Staar Surgical Co Q3 FY2020 Earnings Call

Good day, ladies and gentlemen, thank you for standing by. Welcome to the STAAR Surgical third quarter financial results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the call will be open for questions. If you have a question, please press star followed by one on your touchtone. If you are using speaker equipment today, please lift the handset before making your selection. This call is being recorded today, Wednesday, November 4th, twenty twenty. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor Media Relations and Corporate Development at STAAR Surgical.

Thank you, Stacey, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company's financial results for the third quarter ended October 2nd, twenty twenty. On the call today are Karen Mason, President and Chief Executive Officer, and Patrick Williams, Chief Financial Officer. The press release of our third quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR's website. Before we begin, let me quickly remind you that 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 company's projection of expectations, plans, beliefs, and prospects. These statements are based on judgment and analysis 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. The 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. Except as required by law, 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 net income and adjusted earnings per share and sales in constant currency. 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 today's press release. Following our prepared remarks, we will open the lines to questions from publishing analysts. We ask analysts to limit themselves to two initial questions, then return with any follow-up. We thank everyone in advance for their cooperation with this process. And with that, I'd like to turn the call over now to Karen Mason, President and CEO of STAAR.

Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today's call. The third quarter twenty twenty results we reported today represent yet another record level of quarterly sales and a return to levels of growth that are more representative of the demand for our ICL family of lenses. For the third quarter of twenty twenty, STAAR's net sales increased 21 percent over the prior year, driven by 25 percent global ICL unit growth as markets more fully reopened following COVID-19 related shutdowns. On a regional basis, ICL unit growth in the third quarter was positive in a large majority of the top markets we track compared to the second quarter of twenty twenty. Only three of our top markets achieved positive ICL unit growth on a year-over-year basis. Standout markets for unit growth in the third quarter of twenty twenty compared to the prior year included: China, up thirty-three percent; Japan, up sixty-seven percent; South Korea, up twenty-one percent; Rest of Asia Pacific, up sixty-seven percent; Spain, up twenty-four percent; European distributor markets, up seventeen percent; and Germany, up thirteen percent. India and the Middle East were the two markets that remained most challenged by COVID-19 during the third quarter, with each market down more than fifty percent in ICL units over the prior year period. Excluding India and the Middle East, global ICL unit growth for the third quarter of twenty twenty would have been thirty-two percent, or seven points higher than the twenty-five percent we reported. Several factors contributed to our growth during the third quarter. First, we benefited from our strong presence and growing market share in the Asia Pacific market. Many Asia-Pacific countries seemed to be ahead of the curve in effectively managing the COVID-19 challenge, with life returning to normal earlier than in many other locations globally. For example, our employees in Japan and China report that COVID-19 impacts daily life less than we're hearing from employees in other parts of the world. Globally, we continue to support our customers in getting back to pre-COVID norms while monitoring trends and actions that could lead to business disruption. Second, we are observing an appreciable change in patients' motivation in Asia and Europe, with many patients more inclined to reach quick decisions concerning refractive surgery, often selecting the first doctor they consult, whereas historically these same patients may have met with two or three doctors before making a final decision. The feedback we are receiving from clinicians is that patients are increasingly more motivated to quickly seek visual freedom as the pandemic has been quite challenging, especially for those who wear glasses and contact lenses. There seems to be a sentiment among patients to do something good for themselves, as many clinicians have shared with us. Third, COVID-19 related closures