Staar Surgicals Co. (NASDAQ:STAA)
Bank of America Merrill Lynch Health Care Conference
May 14, 2014 2:20 PM ET
Barry Caldwell – President and CEO
Pleased today to welcome the CEO of Staar Surgical, Barry Caldwell. I will kick it over to Barry and we will leave some time at the end for Q&A. Thank you, Barry.
Great, thank you, Dan and we want to thank Bank of America Merrill Lynch for a great conference and for the hospitality extended. Had a nice reception last night, got to meet a lot of folks and I know you’ve been seeing this throughout the convention in terms of the fact that forward-looking statements will be made and we’d advise you to go our website www.staar.com and look at all of our most recent filings where we all – we get a full picture of the business.
First of all, let’s look at the markets in which we participate. There are two large markets, cataract market and refractive in terms of vision correction. We think we’ve got some nice sustainable competitive advantages.
We’ve got a nice pipeline going forward with new products both from regulatory approvals, because as you know in medical devices today, I don’t think in my lifetime we are going to ever see again where one product is approved globally, particularly as we continue to advance the technology in making new enhancements, what’s available in Europe can be available, it’s going to be different than what’s available in the U.S.
So, part of our strategy is to make sure we have a full canes of new products in each one of these markets and with each one of these new products, we expect to put new IP around each one of those technologies.
Our balance sheet is good with a lot of good leverage going forward and we see good results overall from leverage and profitability for the rest of this year and 2015. You can see our growth on top-line last year was 13% as recorded and 19% in constant currency. 25% or more of our business is in Japan, so the impacted our revenues last year.
This year we reported our first quarter at a 12% growth rate as reported and 15% constant currency. So good overall double-digit strong growth rates throughout the year. When you look at those two areas of strategic focus, those two markets, cataract and refractive, you can see that 61% of our revenues for the last five quarters have been on the refractive ICL side.
And this really strategically is a bigger driver overall to the company as you’ll see where about one-third of our business overall is on the cataract IOL side.
Very different markets and we have to strategically attack those markets differently. As you look at us going forward, this is kind of a good model we say in terms of what we should look like, our ICO business, which is higher gross margin, averages about 85% and we are the number one market share leader in the lens-based approach to refractive surgery.
We grew this business last year 26%, 15% first quarter. We would expect to see double-digit growth every year out of our ICO line and we’ve got a nice cadence of new products and our CentraFLOW are pre-loaded in LASIK as you will see. On the IOL side, it’s a much bigger market; the gross margins are strong in the 65% range.
We’ve said, you should expect to see us grow single-digits in this. As you can see, last year, we grew 5% in constant currency and again, in Japan, the impact of the Yen, over half of our IOL business is in Japan. Our first quarter, we reported 12% growth in constant currency and 4% growth as recorded.
And we got also new products here. Last year we were hampered somewhat by supply of our pre-loaded acrylic IOL which was a very high demand for, but we believe this year we are going to have a much more reliable and significantly more supply of the product to promote.
The other key factor looking at Staar going forward is the fact that we are doing the reverse of what a lot of other companies are doing. We are actually relocating our manufacturing to the U.S. We completed Japan transfer last year and June of this year we will complete Switzerland.
So, the second half of this year we will have all of our manufacturing in the U.S. and it will have a positive impact on both our gross margins and our tax line overall. Staar worked very hard for many years to build a lot of NOLs in the U.S.
And now as we position the business with creating profit in the U.S. we’ll be able to start using those NOLs as well as last year our tax rate was 50% and this year we are projecting it to be about 30%, next year our tax rate overall should be 10% and that should run to 2020 or 2022 depending upon our overall growth rate.
So what’s the impact once we get through manufacturing consolidation? On this slide, you can see, this a P&L model. The first column on your left-hand side shows the five analysts who cover Staar, what their average is for the year, what they would project for this calendar year of 2014.
So then we kind of just drew a line in the sand and we said, okay, what happens to the first 12 months after consolidation complete. So this would be third quarter, fourth quarter of this year in the first half of next year unless, instead $81 million of revenues or $90 million or $100 what does it look like?
And you can see the positive impact it has overall on our gross margin by eliminating those facilities and consolidating into one facility of savings we get there. So you can see our gross margin should be nearing 80% overall. And then you can see the difference between the operating income line at 25% to 30%.
