STAAR Surgical Co (STAA) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the STAAR Surgical first quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero on your touchtone phone. And as a reminder, this conference is being recorded today, Thursday, April 29 of 2004. I would now like to turn the call over to Ms. Jennifer Beugelmans. Please go ahead ma'am.

Thank you operator and good afternoon everyone. This is Jennifer Beugelmans with the EVC Group. Thank you for joining us this afternoon for the STAAR Surgical conference call to review the financial results for the first quarter of 2004 that ended April 2, 2004. The news release reviewing the first quarter results across the wire this afternoon shortly after the market closed. If you haven't received a copy of the release and would like one, please call our office at 415-896-6820 and we will get you one immediately. Additionally, we have arranged for a tape replay of this call, which may be accessed by some. The replay will take effect approximately one hour after the call's conclusion and remain in effect through 11:59 PM Pacific Time on Thursday, May 5. The dial-in number to access the replay is 800-405-2236 or for international callers, 303-590-3000. Both numbers need to use a pass code of 575774 and the pound key. This call is being broadcast live and an archive replay will also be available. To access the webcast, go to STAAR's Web site at www.staar.com.

Before we get started, during the course of this conference call, the company will make projections or other forward-looking statements regarding future events including statements about optimistic sales, the expected timing for submission of a formal request for a reaudit of its manufacturing facility as well as the timing for an audit of the Nidau plant in Switzerland. The expected timing of the FDA approval for the implantable contact lens and the company's belief about its revenues and net earnings for the full year 2004. We wish to caution you that such statements are just predictions and involve results and uncertainties. Actual results may differ materially. Factors that may affect the actual results are detailed in the company's filings with the SEC including its most recent filing of the Form 10-Q and 10-K. In addition, the factors underlying the company's forecast are dynamic and subject to change and therefore the forecasts are assumed to be realistic 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. And if they do so, they will submit the update to the investing public. Now, at this time, I would like to turn the call over to David Bailey, President and Chief Executive Officer of STAAR Surgical Company.

Thank you Jennifer and good afternoon to everyone. With me today is John Bily, our CFO, Nick Curtis, our Executive Vice President - Sales and Marketing, we have Andrew who is Global Controller and Helene Lamielle, Chief Scientific Officer. During the quarter, we as an organization faced a tremendous amount of extra work resulting from the warning letter we've received from the FDA. In spite of this, we were able to achieve results slightly ahead of our internal forecast, which included sequential and year-on-year sales growth. While currency was a positive factor, we also saw two critical and very encouraging trends in the international markets. Real growth in the refractive franchise, both in units and dollars and growth in per price with preloaded IOLs within the distributor markets. In addition to these accomplishments, we were also able to execute on our commitment to decrease variable expense and slow down the rate of cash burn.

Both these issued actions were in direct response to a delay in the approval of the ICL. In order to address the issues raised in the warning letter, we also needed to increase spending in our compliance areas. At the same time, we currently decided not only to robustly address the compliance issues pointed out by the letter, but also to undergo a zero based review of the quality system and the organization as a whole. There were many changes implemented as a result of this review that we believe are making us more efficient, effective, and compliant company. On a personal note, I am pleased with the way our entire organization has pulled together to address this situation and feel very confident and we will look back and see this as a short-term event in the life of STAAR Surgical and one that has helped us become a stronger company overall. Even the biggest companies with huge resources get warning letters. Look at the recent examples of Johnson and Johnson's cardiovascular division. What I believe is important is how the organization reacts to the event from day one, our ultimate move was to make this event a further catalyst for change in improvement. Based on the evidence of the first quarter, I feel confident we are delivering on that commitment.

Today's press release explains the background to supplementary correspondence received from the FDA on Monday of this week regarding observations, full in total, made during the inspection of clinical sites along with the company's internal records of the ICL clinical trial. Critically, there was no reference to any issues related to the quality or completeness of the data reported in the US clinical trial despite the multiple site audits. The correspondents confirmed that the company's response to the observations noted during the inspection of the data was adequate, and that FDA is now seeking updated information regarding the company's actions taken to ensure that the historical deficiencies noted during the inspections will not reoccur in future clinical trials. The issues noted were procedural in nature, dating back in some cases to 1997, involving decisions rendered by executive staff and in all those concerns specified current management has taken robust corrected action. Nevertheless, FDA must, through their own procedures, document and formally communicate observations of non-compliance. We believe this letter will have no impact on our pending ICL application nor do we expect it to have any financial impact going forward. On the compliance front in general, we have been very active throughout the quarter and have made significant progress. Since our last update, we have received and confirmed the formal request from the FDA to audit our manufacturing facility in Nidau, Switzerland during the week of June 14.