and delays, such as in the national college entrance exam in China, which was pushed back to July, may have shifted some of our normal demand cycle from the second quarter into the third quarter. Lastly, we effectively targeted and supported geographies with significant volume opportunities during the third quarter through patient recruiting, surgeon training, and marketing. During the peak season in China, we resumed in-person onsite patient educational roadshows at hospitals and hotels, where our customers promoted EVO with high-definition and premium messaging. We also had active marketing campaigns in China, Japan, and Korea through digital outdoor commuting train and subway stations, as well as social media platforms. We resumed advertising in Germany and Spain as those markets more fully reopened. In the U.S., we expanded our strategic relationships with surgeons through a refractive restart program to support clinics in the U.S. market reopening. The success of this program has prompted the continuation of many aspects of our surgical support into the fourth quarter. Finally, as a measure of our success and awareness beyond just sales, our website drew twice as many unique visitors in the third quarter compared to the previous year. On a year-to-date basis through the third quarter, our website visits are up nearly two hundred fifty percent over the prior year period. Turning now to our pipeline of products and potential catalysts for STAAR in twenty twenty-one and beyond, we have made meaningful progress relating to our two new products for the U.S. and European markets. In the U.S., the primary study analysis cohort of three hundred subjects has been enrolled and implanted with our family of myopia lenses, which sets the stage for first half twenty twenty-one submission to the FDA. If marketing approval is obtained, this will open up the U.S. market for our EVO lenses. Our clinical trial sites continue to adhere to clinical trial protocols, and we look forward to sharing additional details when appropriate in twenty twenty-one. Today, we also announced the initial launch of commercialization of our EVO presbyopia lens in England and Europe. Details on our progress, including publication of the first peer-reviewed clinical paper, consumer websites launching in several countries, and the first patient implant of the EVO lens in Belgium, are contained in a separate press release we issued this afternoon. STAAR is introducing an implantable lens to treat presbyopia designed to deliver all the benefits of the EVO lens for myopia, with the additional advantage of addressing intermediate and distance visual acuity. Clinical trial results have been evaluated and reported in an article written by our principal investigator and medical monitor, published in Clinical Ophthalmology. The conclusion of the study authors is as follows: 'This multicenter prospective clinical investigation demonstrated the ability of the EVO lens to correct myopia and presbyopia, resulting in improvement of uncorrected near, intermediate, and distance visual acuity without compromising the quality of vision which enables ideal subjects to perform tasks of daily living without glasses or contact lenses.' Subjects reported significant improvements in quality of life with high levels of spectacle independence and satisfaction. We are conducting a phased rollout of our EVO lenses to gather information on best practices in patient selection and management to optimize the objective and subjective factors that will delight patients in this large addressable market. The initial surgeons recognized for their leadership in their respective markets for refractive surgery will be implanting the lens and will make significant contributions to the EVO playbook of best practices, providing a pathway for full commercialization of the lens in the second half of twenty twenty-one. The third quarter of twenty twenty was a strong quarter for STAAR on multiple levels. Most importantly, we believe the essential fundamental demand for our products has gained momentum and is reflecting our recovery experiences. The STAAR team remains focused on creating a leading future in refractive vision correction, where we believe we have the opportunity to increase our global market share from ten percent in the near term to twenty to thirty percent plus in the foreseeable future. We feel very good about our business today, and with the exception of the unknowns the pandemic holds, we are reiterating our outlook for the remainder of twenty twenty, provided in August, which has closed out the year with the fourth quarter projected in the range of approximately forty-three million dollars in net sales, with the caveat of increased spending to support a strongly developing outlook for twenty twenty-one.

