STAAR Surgical Co (STAA) 2003 Q2 法說會逐字稿

Good afternoon, Ladies and Gentlemen, and welcome to the STAAR Surgical Second Quarter 2003 Earnings Conference. As a reminder, this Conference is being recorded today, Thursday, July 31, 2003. I would like to turn the Conference over to Doug Sherk with EVP.

Thanks, Operator. Good afternoon everyone and thank you for joining us this afternoon for STAAR Surgical Call to review the Second Quarter of the end of July 4, 2003. If you have not received a copy of the results of the news release issued at market close today and would like one, please call 415-659-2285, and we'll send you one immediately. Additionally we have arranged for taped replay of the call which may be accessed by phone. This replay will take effect one hour after the call's conclusion and remain in effect until tomorrow night Friday, August 1, at 11:59 P.M. Eastern time. The dialed number to access the replay is 800-405-2236 for international callers 303-590-3000. Use pass code 544651 # sign. In addition, this call is being Web cast live with an archived Web cast available. To access the Web cast for the STAAR's Web site, www.staar.com. The Web cast archived of the call will be available until the company's releases the third quarter results. Before we get started during the course of the conference call, the company will make projections or forward-looking statements regarding future events, including statements about domestic sales, the planned commission of SEC filing for contact lenses and the company's belief in revenue and earnings for the full year ending December 31, 2003 and December 31, 2004. We wish to caution you such statements are predictions and involve risks and uncertainties. Actual results may differ materially. Factors that may affect actual results are detailed indeed filings with the SEC, including most recent filing on Form 10-Q and 10-K. The factors underlying the forecast are dynamic and subject to change. Therefore, the forecast are to be only as of the date they are given. The company does not undertake to update them. However, they may choose to do so from time to time. They will update the investing public. Now, I like to turn the call over to David Bailey, President and CEO of STAAR Surgical Company.

Thanks Doug and good afternoon, everyone. Thank you for joining us for STAAR Surgical Second Quarter Conference Call. With me today is John Bailey, our CFO, and Deborah Andrews, our Global Controller, along with Nick Curtis, Sales and Marketing, VP for the United States.

Today, I am going to start off the call with an update on our progress during the second quarter. John will review financial performance and then we will open up the floor to take any questions.

Once again, our financial performance during the quarter was led by the continued growth in our international sales, which was highlighted by 38% increase in the ICL unit sales year-over-year. We are pleased with the progress we continue to make and believe it illustrates our commitment to successfully executing our long-term strategy. Total product sales grew nearly 8% to almost $13 million from quarter 2 '02 levels. For the fifth consecutive quarter, our gross profit margins improved to 54.5%. Our Net loss increased slightly versus quarter one to loss of 6 cents per share, reflecting the ramp-up of investment in R&D and expenses related to clinical and regulatory issues, primarily the ICL filing. Although we are still showing operating loss for the quarter, it was $2 million less than the operating loss in quarter 2 '02.

During the first half, international sales grew 19% versus the same period in 2002, and represented approximately 54% of total revenue. We believe that we are seeing a meaningful ramp-up of European Toric ICL sales which helped generate this growth. We continue to generate increased international operating efficiencies, which resulted in increase in international gross margins. International gross margins were up 12% from the second quarter of 2002 and up 8% overall when we exclude the impact of foreign exchange. In Germany, which remains our biggest market beyond the U.S. after adjusting for exchange gross margins grew by 8% from the second quarter versus last year's second quarter. In Australia, one of our fastest growing markets, they were also up significantly. Sales in Germany were up 28% from '02 levels and ahead by 32% for the sixth months year-to-date. Exchange effects contributed significantly to this outstanding growth, but even discounting this, there was growth in the business net of currency movements.

On the domestic front, we faced another challenging quarter. However, we believe we are beginning to see a bottom out on this sales decline. Sales in the U.S. were down 3% from '02 2002 -- sorry quarter 2, 2002, which was marked improvement over prior quarter-on-quarter comparisons. 11% decline quarter 4 '02 and 6% decline in quarter 1 '03. Critically, U.S. sales were up by 3% in quarter 2 versus quarter 1. We have committed to turnaround the U.S.-based cataract business during the second half of this year. To do this we need to gain traction for IOL sales in this market. Although not yet occurring across the board, we are beginning to see strong trends in our specialty (inaudible). The column of and the historic silicon products which tend to both be premiumly priced. Modest growth trend we reported in quarter one for these products has accelerated significantly in quarter 2 comparison versus quarter 2 last year with unit growth at 31%. Each of these unique products is trending up very positively, not only in yearly revenue and yearly shift comparisons, but also in sequential comparisons. This growth was partially offset by decline in silicon plate (inaudible) sales due to market decline coupled with some delivery issues. The same issues also hindered the growth of our three-piece silicon franchise and are frustrating. All efforts are being expended to solve the issues during quarter 2. We firmly believe we have a reversed solution to the plate delivery issues and expect to gain back some lost business in the third quarter.