Almost all of that translates down to the net income line and that goes down to 22% to 27% because of those NOLs and the use of those in the U.S. So, looking forward in the short-term, there are several key catalysts that the business has that we are quite excited about.
Our CentraFLOW Technology has been very successful. We’ve implanted about 60,000 of these lenses. It help drive our European growth last year in a market in Europe last year that was kind of stagnant, we grew our procedures 29% in Europe and our revenue is 41% in Europe and the number one reason was CentraFLOW.
By putting the port in the center of the lens, we made the procedure much more convenient for the patient and also for the physicians. So much, so that in Korea where we got a distributor who carries a good amount of inventory. They’ve guaranteed a couple of clinics two hours delivery of the lens.
And so patients can come in and have what’s called same day ICL surgery. So in your visit you could also have the surgery and vision corrected that day. So our CentraFLOW technology was approved in the second half of last year in both Korea and India. Korea is our largest market, India is our fifth largest market.
We’ve received Japan approval on March 3 and then today, or what was yesterday in China, we had an expert panel meeting on CentraFLOW and I am told this morning by our people in China that that meeting went very well. We should know next week the outcome of where they were approved or if any additional testing is required there.
If indeed we can gain approval in China then we’ll have all of the major markets on which we focus with the exception of the U.S. We also expect that we will have CE mark approval for our next generation ICL the pre-loaded ICL, it makes it much more convenient for the surgeons and saves 30% to 35% of operating room time eliminating the need for the surgeon to have to load the injector by himself prior to surgery.
Next key catalyst would be, here in the U.S. we had a favorable note from the FDA Ophthalmic Medical Device Advisory Panel on March 14 in terms of our Toric ICL, which is available in over 60 other markets where we sell both the myopic standard ICL which is what we – the only product we have in U.S. and the Toric 40% of the units are Toric and 50% of the dollars are Toric.
So, we would expect that this creates an opportunity for us to very quickly double our ICL sales in the U.S. And then the second half we’ll start seeing, we’ll see some of it in the third quarter and then see more of it in the fourth quarter and then all of it next year.
The positive impact from manufacturing consolidation to the U.S. We are now much more confident about our supply of acrylic pre-loaded IOLs. So we are expecting, though we carried a backlog all over last year and we ended first quarter with $400,000 to $500,000 of backlog.
We expect to be able to clear our backlogs down and be able to more aggressively promote particularly in the Japanese markets where we have a very good gross margin overall and a good share of IOL business. And then, early next year, we should be able to start marketing the V6A this is an R&D term for the next generation ICL and what we are doing with this product is we are putting about 2 diopter add into the ICL.
So that when a patient gets to 40 or early 40 years of age, when they start to need reading glasses like I do, that optic will help kick in and give up to about, we believe 2 diopters of reading ability.
So it would delay when a patient might need to start wearing reading glasses and it could well run eight to ten years or it could run until they become a cataract age overall. So there are several key things as you can see we are excited about with the business. The business is stable, the P&L looks good as does the balance sheet.
And we just got to continue to overall execute and innovate our product line. So with that, we’ll open up to any questions that you may have.
Great, maybe, I’ll just kick it off. This morning, some executive changes and a key hire in your commercial marketing organization. Maybe, just discuss those changes?
Yes, really good question, well, we did a release this morning that ended saying, announcing a couple of things that I will kind of work backward. We announced that our Head of Manufacturing in Switzerland is going to relocate to the U.S. and we are going to split our manufacturing responsibility to that individual. He is going to become - Philippe Subrin, he’ll become Vice President of Manufacturing for ICL.
So he will just focus on the ICL with these new products coming out making sure they get to production we have supply and the cost to goods and then our current Head of Manufacturing at Monrovia, Paul Hambrick, he is going to become Vice President of Manufacturing at IOL.
A lot of his focus has been on the IOL in the past and with the acrylic issues we have last year took a lot of his time. So this will give him more time to focus on those new products in the IOL line as well as focus on our distribution strategy going forward and that's one where we want to be able to get to ICLs very quickly to surgeons.
So surgery can be scheduled as quick as possible after the first visit. The other key thing was a new addition and that is, we’ve hired a Senior Director of Consumer Marketing for the ICL. Now as a medical device company, we think we do a pretty good job if you would on the professional or position marketing of the ICL.