Thank you, Karen, and good afternoon, everyone. The net sales for Q3 twenty twenty were forty-seven point one million dollars, up twenty-one percent compared to thirty-nine point one million dollars in net sales in the year-ago quarter and up thirty-four percent sequentially from Q2 twenty twenty. The increase in net sales was attributable to strong growth in most markets. As Karen mentioned earlier, in terms of product mix, ICL sales represented eighty-eight percent of total company net sales for the third quarter twenty twenty, while other products represented twelve percent, consistent with recent trends. Gross profit for Q3 twenty twenty was thirty-four point nine million dollars, or seventy-four point one percent of net sales, compared to gross profit of twenty-nine point one million dollars, or seventy-four point four percent of sales for the prior year quarter, and twenty-four point four million dollars, or sixty-nine point four percent of net sales for Q2 twenty twenty. The thirty basis point change in gross margin compared to the prior year quarter is primarily due to geographic sales mix, costs associated with manufacturing expansion projects, and a higher sales mix of injector parts which carry a lower margin than our ICLs. The four hundred seventy basis point sequential increase in gross margins from the second quarter is attributed to higher sales and a return to a more normalized level of manufacturing following a voluntary six-week COVID-19 manufacturing halt. Consistent with our comments on the last call, we continue to expect gross margin in the low-seventy percent range for the fourth quarter of twenty twenty. Moving down the income statement, total operating expenses for Q3, twenty twenty were thirty million dollars compared to twenty-five point seven million dollars in the year-ago quarter and twenty-five point five million for Q2 twenty twenty. We continue our cost containment measures related to non-essential variable costs while also expanding programs designed to drive growth. We expect total Q4 twenty twenty operating expenses to be similar to our Q3 twenty twenty results. Taking a closer look at components of operating expenses, general and administrative expense for Q3 twenty twenty was eight point six million dollars compared to seven point one million for the year-ago quarter and seven point eight million for Q2 twenty twenty. The year-over-year increase in G&A is due to increased salary-related expenses, variable compensation, and facility costs. The increase from Q2 twenty twenty was due to increased variable compensation, consulting costs, and facility costs for the fourth quarter. We expect G&A to be up slightly from Q3 twenty twenty as we begin investments to support twenty twenty-one and beyond. Selling and marketing expenses were twelve point seven million dollars for Q3 twenty twenty compared to twelve point five million for the year-ago quarter and ten point three million for Q2 twenty twenty. The increase in selling marketing expense from the prior year quarter was due to increased salary-related expenses, advertising and promotional activities, and variable compensation, offset by decreased trade show and travel expenses. And the increase from Q2 twenty twenty was due to increased advertising, promotional activities, salary-related expenses, variable compensation, and trade show expenses. For the fourth quarter, we expect selling and marketing expense to be down slightly from our Q3 twenty twenty results. Research and development expense was eight point eight million dollars in Q3 twenty twenty compared to six point two million for the year-ago quarter and seven point three million for Q2 twenty. The increase in research and development expense compared to both periods was primarily due to increased clinical expenses associated with our EVO clinical trial in the U.S. and increased salary-related expenses and variable compensation. For the fourth quarter, we expect R&D to be up from our Q3 twenty twenty results. Operating income in Q3 twenty twenty was four point nine million dollars, or ten point four percent of net sales, compared to three point three million dollars, or eight point five percent of net sales for the year-ago quarter. The expansion in operating margin of one hundred ninety basis points year-over-year is due to leverage on fixed and variable operating expenses during the quarter. Net income for the third quarter was four million dollars or eight cents per diluted share, compared to net income of two point four million dollars or five cents per share in the year-ago quarter. On an ongoing basis, adjusted net income for Q3 twenty twenty was six point seven million dollars at fourteen cents per diluted share compared to adjusted net income of five point five million dollars or twelve cents per diluted share in the year-ago period. A table reconciling the GAAP information to the non-GAAP information is included in today's financial release. Turning to our balance sheet, our cash and cash equivalents as of October 2nd, twenty twenty totaled one hundred twenty-eight point three million dollars, up twelve million dollars compared to one hundred sixteen point three million at the end of the second quarter twenty twenty. The sequential increase in cash in the second quarter is primarily attributed to nine point six million dollars generated from operations. Before we open up the call to your questions, I would like to highlight several upcoming investor meetings and conferences that STAAR will be attending. On November 17th, STAAR will be attending the Jefferys London Virtual Health Care Conference. On November 19th, STAAR will be participating in the Stephens Annual Investment Conference. Karen and I look forward to speaking with many of you at these events in the coming weeks, and this concludes our prepared remarks.