Overall, we expect to see silicon lens growth in the second six months of 03' as compared to the first half. Regarding to the column three-piece injector, our target date for launch has been delayed from September to November, reducing anticipated positive sales impact in '03. This system, as I reported in the past, has been very challenging to develop due in part to the unique and proprietary characteristics of the column material. We have, however, made huge progress and are confident of launching the injector that gives acceptable delivery this year. Despite this, all indications point to a positive sales trend emerging in the U.S. market during the second half. I want to reiterate that the issues that we are having with the injectors have been identified, targeted and are solvable. As we have stated previously, the growth in the U.S. will underscore acceleration of future company's profit growth. Despite all of the good news on the ICL and there has been much of it, we remain determined to rebuild and fully exploit the potential of our cataract business in the U.S., although this should be work in progress, I believe the numbers are indicating that we are beginning to turn this into reality. During the quarter we continue to strategically control and manage expenses, but had planned increases in two specific areas. With the ICL in the near, we were determined to deliver strongest possible file to the FDA. This clearly had a significant payback in terms of achieving an expedited review. As a result, R&D expenditure during the quarter was up 16.7% sequentially. We plan for this expenditure to continue during the third quarter at a rate roughly comparable to second quarter as we move toward panel and prepare accordingly.

The second cost factor was our work on improved injectors for IOLs. Having identified all of the issues at hand, we took a conscious decision to accelerate spending in order to get the issues behind us and move our IOL business forward at a faster rate. Conversely, I am therefore pleased to note that once again we decreased our general and administrative expenses both year-over-year and sequentially. As you know, we have made a commitment to our shareholders that we will diligently work to collect all monies due to the corporation. Earlier this month, we were pleased to announce we had collected in full $2.3 million loan owed to STAAR by a former officer of the company. This repayment, along with successful private placement that we completed during the quarter allowed us to strengthen our financial platform tremendously.

We also want you to know that with the appointment of new orders in mid-June, the new firm McGladry and Pullings have begun their review of historical financial reporting, including the past accounting treatment of loans to officers and directors that were granted as far back as 1991. I would emphasize that there have been no new loans to officers and directors under the new management team. At present, the results of this evaluation are unknown. McGladry and Pullings has raised three issues they are working closely with BDO to resolve. They are complex, extremely so, but I'll try and elaborate. Over the past two years, as we have communicated often, the company has worked closely with our auditors and legal advisors and taken exceptional steps to secure and collect these loans. As a result of our efforts we collected $5.2 million of the total $7.2 million in loans to former officers and directors and are aggressively pursuing the remaining $2 million.

There are three issues. In 2000 and 2001, we booked reserves against income that resulted in $3.6 million charge against earnings and we may or may not have to reverse those reserves.

Secondly, we have treated as interest income approximately 321,000 in interest from these loans that was collected in cash by STAAR and there is now a question as to whether this interest income should be treated in a different manner.

Thirdly, while legally the loans were structured and treated by the company as full-recourse loans, there is a question as to the characterization of the note as non-re-cause from an accounting perspective. This characterization in turn brings into question variable accounting treatment and calculation of imputed compensation expense. We recognize this issue is confusing and as of this afternoon we have given you the best available information we have on the issue. However, we have been assured by the new auditors that if there is a charge recorded as a result of their debt decision, it will be a non-cash charge and related specifically to former officers and directors. We will report to you on this development as soon as the decision is reached. It is not an operational -- it is not operational in nature and should not detract from the strong operational progress we are making at the company.

Moving on to our progress. With the successful collection of loans to officers and directors as well as proceeds from the private placement, we now have the cash to ensure us effective execution in the U.S. that the ICL will represent the next paradigm shift in refractory surgery. While we continue to have significant and continued interest in partnership opportunities and are fully exploring that interest, we are as we speak actively executing a plan to market the ICL ourselves within the U.S. For competitive reasons, we will not be discussing the specifics of this plan, but we are actively engaging the organization to execute against it. We continue to make steady progress growing in international business and are certainly improved our cost structure. We also now believe that we have begun to see the beginnings of an uptrend in the U.S. business based on the growth achieved in quarter 2 this year versus quarter last year. We expect to see more improvement throughout the second half of the year. With our core strategy firmly aligned, we will continue to focus significant resources on the commercialization of the ICL and the Toric ICL.