We think we’ve got a pretty good mind share with the ophthalmic surgeons about ICL. The one thing we don’t have, for example, here in the U.S., patients understand what LASIK is, in the U.S. you won't see an understanding of the LASIK, in other markets you will, for example in Korea.
In Korea, last year we were 12% to 13% of all refractive procedures and the recent awareness, the consumer awareness of the ICL in Korea, not – and there isn’t in the U.S. So, what we want to do is, and what we’ve seen in the last couple of years, we’ve invested in social media.
We had six individuals in the company that are focused on this area and we’re seeing some very nice return. So for example in the back half of last year, we saw – we used more videos to get the target age range with is 20 to 35 year olds, to our videos and then to our surgeon locators to know where to go talk to a surgeon about this and what we found was, first of all, when these leads were given to us.
Or I am sorry, were given to surgeons by us, only 68% of those were followed upon. So we got to work with surgeons and their offices to make sure they do follow-up on all these leads, but what’s really exciting is, of those that were followed up on, 62% actually had an ICL procedure another 10% had a LASIK procedure.
So, we are getting 70% of those that go to our surgeon locator and end up being contacted by a surgeon’s office actually having a procedure. So, what we want to do is, expand that. So we brought in this new Senior Director of Consumer Marketing for the ICL who will be working to develop a higher mind share with patients, potential patients for the product and we’ll take small bites at different things.
We’ll try those in our direct markets, Japan, U.S. and Spain and then we’ll move them to some of our distributor markets if they work. And if we find things that work we’ll invest more in those. So, it’s – I mean, it’s somebody like me, I’ve got lot of experience in medical devices not in consumer.
So, this is – for a medical device company, and there are some companies that have been very successful at this, so it’s a little different track for us. So we are very excited about what we’ve seen and potentially what we can do in creating consumer awareness. In Korea, our distributor – who has done a very nice job, they show me data that there is a 70% awareness in Korea of the ICL.
Now I don’t think it’s that high but it’s much better than it is in the U.S. and they’ve done a lot of different things of bus signages, they’ve done subway signages in areas where there are young college students.
They’ve done movie theater ads two or three times in the Korean market. So, and I have seen evidence that in Korea, patients come in and say, I think I need the ICL. In the U.S. patients come in and say, I think I need LASIK. So we want to create a stronger mind share of the potential patients coming in knowing about the ICL upfront.
Do you think, what do you think the biggest hurdle is to driving adoption of the ICL versus LASIK? Is there any missing over that your sales reps here when it comes to trying to push patients to get back versus LASIK?
Yes, I think, if you go back to LASIK in the U.S., you really have to look at these markets individually. When you – and remember, with us, with the ICL, 80% of our business is outside the U.S. So the products and the broader range of the technology has been available longer period of time at those markets in the U.S. In the U.S., we’ve only had the very first product, the myopic ICL.
So now, getting close to commercialize the Toric ICL is a big change overall for us in the U.S. and it gives us now an opportunity or a reason to invest in the patient mind share in the U.S. whereas in the past, with just the myopic ICL, we had at least one arm behind our back in the U.S. market.
In these other markets, where we’ve had other technologies like CentraFLOW, like the pre-loaded coming, the Fix A we learn a lot in those markets and it does help to create more consumer awareness as we introduce new technologies and we think that will be true as we introduced Toric ICL in the U.S. as well.
(Inaudible) other companies and can you talk about the cost of LASIK versus the ICL?
Okay, good. So, two questions in there , first of all, our competitiveness and secondly the cost comparison between the two and really good points overall. So, in terms of the competitiveness, first of all, we have a unique material called collamer.
Most people – most patients think of ICL meaning Implantable Contact Lens because it is just like putting the contact lens inside your eye and you don’t have to deal with it every day or every hour. However people have to deal with contact lenses. We are able to get under the iris.
The iris is the cold part of your eye. We can get under the iris because of our material. Our materials are very high water content material it’s very flexible. Now to the big three, both Alcon which is Novartis and AMO which is Abbott, they have products that they sell but they sit on top of the iris.
Now, if you sit on top of the iris, and that lens rotates at all, it would destroy endothelial cells. We are not getting too technical basically with potentially hamper the transparency of our cornea that's the top layer of our eye that we see through, if it becomes cloudy, then you have to have what’s called the corneal transplant.