Please press star one on your telephone keypad to ask questions. Your first question comes from Anthony Petrone with Jefferies. Please go ahead, sir.

Hi, thank you, and hope everyone's doing well. Congratulations on a good quarter here! Maybe, Karen, a couple on numbers, and then follow up on EVO. Regarding the numbers for China in particular, it looks like sequentially pricing sort of normalizes and even improves. Can you check our math there? Does pricing in China improve? And with the thirty-three percent implant increase, how does that stack up in terms of patients when you bifurcate between high myopes and more moderate myopes? And then I'll have a follow-up.

Well, thank you, Anthony. I appreciate it. In terms of pricing in China, yes, we had a strong quarter globally, and a lot of that was due to mix. When we look at our business continuing to improve, especially in China, I should note that we are definitely seeing a down trend in pricing. We have stories of individuals that were very interested in no longer needing glasses, especially while wearing masks as often as we do now. So yes, the pricing mix in China is continuing to evolve downwards.

That's helpful, and then two follow-ups. One would be when you look at the China implant growth of thirty-three percent and Japan at sixty-seven percent, can you provide some insights on how much of this is driven by procedures coming back and how much is new demand? And then just the strategy for the launch with EVO—will that be a combination of direct and distributor sales? I'll get back in queue. Thanks again.

In terms of our third-quarter revenue and how much is new demand versus holdover, we observed some variation in the typical busy season. For example, in China, the college entrance exams were delayed. This seemed to create a heavier third quarter for certain categories. However, from what we hear from our clinicians, there’s notable enthusiasm for visual freedom, so I would say that the majority of what we are seeing is new demand. As for the EVO launch, we are working with refractive surgeons in major European markets who are experienced in implanting our myopic EVO lens. We are collaborating with them to ensure an effective rollout of our new presbyopic lens, targeting patients correctly and ensuring excellent post-surgery management. We anticipate that by next year at our event in Barcelona, we will make the EVO lens commercially available to all surgeons, including those serviced by distributors.

That's great. Thanks again.

Your next question comes from Chris Cooley with Stephens. Please go ahead.

Good afternoon, everyone, and congratulations on the quarter. I appreciate you taking the questions.

Thanks, Chris.

If I could start with the U.S., could you help us understand what the results of the refractive restart program are and the change in terms of your reach with the surging population here in the United States? Currently, how do you concentrate on premium enchancers for premium ICLs and higher-end refractive practices? We are trying to gauge how the refractive restart program has helped expand within that market.

Certainly! The refractive restart program was designed to support surgeons reopening their practices post-COVID. Many surgeons were previously strong users of our ICLs. The goal of the refractive restart was to help surgeons attract patients by offering a free bilateral implant for patients. As a result, many surgeons wanted to improve their familiarity with our lenses and prepare for the introduction of EVO while providing patients with visual freedom. We've seen a substantial increase—over seventy percent sequentially in units when including those provided free of charge. So we've had a lot of satisfied patients and surgeons excited about the prospect of EVO entering the U.S. next year.

That’s very helpful. I also wanted to cover the losses on the regulatory front. Do you anticipate that it will require a panel for the EVO lens approval in the U.S.? And could you remind us about expectations for starting the process for assuming what would be a supplemental filing for EVO here in the United States? Thank you and again, congratulations on the quarter.

Regarding the class three medical device approval process, we are on a panel track. However, our belief is that this is a safety study with clear endpoints, thus we don’t expect a panel review. The FDA will ultimately decide, but we believe that if we can present the critical information supporting approval, we could go direct to approval. Once the EVO family of lenses receives FDA approval, we will immediately begin discussions on establishing the EVO lens in the U.S.

Your next question comes from Ryan Zimmerman. Please go ahead.

Thank you, and congrats! A couple of questions. The first is regarding Japan, which is performing great—it’s nearly half the size of China in terms of sales now. Can you help us understand what your market penetration looks like in Japan and whether your view of the market has changed as Japan has outperformed in terms of unit growth?