Let me quickly update you on some exciting developments that have occurred during the second quarter. The one of the most exciting news of the quarter was the FDA's acceptance of our PMA for the ICL. On May 8, 2003, we filed the PMA. On July 1, we received notification of the FDA not only accepted our PMA, but also granted expedited review status. This expedited review covers myopia in the range minus 3 to minus 20. Without going into details, I can tell you we are already experiencing the burden of work that results from an expedited review. We believe that this action by the FDA further underscores our ability that the ICL represents the next paradigm shift in refractory surgery. With all of this activity, I'm confident we will exceed our stated goal of getting to panel by November of this year. Please be aware the September panel has been cancelled and tentatively rescheduled for early October. Also during the quarter 2, the ICL was the subject of two peer review journal articles, both of these articles compared various post-operative outcomes in ICL patients to those in Lasik patients. We are pleased with the results of these studies indicated that the ICL post operative clinical outcome was significantly better than LASIK. These objective studies underscore the results of our three-year data which showed 99.4% patient satisfaction rate.

In July, a new study compared ICL to Lasik and demonstrated the patient satisfaction with the ICL as a result of sharper image and less haze than seen with Lasik. This is well demonstrated on STAAR's new Web site which I hope you will visit. Remember, what you see there will be used by ICL Doctors as they counsel patients on the merits of the two procedures. As our research base grows we are increasingly excited about potential for the ICL and the Toric ICL. We currently have new ICL approvals pending in Taiwan and Australia and we are also working hard to gain extended approval from the Toric ICL in both Korea and Canada. Our stated goal is for our international refractive business to double in 2003 versus prior year.

Approval of the ICL in the U.S. would allow us to pursue significant revenue opportunities. Our most conservative estimates assume marketing by STAAR and minimal market penetration rates indicate that we could see revenue impact of $47 million per year. Once approved, we expect to launch a dynamic focused marketing effort to support products within the U.S. market. This will include a standardized training program as we view it international along with recruitment of direct employee proctors to ensure the systematic training programs are successfully ruled out. Overall, we are delighted with the progress we are making with ICL domestically and internationally. We know we were the first to submit a PNA to the FDA and continue to believe that we will be the first to market with phakic lens in the United States. We also believe we have the only phakic lens to be granted expedited review and believe that compared to the nearest competitor we have third-generation technology that is compatible with modern-day surgical techniques. We do not envision doctors will despite strong marketing be long-term supporters of a product that takes them back 15 years in surgical technique, takes three times longer to perform and gives displeasing outcome for patients. In summary, the second quarter was a success of the quarter for STAAR. We continue to make significant progress on our roadmap to commercialization of the ICL in the United States. At the same time, we build additional market share for the ICL and Toric ICL internationally. A base cataract business is looking much stronger with accelerating sales trend on the new technology IOL in the critical United States market. Our gross margin improvements are solid. With opportunity for acceleration as cataract market share builds in the U.S., all of these achievements resulted in increased in STAAR Surgical from the investment community with increased analyst coverage and critically the entry of STAAR into the Russell 2000 Equity Index. We look forward to sharing our continued progress with you throughout the year. At this time, I am going to hand over to John to recap in more detail on the financials.

Thank you, David. The financial fundamentals of the business continues to improve. Gross profit margin improved for the fifth consecutive quarter, SG&A expenses for Q2 and year-to-date 2003 were favorable to prior year. Our continued fund and grow R&D investment, interest expense and debt have been significantly reduced, working capital management is on track. Manufacturing costs have been favorably impacted by yield and efficiency improvement and the company today has over $10 million in cash.

Let me briefly recap year-to-date financial results. Net sales for the second quarter were $12 million 950, up 7.8% over prior year quarter. For the year-to-date period the sales were $25 million 729, increase of 8.8% over the prior year. In the U.S. market sales declined 3% during the quarter and 5% for the year-to-date period. The rate of U.S. sales decline continues to diminish as David mentioned earlier. International sales grew 19% for the quarter and 23% for the year-to-date period. Sales in our Germany subsidiary were favorably impacted by effect of currency. The ICL and Toric ICL grew 38% in the quarter. STAAR sales increased 21% in Q2, flow Aqua Flow sales declined to 9%. Specialty lens sales increased to 18% and silicon sales declined 19% during the second quarter. For year-to-date period the ICL and Toric ICL grew 42%. Target sales increased to 34%, and AquaFlow sales declined 16%. Specialty lens sales increased 11 and silicon lens sales declined 15%. Gross profit excluding royalty income for the quarter was $7.1 million, 1.1 million or 19% increase over prior year. Gross margin was 54.5%, full six-margin point improvement over prior year quarter. Year-to-date gross margin was 54.4, 5.5% improvement over the prior year year-to-date period. Gross margin was the result of reduced cost structure in manufacturing facility, production yields and efficiency increases and significant growth in the high margin ICL product line. These improvements were partially offset by the unfavorable mix due to decline in the U.S. IOL business, which as we said before operates with a significantly higher gross margin percentage than international IOL business. General and administrative expenses in Q2 were 2.2 million, 3.5% below the prior year. Year-to-date DNA expenses were 4.5 million, 4.2% favorable to prior year. Reduced legal expenses and professional services and generally tighter expense controls contributed to the favorable performance in G&A. Sales and marketing expenses during the quarter were 4.4 million, 1.8 million below prior year. For the year-to-date period expenses were 8.6 million, less than 1% increase over the prior year period. R&D, clinical and regulatory activities increased in the second quarter. Spending was 1.4 million, up 400,000 or 41% over the prior year period. Accelerated activity during second quarter included the completion and submission of the U.S. ICL clinical study, Toric ICL clinical activity and lens insertion system for programs.