Every medical device has a complication, that’s not a good complication, that's a bad complication overall. First of all, that patient’s got to go to another surgeon, a surgeon who put in the ICL most likely would not be the person to do a corneal transplant. At a corneal transplant it requires a lot of incisions and does tend to induce quite a bit of a stigmatism.
Now, with the ICL, are there complications? Yes, there are complications. By going in under the iris it’s a very tight spot. If a surgeon were to accidentally hit the natural crystalline lens with his forceps, he could create a cataract sooner in that patient than they would otherwise.
Now, it’s very proven clinically, we got a lot of peer review articles that thousands patients cases, the rate of that is 0.8% to 1.2% overall. And no complication is good, but in that case, what happens is, the surgeon has to go and take the ICL out, take the natural crystalline lens and then put in a “cataract IOL” if you would, the patient will be able to see very well and be very happy overall with the results.
I can remember last year talking with a surgeon, he told me that, I knew when I put this ICL in, that I have touched the natural crystalline and so he said I was following this patient more closely. I asked she could come back at 90 days and 120 days and at 120 day she started complaining that she couldn’t see as well.
So he said, I realized I needed to take it out and that’s what he did. He took the ICL out, natural crystal lens out. He actually put in a collamer IOL in the patient. The patient’s comments were why don’t you do this from the beginning.
This is great, I can see well. So it is a complication but patients are able to see well after the surgery with the corneal transplant not so much. Now also from a competitive point of view, each one of these new technologies, we are putting new IP around it. So with CentraFLOW, putting the KS-AquaPORT in the center which limiting to the step in the procedure there is IP around that.
With our pre-loaded version which will be – we think will be approved later this quarter in Europe. There is new IP around that as there will be in the V6A. So, from a material perspective and then also from an IP perspective we think it helps to create competitive barriers for others to enter the market.
Now on a cost basis, for the patient, it varies dramatically by market. So, let’s take Korea for example. In Korea, LASIK is much less expensive than it is here in the U.S. an ICL will cost about four times the price of LASIK in Korea. But as I told you we are 12% to 13% of the market.
There are 8% to 10% of patients who come in that aren’t candidates for LASIK. So they don’t have an option. Now in the U.S., the price difference is not as much, it’s about a 50% price difference between the two. So, for example, Marketscope data this is third-party data despite seeing on billboards that you can get an eye for $199 or $299.
The average price is $2000 an eye. So the average for the ICL in the U.S. would be $3000. So what’s important for us is that we have to make sure we are working with the right profile of ophthalmologists.
If we are dealing with an ophthalmologist that has to go down the hospital and rent a room to do these procedures in economically it’s not going to be attractive to him, he is only going to do a handful of procedures a year only in those patients who absolutely have to have this technology and so one of our sales rep there every time, because he wants to make sure that lens gets loaded correctly.
So it’s very time-consuming for us with very little return. Our target has to be the surgeons who has an ambulatory surgical center attached to his center or he can designate a room in his office where he actually does these procedures.
For example, in Los Angeles, just the name was Dr. Brian Boxer Wachler, Dr. Paul Dougherty, I’ll name two, sorry, they both have rooms in their offices where they do these procedures. One of them does – does the procedures on the bed with an external laser.
So those types of surgeons economically, it’s better for them. They make more money on an ICL procedure than they do on a LASIK procedure.
And if you go into the – I guess the reverse ability or one of the process of LASIK is I think once you get it done that first time you had a lot of options after that. So, if something were to go around with the ICL, be it with the current – how quickly can you swap out the – and how many times is your eye structurally sound enough have those swaps out, maybe 20 years or to having that?
Really good questions, no problem, you are exactly right. I mean, with LASIK, most patients think LASIK is a laser, it’s magical, it’s not very invasive. You are creating in a flap with LASIK and then you burn tissue away, you vaporize tissue away then that flap goes back in place, that flap never does heal.
Five years later you went back, the surgeon just takes forceps and lifts that flap if he has to do an enhancement. And you can put the tissue back in, once you’ve taken it out. With the ICL, you put it in, you can take it out.
Now the only reasons we’ve seen it taken out, is that the patient – I’m sorry, the surgeons somehow chose the wrong power or the wrong link, there are different links of lenses. Do you know what this thing to rotate inside the eye and for example shows too short of a length they may have to go in a put a longer one in.
I can tell you, a year and a half ago, within life surgery it was about 60 surgeons in the U.S. and you know how it gets with life surgery. The doctors doing the surgery, but he is also talking to the audience of 60 surgeons at the same time.