As we've disclosed previously, this audit is a pre approval audit of the facility required as part of the US ICL approval process. Our consultant from Quintiles, who has been with us since the beginning of April, will manage our internal resources up to and during the audit and will physically be present in Nidau when the audit occurs. We have been planning for this audit since January, and as a result believe, we would be well prepared. We believe the Nidau audit has now become the real determining step in the whole process of approval and must be our first priority given it is where we will actually make the product. As for Monrovia, it is clear from our discussions with the FDA that we should schedule reaudit after the Nidau audit. This will allow us to resolve any residual issues from either side at the same time. According to our current plan, I would expect reaudit in Monrovia in July, and we'll be requesting a confirmed date as early as next week. If both facilities audits are successful, we are optimistic that we will be in a position to launch the Visian ICL in the US at or prior to the AAO meeting in October. As a reminder, our pending PMA application maintains the effects review status and we would expect that once the audit in process, that we have just discussed this complete that our application for approval will be given a priority status. As a result of all this important near-term activities, the second quarter has become a critical quarter in terms of execution for the company.

During the second quarter, we will continue to make modest headcount additions and expense increases in selective areas including quality engineering and manufacturing engineering. For that, we may implement the recommendations of our external auditors. In some instances, we are finding other efficiencies in savings to offset these increases. However, we are highly cognizant about to continue to manage variable expense. As we did in the first quarter, we expect to continue to manage these expenses so that we can continue to achieve the overall goals and expectations that we have outlined for all of our stakeholders. The US remains our area of weakness. Although overall sales in the US were down 2% sequentially and 3% versus the first quarter of 2003, there were some pockets of strength. Sales of specialty toric silicon lenses and chromaplate lenses are trending up significantly compared to last year. In addition, sales of auxiliary cataract products such as packs, physical elastics and phaco disposables are also trending positively. We are very aware of the commitment made to achieve growth in the higher margin US segment and are working diligently to make this happen by focusing on the following activities. Rolling out technology and products that continually improve our injective systems across the entire range, additional resource, both internal and external, have helped us in this critical area. The issue is one of competitiveness as we strive to introduce advancements that make the delivery of our IOLs more reliable. We believe all of this activity will result in growth in the base cataract business within the US in the fourth quarter. We are driving sales of our proprietary disposables by bundling these and package else wherever possible. This has resulted in some excellent growth compared to last year. We are visiting our AquaFlow strategy, our Glaucoma product. We saw sequential growth this quarter along with modest year-on-year growth. Our strategy includes plans to modify the product to reflect numerous surgeon request to make AquaFlow readily compatible with current trabeculectomy procedures.

As we have stated previously, when surgeons do put the time and effort in to learn the non-penetrating AquaFlow procedure, the outcomes are excellent. However, we are aware that the learning curve is steep. Many therefore would like us to modify AquaFlow to improve upon their current trab procedures. We are continuing to grow and redeploy the sales force to increase our sales effort and make us a more marketing driven company. Although, some of our aggressive initiatives have resulted in increased rep turnover, we believe that these steps will increase the strength and depth of our sales organization over the long-term. We are prepared to invest the time and resources necessary to make our new representatives productive in their new territories. We are also strengthening our Collamer offering by keeping on track to launch the Collamer three-piece with its own dedicated delivery system. This has slipped slightly from the timeframe specified on our last call. We are now targeting to launch the new three-piece injection system, in conjunction with an improved three-piece Collamer lens design early fourth quarter, although there will be pre-launch activity occurring in late quarter three. And finally, we are continuing to implement a strategic marketing plan for ICL approval and to capitalize on the increasing interest in the product. During the first quarter, we held 10 international certification courses that were attended by 133 surgeons and have taken 87 additional positions through the first phase of training in the US, bringing us to a cumulative total of 478 physicians that have now completed and made an investment in the first phase of training. We believe that as we move through the year, much of this will come together to give growth in quarter four versus prior year and sequentially.

Our most difficult period in the US will be the next two quarters, when the market will not have the opportunity to see the full effect of all of external activity. The good news going forward is that we have lots of opportunity and upside within our US business, as the new products flow into the market, particularly the three-piece Collamer and the Visian ICL. On international sales, they were strong for the quarter. We are pleased with the sales growth achieved by our Swiss company for the Visian ICL, which was up 51% in units sequentially and 35% in units year-over-year. Similar to the fourth quarter, we continued to see strong demand for the Visian ICL, without the benefit of new approvals and despite some confusion caused by the December '03 warning letter. Once again, I'd just like to reiterate that the letter had nothing to do with the ICL and related solely to our IOL product line. ICL growth has come mainly from Europe, where we believe we've taken market share away from C Division as they exit the PRL product, and we have made some inroads with a number of surgeons who have larger uses of the Iris-claw lens. One of the most effective ways that we've been able to obtain mind share and market share with the surgeons has been through live surgery demonstrations.