Total SG&A and R&D spending for the second quarter was 8 million, excluding the effect of $1.2 million restructuring charge in 2002, results were 240,000 or 3% over prior year. On the year-to-date basis, total SG&A and R&D was 15.6 million, 380 or 3% increase over prior year. Total operating expenses excluding R&D and below prior year for the quarter and the year-to-date periods reflect the company's success in reorganization and in cost reduction activities. The increase in R&D spending is result of significant activities associated with successful submission of U.S. ICL clinical studies. For ICL clinical programs in a broad and in-depth review of STAAR's portfolio of lens insertion system. Operating loss of the quarter was $1 million compared to $3 million in the prior year. On a comparable basis and excluding restructuring charges, the operating loss in prior year quarter was $1.8 million. The year-to-date operating loss was $1.6 million, $3.1 million favorable to prior year. On comparable basis, and adjusting for restructuring cost prior year-to-date operating loss was $3.5 million. Excluding restructuring, the operating loss for the quarter and year-to-date period was $800,000 favorable in the quarter and $1.9 million favorable to the prior year year-to-date. Other mechanic and expense for the quarter was $800,000 favorable to prior year due to reduction in interest expense of $100,000 and favorable exchange gain and losses comparison of $500,000.

For the year-to-date period other income and expenses was $1.1 million payable due to reduced interest expense interest income on notes collected from prior officers and directors and favorable exchange gains and losses. Again, as in prior quarters, the company reported no income tax benefits on U.S. entity net operating losses. Net loss for the quarter was $1.1 million or 6 cents per share. Net loss for the prior year quarter was 23 cents per share. On a comparable basis, net loss in the prior year was 16 cents per share, adjusting for restructuring cost of $1.2 million. For the year-to-date period, net loss was $1.9 million or 10 cents per share. Net loss for prior year-to-date period was 29 cents per share. Again, on a comparable basis, the net loss in the prior year was 27 cents per share excluding restructuring cost and one-time U.S. income tax benefit. Cash flow from operating activities was $500,000 negative in Q2, which was $300,000 favorable to prior year quarter. Significant yearly insurance payments and the ASCRS meeting were the primary factors for the negative cash quarter. Cash flow from investing was $700,000 positive, $1.1 million better than prior year and primarily due to collection of notes from prior officers of the company and $.7 million in reduction in spending for property, plant and equipment. Let me do that one more time. Cash from investing activities was $700,000 positive in the quarter. That's $1.1 million better than prior year and that is collection of notes from prior officers of the company, up $700,000 and reduction of spending for property, plant and equipment at $200,000. Cash from financing activity was $7.8 million positive, $9 million from private placement, $1 million proceeds from stock options and $2.2 million used to pay down debt. Net increase in cash for the quarter was $8 million. At the end of quarter 2, STAAR had $8.4 million in cash and $3.1 million in notes payable. Clearly the first half of 2003 has seen significant improvement in fundamentals of the business both from P&L operating perspective and on the balance sheet. As mentioned above, cash at the end of quarter 2 was $8.4 million and today after the collection of $2.3 million in notes, sits at over $10 million. STAAR's total debt is approximately $3 million and at very favorable interest rates.

I will spend a minute on some guidance for the balance of the year. Previously forecast high single digit growth for the year based on sales of $47.9 million in 2002, we are still comfortable this estimate. We had given guidance which indicated the company would be profitable at some point in time in the second half of the year. Additionally, we had indicated annual incremental spend of $2.5 million would be required to launch the ICL and take it to market in the U.S. With the acceleration in and the optimism with the approval process in the U.S., we have taken the decision to accelerate this expenditure. This strategy will add $1.1 million in sales and marketing expenses in the second half of 2003. This will ramp up in the third and fourth quarters of '03. For 2004, our estimate for the incremental expenses for the ICL remains the same. As result of this change, and the acceleration of the ICL launch expenses we will not achieve profitability in the second half of 2003 as previously indicated.

