the onset of presbyopia. The V6b which would open up an entirely new market for the ICL platform. This project is to place a multifocal like optic on the ICL and implant this in patients beyond the current approved age group. There are 3.6 billion eyes in this category and it's often deemed the most exciting segment of vision care or the holy grail of vision care. We expect to have this product for our European markets one year after we launch the V6a product.

During the second half of 2013 we also saw a real tipping point in our social media marketing activities and specifically in our objective to generate quality patient leads for our ICL surgeons. During the second half of last year 62% of the patient leads generated which were followed up by a surgeon or their office resulted in an ICL procedure. Another 10% received LASIK. So over 70% of the leads we generated ended up in a refractive procedure for our surgeons. These results are very exciting and as a consequence we’re planning to invest more this year in consumer marketing to pull patients into the office of our ICL surgeons.

We think we do a pretty good job on the push side of marketing the ICL product which includes promoting to the surgeon through our sales reps and marketing activities, clinical training, clinical research. Now we’re going to expand our investment on the consumer side of the ICL product and attempt to pull more patients into our surgeon’s office for the ICL procedure. We’re aggressively interviewing candidates with experience in just this on the consumer side and directing our efforts going forward.

There are several catalysts upcoming to help expand our revenue growth. We have the CentraFLOW technology for this full year for Korea, India and Argentina. You may recall those approvals came during the second half of last year. We gained CentraFLOW approval in Japan during this quarter. There is that planned expert panel meeting in China in May for our CentraFLOW technology. We expect to be able to -- commercialization of the preloaded ICL in Europe during this quarter. We anticipate at some point that the favorable panel vote will result in approval to commercialize the Toric ICL in the U.S.

We expect to see gross margin and tax improvements as well as operating expense improvement from the completion of the manufacturing consolidation project at midyear. We now expect to see an increase supply of the preloaded acrylic IOL which should result in additional IOL growth. Finally we expect to launch the V6a ICL in Europe during early 2015.

Before I open the call for your questions let me review our investor meeting plans for the remainder of this year. You can see there are several conferences we’ll be attending including next week, the Deutsche Bank, the following week Bank of America Healthcare Conference in Las Vegas, the end of May Benchmark in Minneapolis, the first week of June in New York City, the Jefferies Conference. Our annual shareholder’s meeting will be on June 9th in our Monrovia headquarters and we expect to report our second quarter results on July 30th.

And with that we’re ready to take questions from those both on the phone and here on the floor. Operator, could you please open the line for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions).

Barry Caldwell

Do we have any questions? Yes, yeah, go ahead.

Unidentified Analyst

Thank you, Barry. Can you hear me?

Barry Caldwell

I can hear you but hopefully the audience can’t.

Unidentified Analyst

Okay, first really for Stevens, I just want to congratulate you Barry as well as all the members of your team on another great quarter and this is clearly a testament of the progress this company has made over the past three years. Hope you will [inaudible] across now when we come back next year. Two quick questions for you, first we heard a lot here in ASCRS about the challenges in the refractive market globally from a number of providers. Clearly you are still gaining share by demonstrating positive double digit growth.

Talk to us about why you have confidence that you can continue to either meet or exceed slated targets but also pick back up in U.S. which was down in the quarter? And then just as a quick follow can we talk a little bit about the IOL market, tremendous progress there. Help us think about allocation of that capacity as it scales up and what that could mean to margin at the gross level? Thank you.

Barry Caldwell

So just in case the audience on the phone didn't hear I am going to repeat question by question and I’ve got three different segments. Chris spoke about the refractive challenges that he's heard here on the floor from most everyone in the industry. And I’ll go back to one of the first slides we showed, in terms of refractive procedures in 2013 in our 12 target markets they were down almost 5%, we were up 25%. So that gives me a lot of confidence that we can continue to grow and I’ll use a few markets as examples too and even some of the people here.

We were forced in 2012 to go direct in the Spanish market. If you look at those numbers for Spain according to Market Scope refractive procedures were down 21% last year. That’s a big dip, we were up 34%. And I think that speaks two things, the CentraFLOW technology and our people in the field executing.