And one of our recommendations is, once you get the ICL loaded in the injector system implant it within five minutes. You don’t want to setting there long because it can have difficulty coming out of the injector.
So he is talking and it was longer than five minutes. Those are surgeons that didn’t really realize what he has done, when he put the ICL and originally it went in upside down. And there is not enough room in the eye maneuver to move this thing around, so it went in one pair of forceps it was totally uneventful, took the foot play pulled it out.
It’s like taking a clean tissue, if you pull the end, everything just follows out, that's the nature of the collamer material, such a high water content and so flexible. It just came right back out, he cleaned it off put it back in the right way. Totally uneventful.
The FDA claim is, that is reversible because when you put an incision and you can never have a reversible claim it is removable and we can’t see looking forward potentially in our line of ICL that a patient may have more than one ICL put in during his life time, say between 20 and 65, it’s potentially possible with some of the new products and some of the new enhancements we are looking at.
I just wanted to clarify, there is no insurance coverage for either LASIK or the ICL that’s the first question and the second question is, side-effects with the LASIK there is dryness issue, that can be very severe, but also what would happen with the ICL in terms of rubbing the eye or what are the side-effects or problems?
Okay, so, all really good questions and if go off track, you alert me. First of all, pretty much 97% plus is all elective here in all of these markets. Some people tried to claim on so disabled by myopia that should be covered and some people have, but it’s very, very rare. So it’s basically elective overall. The next part of your question was…
Oh, rubbing, okay, so, one of the reasons we do so well in the U.S. Army is that, once that you are a soldier and you have LASIK and you are sent over to an area where it’s very dusty or very windy, you can rub your eye rather – now normally this wouldn’t happen.
But if you are a very aggressive eye rubber, you can loosen that flap. That happens in the army they have to bring the soldier back to the U.S. So it’s very expensive. That’s one of the reasons that in the U.S. Army in particular we do very, very well. The incision point that’s created for an ICL is about the opening in your ballpoint pen. And that heals within 48 hours, whereas a LASIK flap doesn’t heal at all.
So, there is no issues with rubbing…
There is no issues rubbing with the ICL, no, and as a matter of fact we have – here is- we have an example of a soldier who stood on a mine bomb or whatever it is you call it, and did a lot of structural damage to his face and head, nothing with ICL was totally in place.
Another good – we have linemen for the Jacksonville Jaguars. These guys, thick guys who were right in the battle every Sunday and they have ICL and we’ve had no issues overall. So it has proven to stand up under dramatic situations overall and you have one more.
Yes, so, first of all, LASIK is a very good procedure, particularly it’s done with the right patients. And as I said, 8% to 12% that come in and think they want LASIK really aren’t candidates for LASIK and that was part of your earlier question. If you have dry eye, you can’t treated for LASIK because LASIK has its tendency to induce dry eye.
There is no dry eye induced with the ICL. As the dry eye comes from cutting layers of the cornea when you create that flap that’s what actually induces the dry eye. So, if you are in the 8% to 12%, the ICL is a perfect option for you whereas with LASIK is not, and the rest of the question was…
(Inaudible) ten years later.
Okay, changes, yes, yes, all of our eyes change and one of the things most people don’t understand, when you are younger and you have LASIK or you have an ICL it doesn’t mean that you are not going to become an old guy like me and that's why I wear glasses, because I am old, I can’t read anymore.
I see you guys better if I take my glasses off, because distance vision has always been perfect, but what happens is, even if had a need for LASIK or ICL early in my life, I am still get presbyopia.
That’s what this is called. So one of the things by with the ICL when I talked about you may have a couple different versions is that, maybe when you are 20 and you are really interested in very, very crisp distance vision, you might want our standard myopic ICL today, because that’s what it’s going to deliver.
But then, as you start to become age 40 and you realize, okay, my eyes are going to change, I am going to need reading glasses, so maybe then I’d want to have this V6A product that we expect to have in Europe in the first half of next year that would give 2 diopters of reading ability.
So that I could delay the need for having to wear these glasses to read. So that’s what I mean by there could be two or three ICLs in a life time for example someone may have, particularly a few are very interested in totally crisp distance vision and also reading vision.
Okay, well I think we need to leave it there. Thank you very much, Barry, I appreciate it.
Good, thank you. And I think we have copies of the presentation, if anybody would like to have one.