Now, some investor relation highlights. STAAR will be presenting at Adams, Harkness and Hill Summer seminar on Tuesday August 5th in Boston. We will be visiting various investors around the country the following week. I would now like to turn back over to David.

Thanks, John, very comprehensive. I would now like to open up for questions. I will summarize as usual with milestones, which investors can use to judge performance for the quarter.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press * followed by 1 on your touchtone phone. If you would like to decline from the polling process, you may press * followed by 2. You will hear a prompt acknowledging the selection. Your questions will be pulled in the order they are received. If you wish to speak (inaudible). Our first question comes from Joanne Rich (ph) with Hazan Gerard (ph). Please go ahead, ma'am.

Good afternoon, everybody. So many good questions. So many questions to ask. First, could you just address the decline in AquaFlow sales? We expected it would be a little bit more positive this quarter.

Yeah, as I said in the main script, this is a great product with excellent outcomes in the clinical area. But, it needs dedicated results to maintain momentum or goal because the learning curve is relatively steep. Just to recap year-to-date units were down 16% versus last year with a much lower rate of unit decline, only 3% when we compare the quarter-to-quarter comparison. The problem has been over the last three months our already limited proctor results for Aqua Flow has been stretched and somewhat distracted with other critical activity. As a result a surgeon proctoring a key component of the sales mix has slowed. This is particularly critical as target surgeon for Aqua Flow does not immediately overlap with our regular customer base. We have plans to realign focus, but only after we have turned the corner on our IOL business in the U.S. For the moment field evaluation of new injector system and recruitment of training and sales reps is taking priority. The clinical evaluations of the new injector system allowed me, for example, to say we were confident we had a robust solution to the hap tic delivery. So, that's paying off as dividends. So, what we've done Joanne, is realigned objectives on Aqua Flow and our short-term goal is to halt decline on AquaFlow in the second half. That is a clear goal just to stop the decline. Then once we get over these injector evaluations and free up proctoring resource, we will put more put more push behind AquaFlow. I should point out that with the ramp-up of ICL that John indicated, will be bringing in a proctoring force which we started to recruit now. And although that proctoring force is going to be directly focused on ICL, it will give us some way to get increased proctoring on AquaFlow. But there is no doubt that this quarter highlighted the pull we are getting on the base business and that base customers and AquaFlow which is a different customer base. So the short-term plan is to stop the decline, it is disappointing but it is understandable given our priorities that we have set.

Okay, what is the chance of a collimator injector getting delayed? Not in September to November, but from September to February or some later date?

I think that is very low. I would like to say in my text, we have made a huge amount of cold war, I'm very cautious to admit, because it has been challenging. I am solid with revised dates and the whole R&D group are behind that and we've actually added some additional results, as you saw both from an expenditure point of view, both variable expense and people. To make sure we get over those hurdles. You can never be 100% sure, but I am very confident with those and we've added resource and increased expenditure to make sure delivery is absolute.

Okay. Two more questions and I will get in queue. The first is you said you think you will do better than getting on a November panel. Is that a round-about way of saying you believe you are on an October panel?

I don't know, Joanne, I am just very confident with having gotten the expedited review and all the activity going on which, as I said, there is a lot. And I will be the estimate that we always talked to, which is November. Nothing is firm yet. That October panel is provisional, as indicated on the FDA website. We are pulling every stop out to get to an earlier rather than later panel review. Nothing is confirmed, however.

Okay. Finally, I recognize the gain for the second half of the year, high single digit in that revenue. You will not get to break-even during the year. Could you please be more specific what to expect for the third quarter and what to expect for the fourth quarter?

I think in line with the previous guidance, we've tried to stay fairly general and give everybody a framework to work with rather than specifics for the individual quarters. And I think I want to stay with that guidance, Joanne. I think based on what we've said the low single digit growth, the fact we're going to increase sales and marketing by 1.1 million over the two quarters, it will ramp up more in fourth quarter. We expect flat AquaFlow, that's the goal. And that should give people a good range to work within.

Okay. Thank you very much.

Our next question comes from Kate Sharadin. Please go ahead, ma'am.

Hi, everybody. What was the FX contribution on dollar basis, John?

For the quarter?

Yeah.

We think the FX was something right around a million dollars in the quarter. Mostly in Germany, if not all in Germany.

Okay. Maybe just sort of taking Joanne's question giving us something to work with. We have expense information, but I think most of us are probably looking at gradual increases in gross margins. Can you give us an idea of where you might exit and the next couple of quarters fall out?

Clearly up.