Take a look at a market like Korea where we continue to gain market share, though we're between 12% and 13% of the market. And in all 12 of those markets overall we gained market share despite eight out of the 12 been down in total refractive procedures. So those kinds of things give me confidence that we can grow the ICL procedures along with the new technology. There is a lot of interest here in the preloaded ICL, obviously there's a lot of interest here on the Toric in the U.S. and there is new interest in our V6 projects. So I think all of those give us confidence that we can grow this market despite knowing there have been challenges.

The next question was in the U.S. specifically. We were down first quarter despite last year our procedures in the U.S. were up 19% against the back fall according to Market Scope refractive procedures were down 3% in the U.S. market. So we did a very good job last year and I think some of that's attributable to our social media marketing, some attributable to our people in field really executing and some of it even in anticipation of Toric at some point because the news of the panel was there.

During the fourth quarter we had very good quarter in the U.S., some of that was driven by some of our large accounts have procedural volume programs and they need to meet certain margins and do certain number of procedures to have a discount in the following years. So we saw some of that, so maybe there was a little bit of puling forward of procedures.

Plus we do think overall from what we hear first quarter procedures were down in the U.S. So we don’t have any data that we can look to other than anecdotal. Last question was IOL manufacturing as we get more product available of the KS-IOL line how are we going to allocate that? Well the answer is we are going to allocate it through our highest gross margin markets. So first step would be Japan. That’s our highest gross margin market and last year during this point in time we started reducing inventories in Japan, because we could see going forward through all of last year that we were going to have problems with supply.

So as we refill the pipeline and we are doing that right now in Japan with consigned accounts. We are expecting to get nice results in Japan second, third and fourth quarter of this year with our acrylic preloaded. And there may well be some new markets that we open in Europe but we won't look at that until the second half of the year. So hopefully I answered your questions.

Other questions, operator, okay the operator has questions.

Operator

Your first question comes from the line of Matthew O’Brien with William Blair.

Matthew O’Brien - William Blair

Afternoon, can you guys hear me okay, we are having a little bit of a hard time hearing you guys.

Barry Caldwell

Thank you.

Matthew O’Brien - William Blair

So I assume you can hear me. Just talk a little bit more on the U.S. softness in the quarter. I think you’ve started to kind of run through it a little bit Barry. But is there any way to attribute how much of that was potentially weather related or more a function of the docs waiting for the Toric for the full quarter sales, last quarter. Just a sense of those volume trends in the U.S. and then how we should think about coming out of that hear in Q1 into Q2 and beyond?

Barry Caldwell

Good and hopefully Matt, can you hear me okay?

Matthew O’Brien - William Blair

I can hear you fine now.

Barry Caldwell

Okay, great, great. Yes, I think Matt it's a combination of all those things and let me repeat it here for people on the floor. Matt's question was in regard to the U.S. softness in the market and how much might be related to weather, which we've certainly heard that in terms of first quarter not only from refractive surgeons but other medical device companies and how much might be related to the pull forward. There is clearly some of both of that in the softness in the first quarter Matt from what we see. But we feel very good with the level of interest in the ICL, particularly driven by the positive Toric vote at the panel meeting.

There is a very strong interest -- we had here in the booth on both Saturday and Sunday we had four panel meetings which included -- they were an hour long and they included four surgeons in each one of those sessions. They all went over their allotted hour and we had full audiences for most, if not all of those presentations. So we saw a lot of interest here on the floor on Saturday and Sunday.

Matthew O’Brien - William Blair

Okay and then heading over to Japan, that's an area that's been soft for a while now. There was a pretty quick snap back in China a few quarters ago when that market rolled over, can you just give us any sense for when you think Japan may start to stabilize in terms of the number of refractive cases being performed?

Barry Caldwell

A really good question, Matt because that market, and the question is around the Japan refractive market. That market seems to have big bounces, not small bounces. If you look at the Market Scope data refractive procedures according to them were down 51% last year. Now we were up 4%. We were -- obviously we're not happy with that but in that market drop back it tells us a lot about what's going on. It wouldn't surprise me if the market doubles this year. Though I can tell you in the first quarter we're not seeing any signs of any rebound yet but when it does rebound there will be a nice rebound.