Our most recent demonstration, which took place in Milan in March, was quite well attended. We have received feedback that these live surgery forums are an incredibly effective way to illustrate the surgical advantages of the Visian ICL, compared with its key rival in Europe, the Iris-claw. Compared with that product, which is a history of creating significant induced astigmatism, iris prolapse related to the large incision as well as hyphema. The ICL surgeries performed by Dr. of Belgium illustrated for the audience the clear advantages of the Visian ICL. We look forward to additional live surgeries performed at the ERF in September in Paris and assuming that the ICL has been approved in the US at the AAO in New Orleans, on October 22. These advantages will be even more compelling for the US commercial markets where aesthetics, patient outcomes, and procedural cost are key priorities by capitalizing on these important distinctions, we believe we will be able to accelerate our international sales growth trend and we'll well prepared for our US launch. We recently gained approval for the Visian ICL in Russia and have held courses in eight countries in Europe this quarter. There's still ample opportunity for growth in international markets. In addition, reimbursement change is expected in Germany later this year should provide us slight stimulus for refractive lens surgery and boost German ICL sales towards the end of the year. We continue to pursue approval for the ICL in Taiwan. However, we have been informed that the next step in the approval process is for the ICL to undergo a limited clinical trial to generate even country data.

This is an additional step and neither we nor our in country distributor were expecting. Although we will move the trial quickly, approval will be delayed beyond this fiscal year. For the Toric approval, Korea and Canada requested clinical data from the US trial. In both instances, we've submitted patient data with six months of follow up, but we're anticipating that both countries will need longer follow up before granting approval. The US Toric clinical trial is progressing well. We may now have all the 125 patients enrolled with 106 or 86% of our target actually implanted. The remaining 19 surgeries have already been scheduled and we expect to have the implants completed by June. This is slightly later than we planned due to events of nature that caused plenty of patients to pull out of the study. We had a couple of pregnancies among the ladies. As a reminder we will only need a maximum of one year's follow up on an 125 patients possibly depending on statistical pull before we can apply for approval in the US.

As we stated, previously the outcomes have been outstanding and we continue to see strong interest in the product. We believe that most ICL surgeons will convert a portion of their practice to the Toric ICL once it becomes available. Assuming we remain on track, approval should be granted approximately one year after the ICL comes to market. Before I conclude my overview of the ICL market, I have been asked to review what we see as the Global Market opportunity for the product. We estimate that every year in the US, there are 4.7m potential patients with visual defect with minus four to minus seven and 3m potential patients in the minus eight to minus 20-dioptic categories. This creates a total accessible market at 7.7m patients.

Assuming a very low baseline of market penetration of 0.5 and 0.8 respectively, this means that we believe we can capture 47,000 patients per year on 94,000 procedures. If we also assume that the average selling price will be similar to Canada or $700, this will create yearly annual revenue opportunity of 65m at relatively low penetration rates. Over a five-year period if penetrations were increased even modestly to an average 1% annual revenues would lead to an excess of 100m. On the international side, it is more difficult to find definitive numbers on the segments. However, for Europe we comment as follows. We estimate within the minus eight to minus dioptic range as 5.9m patients again with a very low baseline penetration level of say 0.5%, this means that we have 28,000 patients per year. With an international average selling price of $500, this would create a yearly revenue opportunity of 28m market. As said, this signals all patients in the minus three to minus seven range.

For Asia, the numbers are much larger because mean myopia is much higher. Applying this in criteria is a would result in a huge market potential. Overall, I tend to concur with AMO's estimates indicating this is $200m realizable market over the next few years at 400, 000 implants, 200,000 patients. We believe that the international market will begin to make more rapid progress towards its true potential once the device has approval in the US.

Historically, sales of medical devices abroad gain more acceptance and use once they are approved in the US. In addition, we would expect that the patient pool will be augmented by patients currently having Lasik who would be authorized CL by their doctor because of the various factors, treatment rates in high levels of myopia. So it is also there that indicates at approximately 7% to 12% of prospective Lasik patients who were pulled in to large practices through marketing, had turned away due to thin corneas or other physiological roadblocks. There is a feeling that a percentage of these would be captured with an alternative such as the Phakic implant. Turning to the cataract side of the business, international sales of our pre-loaded cataract lens launched in the EU late last year continued to track well and are above internal expectations. We obtained approval for this product in Australia during the first quarter and expect to see sales steadily increase throughout the main remaining portion of the year. In Germany, we are at the beginning of our launch of the product and expect sales there to increase throughout the year as well.

Overall, we expect this product to continue to pick up positive momentum for the remainder of the year. Our goal is to grow our overall cataract business market share in the international markets and we believe that the pre-loaded is a dynamic product that can help us to achieve this goal. To summarize, we believe we will be poised for topline growth in the US in the fourth quarter and that we were on the cusp of a very exciting opportunity later this year for both the cataract and the refractive business. Despite the challenges in the US, overall we had a solid first quarter with our international business, once again, providing us with the stability to make tangible progress on our longer-term opportunities. We still face the challenges turning the corner in the US in a sustained manner. Although product issues have held us back, we are now making solid quantifiable progress. This, combined with the changes we have made in sales and marketing, make our entire organization more optimistic than ever that we will begin to build positive momentum in the US, which will help us achieve our goals of consistent revenue growth, positive cash flow and profitability. I would now like to hand over to John for a review of the financial highlights.