While John looks it up, I want to indicate ICL sales are not particularly affected by currency because it is out of Switzerland and it is dollar invoicing.

Uh-huh.

Just to make that point.

Most of the currency is in Germany and not ICL related.

Right.

Well, we're going to go up and if you look at the first half of the year, Kate, we're going to improve on that by a couple of percentage points somewhere between 2 and 3 percentage points.

By end of the fourth quarter exiting the year up from here?

Right.

Okay. That will be helpful. And just curious on the ASP, decline in ICL, what are ASPs doing specifically?

ASPs are doing reasonably well because as I said specialty lens are growing which command a much higher price. So, ASPs overall in the U.S. are holding up pretty well. So, gross margin is improving in the U.S. Uh, ASP for ICL is actually getting pushed up slightly. As we start to sell more Toric ICLs, we will sell for a premium. But, overall on silicon lenses, ICL is holding up reasonably well. We indicated we were losing market share on the basulense. The specialtilenses are taking it up in the region of in the region of 30% premium.

Okay.

Even 35% for silicon and about the Samot Toric Silicon.

Okay. David, you made a pass at the $47 million a year ICL potential opportunity. I was wondering if that was sort of buffer years or once you get to out of the gate and then on a run rate per year and then if that is the case, when do you get to that point after the rollout?

I think that $47 million is consistent with the presentation I have given to investors join the potential at low penetration rates, .6 and .8 we have talked about. I think that is obviously a ramp-up number. In terms of an absolute growth in ICL, now we have -- we will wait to give more guidance. That is a ramp-up number. As international, we will go for a steady ramp-up over time with solid outcomes. That is highly successful in the markets where we've done it. From the get-go it is going to be faster in the U.S. given the interest we are seeing in the product assuming of course we do get approval.

Okay. Last thing and I will leave. I'm curious about the trend in Europe specifically with Toric and was wondering with the Toric are you gaining new surgeons now that you have that to offer or is it sort of the same people? I talked to a couple over there, not a lot, could you give us some feel for that?

Yeah, first thing I would say is we have the same mark in December. There is a 60-day lead time to fill an order because that's the delivery on it. So, effectively you are only launching toward late first quarter. Against the orders you are generating, we are seeing some trade-up where customers are having the Toric ICL to their usage and that's replacing ICL. But, I do think we are starting to see new customers being attracted to the ICL because of the dual benefit, being able to direct two procedures in one.

Our next question comes from Jayson Bedford with Adams, Harkness and Hill.

Any word on Taiwanese approval for the ICL? Or what is the timeline there?

That is a great, timely question. What -- first off, I am very frustrated with Taiwanese approval because we expected it before now. But, we were able to actually get a meeting with the Taiwanese authorities or our representative was, last week. Yeah, late last week. And it was really clear during that meeting, two things were very clear. One was that the STAAR issue, which I hadn't factored in from this point of view, has taken a toll on the health authorities in Asia with Ministry of help being in turmoil and numerous headcount changes. That has delayed a lot of the processing of applications in Taiwan, in particular. don't know the details in Korea because we didn't have a pending approval during this process. We had already gotten ICL approval. So, that's caused chaos and I know there are a number of companies specifically in ophthalmology that are in the same situation. And during that meeting, we met with a pretty senior person, a section chief, and he confirmed SARS and some process changes relatively minor had caused delays in the approval process for a number of products, including the ICL. His estimate was the average delay and I repeat average delay was at least six months. So, based on that meeting where we went through the detail of what they had and anything else they needed, which was fairly limited, we would revise our approval date to late this year. So, that really is quite most recent news, Jayson.

Okay. That's fine. Then, when do you expect to hear from the FDA regarding a panel meeting, if you were to be on the panel meeting in October, when would you expect to hear?

Sometime about the third week of August.

Okay. Great. Finally, you mentioned your intention to distribution of the ICL yourself or have STAAR do it in the U.S., have you stopped discussions with partnerships or are you still open to that?

No, as I said in the main text, there is considerable interest and we continue to explore that interest. But, we're locked and loaded on a direct campaign. We're actively recruiting and hence we have added in additional expenditure which I think is the right move since we got the accelerated review.

Okay. Great. Thanks, guys.

Our next question comes from Vivian Wolf (ph).

Should we read into that that there is indeed a possibility of getting final approval on that before your-end in the U.S.?

Vivian I couldn't be that specific. I really couldn't be that specific. There is tentative panel date in October. We've got accelerated review. We've got frantic activity going on.

You have optimism.

We'll see.

Optimism , that's good. One question, there is update from CMS on some of the hospital rates today. I wasn't -- I haven't seen anybody write about whether that affects the IOL business, but do you have any information on that?