So we're trying to educate as many new docs as we can on CentraFLOW now that we've gotten approval. I was in Japan just two weeks ago and we had evening symposium and dinner on CentraFLOW and it was a full house.

So we're excited about the opportunity there but you're exactly right in kind of driving to the point, we're somewhat hindered by what the market does in Japan and it does have big swings. So when it's ready to swing back I think we will be ready with the CentraFLOW technology there.

Matthew O’Brien - William Blair

Okay, and then two more if that's okay. Just quickly on China, you mentioned that meeting in May. Can you give us a sense for next steps following that meeting as far as getting CentraFLOW approved and then should we kind of think about this as a late 2014 event to get that approved?

Barry Caldwell

Good question. Our anticipation but it would only be ours, a lot will depend on what happens in that meeting which is scheduled for mid-May, is that very quickly within 30, 45 days afterwards we would be able to commercialize in China. But we will have to see how that meeting goes and if any new questions arise or if there is any new data that they need. But we will be there prepared to present all of the data that we have in all the other markets regarding CentraFLOW. And that meeting is only scheduled for about two or three hours I believe.

Matthew O’Brien - William Blair

Okay, and then one more quick one, if that's okay. I was a little bit surprised to hear that the amount of product coming out of U.S. was about 41% this quarter. I thought it might be a little bit higher than that but you are saying you are on plan as far as that transition goes. What are some of the factors that you guys are certainly monitoring closely that could disrupt any kind of that transition period here in a couple of months?

Barry Caldwell

So yeah, really good question on Comet. And what we're seeing, Matt saying he is a little bit surprised that only 41% of the ICLs were shipped out of the -- from U.S manufactured product. That's all on schedule with what we had planned. But as you see to guarantee to ourselves that there is no disruption we built our inventory significantly and spend over a $1 million in inventory increases during the first quarter to make sure we're ready. It's very -- we track weekly the trends on the ICL production, the yields what ends up going to finished goods.

So while obviously during the third quarter some of the product will still have the made in Switzerland and we're using a lot of the Swiss capacity right now to build up Toric ICL for potential U.S launch. We feel very good about where we are, so much that if we really wanted to push the envelope I think we could have closed Switzerland at the end of first quarter. There was no need to do that but I also got to say hats off to all of our employees.

I mean they have just done a tremendous job with this project. It went up, we said originally it would cost us $6 million, it’s going to cost us $6.4 million, we said it would take three years, it’s taken us 3.5 years. The reason the cost was higher than we anticipated is because our employees stay. When you budget these things you budget for some attrition especially when you tell employees two or three years ahead a time their positions are going to go away. So we budgeted for 70% retention. Over 90% of our employees in Japan and Switzerland have stayed through their exit date and they not only stayed but they have executed. They have been very loyal to the company and very loyal to the product and a strong interest to making sure the quality of the product has continued.

Matthew O’Brien - William Blair

Thank you.

Barry Caldwell

Next question, operator.

Operator

Your next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed.

Jason Mills - Canaccord Genuity

Great, thank you, Barry. Can you hear me? Barry, can you hear me?

Barry Caldwell

Yes.

Jason Mills - Canaccord Genuity

Great, this is Jason Mills asking the question Barry, if you didn’t hear the operator. Stop me if you can’t hear me but I wanted to go back to the question on Japan. I wondered if there was any hold back in performing ICL procedures in Japan and folks waited for the next generation product and what you’ve seen I guess thus far in the second quarter while you are not all the way done with the quarter yet, you do have about half a quarter worth of data. I wondered if you could provide any anecdotal feedback out of Japan.

Barry Caldwell

Yeah, really good question, Jason. His question is about CentraFLOW approval in Japan and we got at the beginning of March and if we’ve seen any impact thus far. You know first of all in Japan surgeons have the ability to prescribe or use the product that’s not yet approved on a name patient basis and in the major centers in Japan they have been doing that, so they have been using CentraFLOW but they have been handicapped because they have to order it from Switzerland, wait till the lens gets there and then call the patient and bring them in.