Thank you David. During the first quarter of 2004, the company put forth a concerted effort to respond strongly to the regulatory and compliance issues noted by the FDA. We also took this as an opportunity to review and adjust our operating plans. Additionally, we focused on implementing plans to conserve cash, efficiently manage the balance sheet, all the proper resources to prepare for the US launch of the Visian ICL. I would now like to just give brief summary of financial highlights for the quarter. Net sales for the quarter were $13.6m, a 6% increase over the quarter ended April 4, 2003. Excluding the impact of currency, sales declined 1%. Sales in the US declined 3%, our international sales increased 14%. In constant currency, international sales increased 1%. Our US of sales of silicon lens has declined. We did the important sales increases in our toric, single piece Collamer and cruise control products. International Visian ICL total unit sales increased 35%. The ICL itself increased 35% and the toric ICL increased 37%. Gross profit, excluding royalty income in both periods, gross profit for the quarter was 53.9% versus 54.2% in the prior year quarter. So, a slight 3 tenths of a percent reduction in gross profits, is due to increased quality and manufacturing support activities, higher capacity charges relating to the three-piece Collamer production in Monrovia, California, and increase in the inventory provision. Total SG&A expenses increased $557,000 or 9%. D&A spending decreased $218,000 or 9.5% primarily on reduced compensation and bank charges. Promotion sales and marketing increased $775,000 or 19% due in a large part to the planned expenses for the launch of the Visian ICL and some exchange rate differences in our German subsidiary. R&D spending for the quarter grew 9% or approximately $100,000 due to an increased head count and consulting expenses. Growth over the fourth quarter of 2003 was 3%.

Other income increased to $156,000 due to lower interest expense and exchange gains. This was partially after that by unfavorable equity and earnings of the Canon-STAAR joint venture. Our net loss for the quarter was $0.07 versus a net loss for the quarter ended April 4, 2003 of $0.06. Shares outstanding at the end of Q1 were 18.4m. Going to our cash flow and some balance sheet highlights, cash used in operating activities for the quarter was $1.3m. Purchases of property, plant, and equipment totaled $480,000. Net decrease in cash was $1.8m compared with a $2.6m decrease in the fourth quarter of 2003. Cash on hand at the end of the quarter was $5.5m, with a total debt of $3m. The debt level is unchanged compared to the fourth quarter of '03. Days sales outstanding, which is a measure of our accounts receivable collection effort, ended the quarter at 40 days versus 39 days at the end of 2003 and 47 days in the first quarter of 2003. Inventory days on hand, again a measure of inventory performance, at the quarter end were 188 days compared to 210 days at the end of 2003, and a 179 days in the first quarter of 2003. What I'd like to do is talk about some of our upcoming Investor Relations events. Right after this conference call, many of managers would be leaving to the ASCRS from May 1 through May 4, in San Diego, California, STAAR's booth is number 323. Shareholder meeting in Monrovia, California is scheduled for May 18. The company will be attending a SunTrust Robinson Humphrey Institutional Investors Conference May 25 and May 26 in Atlanta, Georgia, and also a Pacific Growth Equities Life Sciences Conference June 9 and June 10, in San Francisco, California. I'd like to turn the call back over to David.

Thanks John. Before we open up the questions, at the ASCRS in San Diego, we'll be hosting an informal discussion with investors, which is on Monday morning at May 3, at 9 AM. Please call the ABC Group if you would like to attend, space is quite tight. So, with that said, I would like to open up for questions operator.

Thank you sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to disconnect from the polling process, press the star followed by the two, if you will hear a three-tone prompt, acknowledging your selection. Your questions will be polled in the order they are received. If you're using a speaker equipment, you'll need to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Kate Sharadin with Pacific Growth Equities. Please go ahead with your question.

Hi Dave, hi John.

Hi Kate.

First one is just on the new observation. You're absolutely certain and that would not hold anything up and is that just, have been told to you by FDA or you've got some prerequisite before or, I guess I'm trying to get some better color on that?

Yes. As we put in the press release, Kate, we feel comfortable that these issues have been dealt with and they should not hold polled up at all. You can never be absolutely certain that we feel very comfortable with the response we gave and we feel very comfortable that we've taken proactive action, and as the correspondence indicated, by the way the letters available on our Web site and that's ahead of publication by the FDA, so, investors can read that in detail. You will see that the incentives have been dealt with and didn't in any way affect the integrity of the clinical data. So, we feel, as we indicated, that this is being dealt with.