I'm not familiar with that, Vivian. We will have to look at that and get back with you if we may.

That was just out earlier today. I haven't seen anything on the ophthalmic side.

Nick and I are looking at each other and we are not aware of anything and we will be happy and look at that and give you a comment after.

Thanks. I will come back in the queue.

Ladies and gentlemen, if there are additional questions, please press * followed by 1 on your telephone keypad. As a reminder, if you are using speaker equipment, lift the handset before pressing the numbers. One moment, please for the next question. Our next question comes from Larry Huminvich (ph) with HMTC. Please go ahead.

Good afternoon gentlemen. A question for Nick. I didn't realize he was there. Hi, Nick. Can you give us any update on the marketing and sales front? I know you have been working hard to extremely improve sales and marketing effort in the field. Any quantitative data points you have for us, Nick?

Yeah, I'm having a hard time hearing you, Larry. I completed my relocation from Chicago to California a couple of weeks ago. That's positive. I'm here now for good. We've restructured the sales and marketing department and in fact we physically moved the departments which really I think from an accountability and productivity perspective, really bring the departments together is very positive. We have a new head of marketing and new director of sales which really is helping us provide better support to regional managers in the field. As a result of the ICL, there is so much excitement surrounding that it has created a keen interest in our company. So, we've had a lot of people coming to us that are interested in careers at STAAR. I'm looking to continue to strengthen the marketing department with specific strong product directors in some of the product areas so we can really focus in the various product areas and have someone accept responsibility for those specific areas. The relationships as far as between corporate management and field management, I think is really very much improved. We've spent a lot of time really trying to develop that relationship as well as to really articulate our goals and sort of align our goals much more in the field. I think that we have really made good progress in that regard. In fact, I'm really encouraged in that regard and feel like the region managers are really revitalized and pretty committed to growing their business. They realize with the ICL strong profitable company is critical to their futures and long-term success there. So, you know -- shape

I think as I said, Nick grew the sales quarter modestly 3%. That was growth. The rate of decline versus prior year quarters has decreased significantly, as I indicated. I think Nick is making a lot of changes and that underscores it. The other thing I would say to investors. Nick will be in attendance at some of the meetings next week so people will have a opportunity to question and get into that detail more.

Nick, follow-on question. Can you tell us who the new hires for director of sales and head of marketing are? Can you identify who the new hires are you talked about, new director of sales and the director of head of marketing?

Yeah, Darcy Smith and Director of Sales, Rick Parel.

Darcy was with the company, Is Rick a new addition?

Rick was with the company and has strong sales management team.

You promoted from within?

Yeah, and restructured when we put the departments together. It has increased our efficiency and really we're not having to go out and incrementally spend in certain areas. We looked through and have been pretty strict with our budget.

Okay. Thank you.

Our next question comes from Van Brady (ph) with Presidial Management.

Dave? This is Van Brady. Dave, a question for you that came up as a result of my having a conversation with one of the analysts that has been very involved in Lasik early on. I asked him about the procedure. He felt that many of the doctors that have been comfortable with Lasik have kind of relied heavily just what risks there were long term in introducing a foreign body in the eye, particularly in as much as there hasn't been long-term results. Is this -- how much of an issue is this in your dialogue with practitioners, et cetera for the long-term uptick of the ICL?

Yeah, hi, Van. Great question. Unfortunately, I think you will get different answers from different people. I will have a shot at that. First off, if you are going to put something in the eye, you've got to be sure it is highly biocompatible and not going to create inflammatory reaction. ICL is made from a perfect material, what we regard as perfect material. The real comparison is with the when you attack the cornea, which is anatomically perfect, it might not have enough refractory power, but functioning perfectly. What are the risks associated with that versus the risks of putting an implant in the eye? Now, from STAAR's point of view, we believe we have the best technology, the best lens and the best material to minimize the risk of putting a lens in the eye. So, certainly our clinical data shows that. Putting aside the patient satisfaction level in terms of the quality of the outcome is in the fact people can be more lines on the chart than they could often with their glasses before, over 50% fall into that category. You have -- we have clearly looked during the clinical trial at the inflammatory reactions side effects, complication profile and we feel very good about those.

Any surgical procedure has risks. And can result in complications. The real question is what is the balance of risk versus benefit. That has to be weighed for both cornea-based procedure and intraocular procedure. There is significant movement in ophthalmology that says refractory surgery will go inside the eye of one form or another surgeons are very keen to look at implants going in toward the eye rather than staying on cornea. It is amazing five years ago corneal-based procedure was when I introduced LASIK in Europe, corneal-based procedure was used as radical. Ophthalmologist were taught to leave the cornea. There is concern of it going inside the eye. We have a well-performing product which has low complication profile versus the benefits. Therefore, I think people will choose to do that. I think people will -- once you get a phakik implant approve din U S people will have a comparison and a option to the current corneal procedures and they will be able to see in their patients the differences.