With approval, those facilities can go ahead and they can actually have inventory in house if they want it or they can get it right away from our facility in Japan. We’re in the training -- that was part of the reason for the symposium is training and educating the rest of the surgeons in Japan the other 30% or so of the market. It’s really too early to say we see anything yet in Japan but there’s obviously a very strong interest in CentraFLOW there.

Jason Mills - Canaccord Genuity

Great. And my next question Barry is around your guidance and I certainly appreciate one quarter and it’s not perhaps the perfect time to change your guidance but as I look at the metrics that you laid out and you sound very bullish about your ability to achieve not only your 20% growth target on the ICL side but your 8% to 10% growth target on the revenue side and as I look at how you performed in the first quarter with the IOL business really standing out relative to where we were expecting you to come in. If we look at say the run rate in the first quarter dropping by on average $0.5 million per quarter on the IOL side and then the ICL business you have tracking, let’s say 19% growth.

And then lastly the other revenue line dropping in half for the rest of the year on a quarterly basis you get to a number sort of 11% to 11.5% year-over-year growth for the full year notwithstanding that you have perhaps Toric contributing in the U.S., the CentraFLOW contributing in Japan. You talked about some of the bullish indicators on the IOL side contributing as well.

So I am just wanting to get a sense for if there is anything I am missing in those metrics that would suggest that my tendency to think that your guidance is conservative is incorrect.

Barry Caldwell

Well I think you raised all good points and if we’re able to execute on everything you said you are exactly right and I am wrong, and I love to be wrong and our employees prove me wrong every day of the week. All of those catalysts seem solid and all of those things seem in place to really help drive our growth. So we feel very good about the rest of the year but I just want to hold back another quarter and hopefully you can appreciate that if we have one of two new product approvals then we can roll those into that and give you even better numbers in the year.

But I’d say overall we are very bullish on the year. We are very proud of our start in the first quarter and we believe we can do very well this year but we just like to hang on to the current metric that we have at least just one more night and one more quarter if you would.

Jason Mills - Canaccord Genuity

Fair enough, I’ll end with just one question Barry on the gross margin line. Perhaps or Steve if you’d like to pass it over, but there were obviously several offsets this quarter and last quarter on the gross margin line, components that hit your gross margin. As we look forward which offset to the gross margin will go away? And within what time frame will these negative factors abate?

Barry Caldwell

Well so I am going to turn that over to Steve for a minute but just only to make one quick comment and that is overall with the transition and the lowering of our cost to make ICLs in the U.S. that’s going to have a nice impact. As well as some of these other favorable dynamics including V5 in Europe including CentraFLOW in additional markets and then obviously Toric launch, that’s also been able to quite positive impact on gross margins. So Steve?

Stephen P. Brown

Can you hear me Jason?

Jason Mills - Canaccord Genuity

Yeah thank you Steve.

Stephen P. Brown

So as Barry said the start-up costs in the United States and while we are ramping down the facility in Switzerland that will start to correct in the second quarter as the U.S. production values get up to or get to the need out levels. So that’s one impact is going to true up. The other one is we had lower average selling prices on our IOLs and that had to do with geographic mix of our IOL sales between Japan and Europe. And as Japan starts to expand and we fill back the consignment stock there, that ratio of geographic mix will return to what have been normal and that will represent another improvement in gross margins. And lastly we are experiencing favorable average selling prices on ICLs and we expect that to continue and expand through the year.

Jason Mills - Canaccord Genuity

Thanks guys. I’ll get back in queue.

Barry Caldwell

Thank you Jason.

Operator

Your next question comes from [Inaudible]. Please proceed.

Unidentified Analyst

Good afternoon, Barry. The first question I have regards to sales force required to go forward with the pending approval of Toric in the U.S., reported U.S. sales force?

Barry Caldwell

Hi, Jim. Yes it's a matter of fact Thursday morning I participated in the initial sales training for four new sales reps here in the U.S. I believe we have one or two more to go, I am not sure of the exact number. But that’s a level we feel comfortable with for launch of the Toric ICL. And I think as we’ve spoken about before the U.S. as begin launch we are going to focus on our top current 150 ICL users and work with them on the list of pent-up demand that they have as well as further penetrating their accounts with the ICL.