Okay. And can you just walk us through then assuming this potential timeline to why AAO and look out in the September-October some time frame. How many surgeons will be trained, and I really didn't quite understand the whole Phase I issue of the surgeons that are in that process right now or have completed it? So, just number of surgeons, who all have been trained and then maybe, number of surgeons that are in the different phases by that time?

I will let Nick pull it out together and then we will comment, but just before we go into that, just going back to your first question Kate, let me give an example. One of the observations was that the company sent two to a site, prior to the protocol for the being approved. This was in early . Those lenses were picked up by the procedures in the company, and they were pulled back before there was any implantation. Now, that never should have happened, it was picked up, we can be more proactive in that regard. So, that's just one of the observations, and I'm just illustrating that as an example of why we dealt with it.

Okay.

Sorry that was -- I said 2003, that was actually 2001.

Yes.

The other three observations were before 2001, going back as far as '97 & '99, and they related to an investor agreement that was signed at later than it should have been. An IRB approval from one side, which is not continuous enough, and then there was one exclusion criteria, which was inadvertently omitted from the exclusion criteria for the trial, and that was clearly narrow. We subsequently checked that no patients were included in the trial that met that exclusion criteria. So, all four being dealt with, all were historical '97, '99 and the last one on the two torics was in early 2001. So, I would urge investors to read the total letter, we feel very confident that we have dealt with that. Now coming back to your question Kate, I'll ask Nick to comment.

Okay. Thank you.

Hi Kate.

Hi.

As of the beginning of the year, as of year-end 2003, we had trained 360 surgeons at the end of 2003, and we've trained 118 to-date in 2004, which gives us a total of 478 doctors that have been trained. What Dave was referring to is first phase, if you recall from a previous call, 35 of those surgeons have been investigators who would require no more training or proctoring. And the first phase of the training is that they attended the certification course, which is the only thing that we can do now until they can implant, actually implant lenses in the United States, but the second part of that training would be the proctoring that they will do when they schedule their first cases.

So, we should assume that basically, once the product is launched that we would have roughly maybe, that month after 30 to 35 or so, they are pretty much ready to go, and then you got to proctor the rest of them?

Yes, and then we will be proctoring on a selective basis, the targeted surgeons that we've got. We are targeting like size of market, numbers of patients, those types of things.

Okay. Fair enough, and then just refresh me. I mean obviously, all the discussions labeling etcetera, they aren't bailing outside of the audit issues, correct?

There is active dialogue with FDA on all of these issues Kate.

Okay. And you still feel confident in it, as you had back three months ago?

Helene, do you want to comment?

Yes. There is still very good dialogue with ODE. We are dealing with the itself, and we do not have any hold on that to answer for product of the side.

Everything is communicated as we would expect Kate.

Okay. Just on the Taiwanese, the study that needs to be conducted there. Are you going to pursue that, and does that add any extra cost of what you've been expecting?

I am going to be meeting with our distributor tomorrow actually to discuss that. It's reasonable number of patients, so it should - it won't have dramatic cost, and we will probably have some kind of sharing of that, Kate. So, it's not going to be that material.

Okay. And just lastly, is there anything new coming out of ASCRS that we haven't seen yet on the ICO obviously?

Yes. In terms of date, we've got a number of presentations. But on Sunday morning there is CME event. Nick just want to recap what that is.

We've got a CME event on Sunday morning, which is on global experience and our practical advice on implementing the IPO into the practices in the US, and as of about two hours ago, we had 563 surgeons that had enrolled on-line for that particular course.

Okay.

And one of the speakers of that, Kate, is the doctor I mentioned in Milan, who did the live surgery, Dr. , who's got significant experience with both product. So it's a very nicely balanced podium for the doctors to understand the differences of the products, the experiences, the amount they put them into that practices and as Nick said, interest is being very high.

Okay. Thanks very much, that will do for me.

Thanks Kate.

Thank you. Your next question comes from Ryan Rauch with SunTrust Robinson Humphrey. Please go ahead with your question.

Good afternoon, just two brief questions. David, how are ICL trends in April, internationally are they still relatively strong and do you just think your increase, both in the March quarter as well as hopefully in April are driven by the panel results of your competitor. Can you just walk us through with a little bit more detail there?