Japan is an exciting story for STAAR. We have been effectively collaborating with key opinion leaders within the Japanese society. With the decline in laser vision correction procedures, which once were above four hundred thousand, we are now seeing the number of laser procedures drop to around eighty to one hundred thousand. Our market share in Japan currently exceeds thirty percent, and we continue to work with local practices and university colleagues focused on evolving refractive practices.

One note about Japan is that our injector revenue is included; that may contribute to your perception of overall growth in Japan.

That clarification is very helpful. Thank you! As a follow-up to Anthony's question, could you speak to the seasonality in China and expectations for the durability of that dynamic in the fourth quarter? What are your expectations for continued growth?

We previously discussed our growth projection, estimating around thirty-five percent growth in the Chinese market. The third quarter recorded thirty-three percent growth in sales to distributors. Demand in China continues to outpace our sales, which is indicative of a favorable market position for us. We expect continued growth in the fourth quarter while adjusting for potential inventory depletion in Q3. Our overall projection remains for approximately forty-three million in Q4 revenue amid concerns about COVID variations experienced in the Middle East and India, where the recovery remains slow.

I appreciate that, and on FDA submission timing, are you still anticipating a few months on the market in twenty-one, or at least expect some revenue from EVO in the U.S. by the end of the year? Thanks for taking my question.

We would love to have EVO revenue in the U.S. as quickly as possible. However, we are cautious. It is essential to go through the FDA's approval steps. We are preparing diligently, operating as though we could go to market at any time.

The next question comes from Andrew Brackman with William Blair. Please go ahead.

Good afternoon, and thanks for taking the questions. Karen, may I revisit a point you made earlier regarding patients making ICL decisions more quickly? How should we anticipate this trend continuing over the long-term? Additionally, are there other macro changes you've witnessed in this current recovery period?

Yes, we have weekly calls with our global representatives about market momentum, COVID, and other business indicators. One trend is that, due to the necessary sacrifices made during the pandemic, many people are eager to improve their quality of life. This sentiment is particularly strong among those who struggle with glasses and contact lenses, and they express a desire for immediate action. Notably, those who previously took time to consider their options are now more decisive. This shift is affecting not just vision correction procedures, but also trends in plastic surgery and other aesthetic treatments. We believe that people have a strong desire to improve their situations, prioritizing vision care highly.

That's very informative. Shifting gears, you mentioned a market share goal of around twenty percent in China first. Is that your working assumption? What's the longer-term target going forward?

Yes, we are focused on achieving twenty-five percent market share. The momentum we have is significant, and we will make every effort to meet that target sooner. It's essential for us to meet all the demand we anticipate in China. Our outlook remains aligned with aiming for increased market share.

Thanks very much.

Your last question comes from Bruce Jackson with Benchmark. Please go ahead.

Thank you for taking my question. Could we discuss the seasonality in Europe during the fourth quarter? Typically, this quarter sees sequential growth, but with COVID-19, some markets may face increased lockdowns. Additionally, you mentioned that the launch of EVO will be controlled. How do you perceive these dynamics affecting sequential sales growth in Europe for Q4?

Yes, just a reminder, last year we switched from our typical sequential growth from Q3 to Q4, where Q3 became our strongest quarter. China being a big driver for our units and a busy season created a different dynamic. This year, we expect Q3 to be the best quarter, with Q4 showing strong double-digit growth compared to the prior year. However, we need to remain cautious and be prudent as we assess market conditions globally and monitor for any challenges due to COVID restrictions. We analyze these dynamics daily to ensure we are prepared for the fourth quarter. Thank you for your participation in our call today. We look forward to speaking with many of you in the days and weeks ahead. We appreciate your interest and investment in STAAR. Please take good care and all the best to all of you.

Thank you for joining today's conference call. You may now disconnect.