Unidentified Analyst

Okay and what do expect the next communication with the FDA to be regarding the approval? Do you think that is another round of question or you get the approval or do you think that, that communication will be actual approval?

Barry Caldwell

Well, really good question I don’t know the answer but I’ll give you a little bit of information in between the lines. We came to this meeting with panel booths made for both ways approval or non-approval. And there is another day of the FDAs listening, there is another day for this meeting and we do have the ability to change this out overnight. Jim it did take them a couple of weeks to get the transcript back from the meeting. And as you would expect and rightfully so they want to go through that very closely to make sure there wasn’t anything that they missed.

We have not got any questions from them, though we had communications with them. We would expect that our labeling is pretty solid, we could be wrong but that’s what we would expect because we’ve been discussing labeling with them the last two or three years as well as the only change between the currently approved labeling for the ICL and the Toric is the astigmatic correction.

Secondly is we did suggest post approval studies in our submission to the panel and they thought those were good. They had comments. So the FDA would be going through those to see if there is any changes that they would suggest or ask or demand that we make in those post approval study. So if they have no questions we could literally get a fax tomorrow or next week or next month. If they have some questions then we’ll proceed with them along the process that they want to go.

Unidentified Analyst

And then finally you were breaking up a little bit towards the end of your script, can you just repeat what you said about launches in Europe? I think you said you are going to launch the preload by the end of this year and what other launches do you expect in 2014?

Barry Caldwell

Yes, Jim. So in Europe we would expect to launch the V5, that’s the preloaded ICL this quarter the current quarter that we’re in and we would expect the first quarter, first part of 2015 to launch our V6a product, the one that gives two diopters of reading add.

Unidentified Analyst

Okay, and then how about the V5 in Asia? Do you have any schedule for that?

Barry Caldwell

We do not currently but what we’ll take is the data that we used for CE market approval which our regulatory buddy has told us is just the technical file though we’ll probably do -- we’ll do some of our own pre-marketing procedures and there may well be some post approval studies we need to do for them but we’ll take any data that we have to each one of those new markets as we typically do and you know they all run on different timing tables but is pretty consistent that the cycle starts in Europe and it ends in the U.S.

Unidentified Analyst

Okay, thank you.

Barry Caldwell

I have a question here from the floor. Chris?

Chris Cooley - Stephens Inc.

Chris Cooley with Stephens. Can you just remind us on the budget, Comet expenses of 168,000 I believe approximately in the quarter, with that complete in the 2Q is there a tail to those expenses into the second half, if we think about our GAAP, non-GAAP reconciliation and then additionally as we think about the tax rate I appreciate Steve talking about 30% of EGR the full year, help us think a little bit about the transition again from Switzerland investment [inaudible] back turn. So I am thinking about kind of the sequential progression of that as opposed to the year. Thanks.

Barry Caldwell

So I’ll take the first part and I’ll hand the second part over to Steve and I will repeat the question for everyone is first are there any Comet cost that will spill into the second half of the year and the second part is regarding the tax rate how it will roll out the second half of the year third quarter and fourth quarter depending up on the manufacturing where products come from. So for the first part in terms of Comet cost, we project cost we projected for the year are only in the first half. There shouldn’t be any that spill over and we were pretty confident of that overall and I think the plan is on very solid footing that we have to complete all of that. Steve?

Stephen P. Brown

As I said the expected average for the year is 30%. Quarter to quarter that gets applied and that could result in a different effective tax rate depending on the gains or losses in your tax jurisdictions but as the U.S. achieves more profit we then average down to that 30% tax rate. But it also has to do with the tax restructuring that we have done in Japan, the tax restructuring that we have done in Switzerland and we won’t achieve full tax benefits until 2015 when we get an exemption out of our Swiss legal entity.

So for this year our guidance is 30% and next year will go down to 10%. As I said when it was my turn speaking we do have some potential upside this year on the tax rate.

Barry Caldwell

Operator, any more questions?

Operator

Yes we have a question from Jan Wald with Benchmark Partners. Please proceed.