Yeah, don't want to comment too much on April. But other than to say that international in April gets a little bit distorted because of the Easter break, which affect two weeks and obviously we were going out four weeks out of the April month. So, it tends to hit both ways, either side. But, other than that, interest is high, I think it's been driven more by the number of causes that we have run, which I referred to in the main text and the number of doctors that we have taken through training and then we, so, and in addition to that, we just got the approval in Russia and we had actually already run a course in Russia in quarter one. So, I am pleased with the level of interest we are seeing and it is being driven by the interest of the doctors to get trained. I know we are picking up PRL business as people exit to PRL as vision of tended to neglect that line and as well as that as I said in the text, we are also getting very good feedback when we have the live surgery sessions where it really tends to emphasize the differences between the products when they are used. So, the combination of the training courses that we are running that are bringing people back to the ICL, the combination and the impact of the live surgery, which highlights the differences in the products is really healthy. I think people are becoming aware of the differences in the clinical data with the other products because they went to panel and that's the third time we've seen published core clinical trial data on that product. So, there is a like-to-like comparison that can be drawn and clearly we do that like-to-like comparison, it shows much lesser stigmatism of the ICL. It shows the confidence of the doctors to go to lower levels of myopia with it as evidenced by the clinical trial data and it shows better data and are actually more consistent from the ICL. So, it's all pulling together, to increase the level of interest, Ryan. Nick, do you want to add anything to that in terms of the comparisons?

If you would compare the ICL in the artisan or the from the US FDA clinical trial, you take a look at the requested range of approval where we will be requesting minus 3 to minus 20. The artisan always requesting minus 5 to minus 20, the panel approval granted us the minus 3 to minus 20 whereas with the artisan, they were granted a minus 9 to minus 20. In terms of looking at the patients and the acceptance level of the surgeons in terms of where they are willing to go, how well in terms of putting this in, you look at the FDA clinical trials, with the artisans, only 0.3% of the patients were less than or equal to seven diopters of myopia and with the ICL clinical study, 21% of the patients were of less than or equal to seven diopters in the study and in terms of left-handed equal to eight diopters 2.8% with the artisan versus 33% with the ICL. So, I think just from a clinical trial perspective, the surgeon comfort level in terms of where they go with the patients show that it has more confidence in terms of putting the ICL into the patients in the lower ranges than with the artisan product. Although the artisan study allow the patients to be enrolled with down to five, only three cases were enrolled below seven diopters o myopia. And I think that's probably why they got the range, limited range was approved by the panel as far as the artisan is concerned.

Ok and then I apologize if you already answered it during your discussion, where do you stand with the Toric ICL study as well as the Collamer IOL injection system?

Toric I feel, we'd hoped to have all the implants in, but we had a couple of scheduled patients dropout for medical reasons whereas 86% of the implants in terms of relieving 125 patients for one year follow up, we've got a 106 patients implanted, we've actually got more lenses in that because some of them had two lenses and we need one year follow up. So, we would expect it to get to the 125 by June time. We are actually a 106 on the trial and a 135 in total. There is a possibility that we could to meet on 125 eyes depending on of the data. So, actually it's advantageous for us to get more eyes on the 125. So, 106 that would be easily pliable. The additional 24 maybe able to count towards the 125, but we should have a clean 125 by June, and we should get to the one year follow-up and submit after that.

Then how is the Collamer injection system?

Yes. On the Collamer three-piece injection system in lens, the injection system is going very well. I announced that it was slightly delayed as a combination. We'll have a full launch in early Q4 and we'll start activity in late Q3, but that will be with the revamp Collamer three-piece lens with some additional features, which I don't want to go into for competitive reasons. Though slightly later than we've announced in the last call, but the injector is coming along very well, and we've taken a conscious decision to actually make a few enhancements on the lens to make it a more aggressive competitive package generally.

Okay. And then finally John, can you walk us through your cash position and do you still feel comfortable with the level of cash you have and your ability to get the profitability?

Tough question Ryan. Our cash position what we have, $5.5m at the end of the first quarter as I mentioned; we used $1.8m in cash in the first quarter. We are going to continue to use cash Ryan. Second quarter, you know we mentioned earlier in the conference call, second and third quarter will be challenging for us. Our strategy is to monitor the cash use closely. We are going to look at inventory, accounts receivable, capital spending, money owed to the company. We have a substantial amount of money owed to the company, which will be aggressively pursuing. We are going to review, the most likely ICL approval time lines, and new product launch schedules, and other cash requirements that we have for the company, converge those two time lines and we are going to keep all our options opened as it related to making sure that we have adequate cash to achieve the objectives that we have set out to achieve. So we're just fundamentally keeping all financial options open Ryan and guarding cash duly, and trying to collect as much as we can.

And I think the numbers here, Ryan, we tightened up significantly in Q1 versus Q4. So we've been very effective with that.

Okay. Have a nice afternoon.

Thanks.

Your next question comes from John Calcagnini with CIBC World Market. Please go ahead with your question.

Hi. Good afternoon guys. I wanted to, but first get a couple of housekeeping questions out of the way. Can you give us what total revenues for the cataract business were and then total IOL sales in the quarter?

Yes. We don't tend to break those down John. We just tend to give an indication of increases in the different categories.

Okay. Can you give us the growths for Elastic, Elastimide, Toric, Collamer?

Yes. We tend to lump all those together as well, John. I mean this three is specifically a historical question, I think we've been through previously. We tend to just through all the IOLs together rather than giving a detail breakdown.

Okay.

I am consciously with maneuvers in the market, John and there is a lot of competition out there.