I think, as I have said, intraocular procedure with an ICL will hold up very well in terms of a low-complication profile and excellent outcome. a long answer to your question, but hopefully that gives you a feel of my opinion on that.

Thank you.

Our next question comes from Vivian Wolf. Please go ahead.

Hi, this is (inaudible) and Dave. Nick, with the injector delayed until it looks like November, it is fair to say most of the growth or all the growth comes from the US market? If I look at the projections you had given earlier for international refractive business to double, if it's running -- what was it running, in the 40s year-over-year, up 42% year-over-year -- I mean, for you to make a doubling implies very healthy growth rate coming out of Q4. So, just wondering if you could both comment on those two assumptions?

Let -- related to your question, let me reiterate and then Nick may want to comment. We do expect some growth in the base IOL business in the US in the second half versus first half. That growth is going to come from a continuation of a positive trend on the specialty lens and then stemming of the decrease on the silicon specifically the plate and actually gaining back lost business on that. That's going to come because we do have a robust fix to the injector issues which is going to drive incremental. The injector delayed, it really gives an acceleration to the growth rate on the specialty lense because it makes us competitive with the (inaudible) columner. The growth rates I reported are based on the one-piece columner. You will increase dramatically the growth rate once we get that injector.

Is the new injector on silicone you introduced in late in Q2, is that what kind of response are you seeing from that in the market?

As I said in my text, we introduced that and put that injector and the one for the plate we had inconsistency. We have to fix that inconsistency (inaudible) on board for you to see the merit.

On both, on the silicon and columner?

Silicon three-piece and Silicon for the plate. We have a fix and expect that to give us real growth on silicon in the second half. We also expect continued growth with columner plate and then that will get accelerated when we come out with the three-piece injector which is the one that has been delayed. So the real had been delayed on three piece injector (inaudible)

On international, Dave, are you still -- the fourth quarter has to be a hell of a quarter to double international refractive business.

Yeah, we are expecting a lot from ICL internationally. We have put a lot of work in and had good growth in the first six months despite the fact we know refractive procedure slow down in Asia because of the SARS thing. We also know that it slowed down in some of the hotter European countries like Spain and Italy. But that is starting to pick up. We also know that done reasonable ly well in some markets to bring them back like South Africa. We're taking some steps in two countries in particular, Italy and France where we've had growth, but know we've been limited because of the distribution channel we're using. So, we've actually started to open up additional channels in those two countries so the product can reach full potential. So, yeah, we've got a lot going on and expecting a lot. But the interest in the product and the results we're getting now with repositioning and the before and the fact we have the Toric all bode well for growth. Whether we'll get exactly a doubling remains to be seen. We'll be pushing hard to get there.

Okay. Fair enough. Thank you.

Ladies and gentlemen, if there are final questions press the * followed by 1 on your telephone keypad. As a reminder, if you are using speaker equipment, please pick up the handset before pressing the numbers. We have no further questions. I would turn back to David Bailey for closing comments. Please go ahead.

Thank you. Thank you for those very strong questions. In line with prior calls, I will just finish off by reiterating milestones for investors to use going forward. For the ICL our next milestone is obviously going to panel. We expect to be reviewed in the very near future. You should continue to look for ICL approval in Taiwan and Australia. As I explained, Taiwan is delayed, as well as expansion of Canadian and Korean approval for the Toric ICL. We also recommend that you watch for new peer review articles which will further build the case for the ICL against other procedures and phakik implants. For the Toric in the U.S. by the end of the year and that is well on track. For silicon IOL is expected to begin gaining back lost plate business as I answered to Vivian's question, and gain market share in the second half. The columner is expected to continue pending introduction of three-piece columnary injector by November. After which we would expect to see acceleration in the current growth rates. Look for the introduction of limited number of direct sales people in the U.S. to further strengthen sales and for consequential incremental spend, as we indicate We will further strengthen international sales channel, as I talked to in Europe, particularly in Italy and France. In removing limitation of growth of the ICL and Toric ICL in these markets. Expect increased activity for AquaFlow sales declined in the six month. That's a great product to delivers exceptional outcomes and demands dedicated resources, as I indicated in one answer to the questions.

See us continue to make overall progress with the business. We look forward to updating you on that progress on future calls. Thank you very much.

Ladies and gentlemen this concludes the STAAR Surgical second quarter 2003 earnings conference. If you'd like to listen to replay you may dial 800-405-2236 or international participants dial 303-590-3000 using pass code 544651. Thank you for your participation on this today's conference. You may now disconnect.