Jan Wald - Benchmark Partners

Hi, good afternoon and congratulations on the quarter it really looked solid all the way around. I guess a lot of my questions have been asked already. But if you wouldn't mind just going through maybe in a little bit more detail providing maybe a bit more color on what your plans are for the Toric ICL launch. What's kind of -- are you going to go through what kind of sales training and conditioning of the markets, those kinds of things. How we would understand what you're going to with the time lines and maybe even some of the costs associated with it?

Barry Caldwell

Sure. Thank you, Jan. And first of all in terms of addition of new sales reps we're adding five new sales reps. As I told Jim earlier we have four now on board. So we've already started the training process for those reps. We currently have about 800 surgeons in the U.S. that have been training on the ICL and of those 800 about 500 have already gone through Toric training.

One of the good things here in the U.S., there is not too many good things you have 10 years to get the product but one of the good things is that surgeons in U.S. today are very familiar with Toric IOL versus where they were 10 years ago. So the additional training needed for them is not very high but what we're requiring of the 500 that have previously been trained it's about two hour program online. It's kind of a refresher course of what we gave them previously in that some of those surgeons may have been two years ago or more that they were trained on Toric.

So and then our sales reps will be focused on those top 150 current ICL users and penetrating those accounts. Now more than half of our sales team have already been trained as full certified ICL specialists and we will have them go in with the surgeons in to the OR and make sure surgeons are comfortable with their first few procedures and make sure that they are having success with the technology.

Most important is to make sure that as we roll out Toric that there aren't any surprises that we could have otherwise been prepared for and taken care of earlier.

Jan Wald - Benchmark Partners

Okay, thank you. Maybe just one more question on the U.S. market. Wouldn't things turn around if procedures are going down does that -- is that something that's going to go on for a quite bit of time or does it stabilize and come back what are your thoughts on the U.S market?

Barry Caldwell

Good question and the question is on the U.S market and that we see it turning around. Since 2007 it's continued to decline. According to Market Scope it went down 3% last year. But I'll say this though Market Scope is not always exactly right, they are pretty good at looking at the tea leaves and coming up with trends. They are projecting that there will be a return to growth in the next three -- over the next three to four year period in the U.S.

We would hope that some of the excitement with the ICL and Toric ICL and then also CentraFLOW eventually in the U.S., that that will also help overall in the refractive market along with the consumer, social media work and pull marketing that we plan to do, we hope all of those can be factors in helping return the total refractive market to growth.

Jan Wald - Benchmark Partners

I guess my last question, what do you think the reasons were for the procedural declines, is it patients not available or not interested?

Barry Caldwell

Good question. What and the question is what really has led to the procedural declines in the U.S. So I'll give you my personal opinion. First of all LASIK is a good procedure and I'd argue though that the ICL is a better procedure but LASIK is a good procedure. It's not a good procedure for the wrong patient and there are patients that LASIK is not good for. About 8% to 12% of patients that call the office or walk in the door and say I think I need LASIK aren't candidates for LASIK. And what I see is that surgeons in the economic environment that we've had they have maybe somewhat pushed the limits of LASIK and maybe gone into that 8% to 12% and done LASIK maybe on patients they shouldn't otherwise have done.

And when that happens there is a higher rate of complications though it's not high but it is higher than the normal LASIK procedure. And then for whatever reason media throughout the world seems to love to grab these refractive complications and blow them up -- not blow them up but just exploit them. And a good example is China in 2012 where the China Post for two weeks every day, ran a negative article about LASIK because of one surgeon in Taiwan who complained about the complications. And that type of media exposure I think has really put a lid of refractive procedures around the world.

So as an industry we've to work together to restore confidence in refractive procedures and the results from refractive procedures because overall there are excellent results.

Jan Wald - Benchmark Partners

Okay. Thank you very much. And again a good quarter.

Barry Caldwell

Thank you.

Operator

We have no further phone questions.

Barry Caldwell

Any additional questions from the audience? Great, I want to thank all of you on the floor for all the great hard work the last few days and I want to thank all of you on the phone for your participation today. We look forward to providing you an update on our progress and we have planned to report our second quarter earnings on July 30. Thank you very much and good day.

Operator

That concludes the call.

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