Okay. Can you give us total cataract done or total IOLs?

Well, the total IOLs would be down; Collamer was up in units and revenue. Elements of the cataract business grew as I indicated, Phaco disposables, viscoelastics, and Gallery . Cataract grew in international a little bit and then ICL clearly grew quite nicely.

Another question on the ICL. You said it was up by about 35% in units, but then I think John said it was up 35% in revenue. So I'm trying to understand which is the right number?

Well, John what we have was, I quoted a couple of growth numbers between the ICL and the Toric ICL. Total revenue was up 26 some 26%, and we had the Toric ICL grew 37% in units.

Okay. And the ICL to Visian ICL?

Visian ICL or the Myopic ICL, whatever you want to called, it grew 35% in units and then total revenue was up something over 26%.

Okay. And the glaucoma product about 260,000 somewhere in that range?

That had grew a little bit year-over-year, which was pleasing and it grew sequentially and we set an indicative revenue on that just under $1m -- around $1m for the year, so that kind of range, John. We are not too far off on that.

Okay. Let me ask you a question about the warning letter. How did this issue of ICLs being sent to a site early, How did the FDA discover that? I mean, how did this emerge and what have they been doing? How many clinic sites were in ICL study and have they been visiting all of those sites, is that how this was discovered?

We discovered this internally back in '01 and the lenses -- we discovered it with our own clinical department and the lenses were pulled back into here before they were ever used. So all of these issues were discovered internally.

Okay.

Particularly that one and action was immediately taken, that was about three months after I came to the company, John.

Okay. So, why is this just coming out now from the FDA?

Well, the FDA audited it late last year. It's called the BIMO Audit, which was the clinical audit, and we pointed out certain issues to them and they looked at certain issues. Critically, no issues came from the audits of the clinical sites.

Okay. And when were those completed? How many total sites and were they all audited?

Three sites were audited and they were completed in, I think, Helene, like September, October timeline - October. And so the observations we got, none were related to the clinical sites, John. A number we had already covered, we got those observations in December, we responded in early January. We felt we had a robust response and I say, one item was picked up from the clinical site, which was the IRB approval, I think. So, we responded in January and then this is the response to that response.

Okay. And so, are you feeling that on the ICL you don't at this point, if I understood your answer really, you don't expect any labeling restriction on the ICL approval with regard to range of patients that you can treat?

I don't believe so at all.

Okay. And have you had these discussions with the FDA? I mean how would you -- where does that emanate from? Is that just kind of what you hoped for or they said we're comfortable with the wider range than Artisan?

Helene, do you want to comment?

scale of minus three to minus 20. We will have some prescriptions as we are still doing .

Okay. But in terms of the endothelial cell counts preoperatively that's nothing different than what was discussed at the panel meeting?

No, exactly, John.

Okay. And just one final question on the gross profit margin. Net of 56.6% margin in the fourth quarter that slipped to about 53.9%. I thought of that, it sounds like was inventory charges on the -- is it the or can you tell us what that is and how big those inventory charges were in the quarter?

Yes, you might want to comment on the standard margin as well, John?

Yes, sure. What we had -- you are absolutely right, John, fundamentally. What we had in the quarter was what we would call a product margin or a standard margin that was actually quite good. In fact, it was growth over prior year and growth sequentially. But what happened is we had non-product related charges in gross profit, global quality manufacturing, engineering, inventory provisions, and things of that nature. That's what drove the gross profit down to 53.9%. So, yes. But what Dave wanted to mention and what I wanted to mention is that the product margin, which is sales -- product going out the door versus what it cost us to make it was actually quite good for the quarter.

Can you say what that was?

It was -- let's say it was in excess of 60%.

Okay. And that's fully costed.

Correct. We use full absorption standard cost and GAAP accounting here in all of that so, but we did get hit and gross profit is gross profit, we did have some issues in some of the other areas.

Okay, thanks.

Thank you. Our next question comes from Jayson Bedford with Adams Harkness & Hill, Inc., Please go ahead with your question?

Hi, good afternoon, guys.

Hi Jayson?

Hi. Just with respect to the second warning letter here, I don't mean to harp on it, but have you guys responded and then what are you expecting back from the FDA in terms of follow up. I'm just trying to figure out the implications of this letter?

We responded for the observations back in January. We received this letter on Monday and we're preparing a response, and the letter, as we stated in the press release which is available on the Web site for investors to look out, indicates that our response with adequate. We will be, but they won't further follow up which we'll be supplying within the next 15 days.

Yes, I would like to comment on this fact that while our response has been adequate, we still got one letter. That means to the nature of the relations that the FDA observe. that has seen by FDA. No matter what would happen after giving them a corrective action, easily being through such sort of actions that you want

Jayson, I've said in my text, the FDA through their own procedures would need to formally document the observations of non-compliance that were picked out in our 483. So, although we responded and basically the response that we had, it picked itself or we taking corrective action, and nevertheless they need the document that's historical non-conformity. Even if it is days back to '97 or '99, and even if we picked it up like one event in 2001, they are still obligated to respond with a warning letter for their procedures. We actually saw our responses that we gave in January, we're pretty good and robust, but then we've taken strong action. We have to pick this thing up or we are taking strong action around it. So, that's the context.

Okay, and then you responded to them within the next 15 days, what's the next step?

The next step would be to have an acknowledgement from FDA about our response, and possibly don't just follow up. We achieved something usual on the course of FDA inspection.

Okay, we probably checkout the changes that we've made during a re-audit or the next normal audit, Jayson.

Okay.

You know, clearly our response seems to be very robust. You can see our assumption is that we're going to make sure that no reoccurrence can occur.

Okay.

We're very confident about that.

Okay, that's helpful. And then with respect the re-audit in the release you mentioned that could happen in early to mid-July, and then you are at the final stage of the approval process. What entailed in the final stage of the approval process? What needs to happen?

Well, just referring to one of the questions we had earlier, we've got a very good dialogue going with FDA and it became clear that they were indicating that we should have the Monrovia re-audit after the Nidau audit. The Nidau audit as we said has now firmed up for June 14. Next week, we'll requesting the re-audit sometime in the July time frame. So, it could earlier it could be late, or it depends. Following that re-inspection, then there is variable amount of time that it can take to hopefully close things off. I don't want to be vague but it's impossible to give absolute time lines, because you're dealing with the agency. But assuming a late July re-audit, then I indicated we'll be looking for approvals to have a full launch of AAO. So you've got a window from late July till mid-October to finalize all the other things. It's difficult to be anymore precise than that.

Okay, that's fair and that's helpful. Switching gears, can you comment on the sales force, you mentioned some turnover there, can you let us know the size of the sales force right now and if you plan on any additions going forward?

Yes, we consolidated one of the regions and I chose not to renew one of the region manager's agreements, and we put a replacement into that geography. I'm please to say that we actually lowered the cost of sales in that area pretty substantially. So as percent of sales in that region, the cost was brought down substantially, which kind of protects us a little bit on the fact that we are sort of knowing that because this is such a relationship business that we are bound to loss some business in that regards to making the changes in the short-term, but we will pick it up in the longer-term through extending relationships over a wider range and making more calls in that area. As far as the net pick up is concerned, we have this week, got some activity going in the Phaco disposable sort of bundling area. We did add a very experienced Phaco specialist in our geography.

Okay. And just, , one quick question for you. Am I incorrect, I thought for some reason you guys had 60 physicians ready to go to start performing procedures upon approval, was that a fair number?

That -- I don't think so, its only been 35 from an investigator perspective.

Yes, it's 35, because we have the investigators, have been through both Phases of the training. So, at the moment, going back to the discussion we were having with we've got 478 who have been through Phase I. Of those, 35 of the investigators who can start immediately. So we currently got 443 that we're ready to proctor. So, you've got in any model, Jayson, you got 35 who could potentially implant immediately and you've got 443 to then start proctoring through Phase II through the proctoring floors that that we have. That makes sense?

Okay. Yes, I'll just look back on -- Okay thank you.

It's 35 not 60, Jayson.

Yes, Jayson, I don't know that we never talk about anything different.

Okay, thanks.

Thank you. Our next question comes from Michael Lever with . Please go ahead.

Good afternoon.

Good afternoon, Mike.

Hi. I have a couple of questions. The first is, the revenue recognition policy for ICL sales, is there an opportunity to stuff the channel or do you recognize revenue when this is actually implanted?

John? John, come on.

Yes, the ICL is only sold internationally.

Right.

The ICL is sold, I believe, only through distributors internationally. So we bill upon shipping and not upon implantation like we do with an IOL in the US market. And so, clearly there is that opportunity, but is that was your question?

That's right. If you were approved for or when it's approved in the US, so you'll use the same policies that you have for IOLs?

No, slightly different. I believe in the US, obviously we will be shipping directly to surgeons, but we are also going to deal billing upon shipments versus billing upon implantation, that is the revenue recognition strategy that we have currently agreed upon between sales, marketing and finance and everyone.

Michael, to the heart of your question, I think, because in international we sell fundamentally through distributors, we do have an opportunity to sell more inventory through a distributor and in effect to store your run rate, that if you look at the receivables numbers that John gave, which is one indicator of that, it indicates that we have intended to do that.

Thank you. Our next question comes from Simon with Stiffanus . Please go ahead with your question.

Hi. Two very basic questions and I apologize to the analysts who are pretty much more familiar with this than me. You referred in the text of your release to making the lens injection systems for the IOL more competitive. What are the competitive issues for the injective system and were are you at? And the second question relates to the ICL. I think you mentioned that you had approval to go down three . Is it meaningful and realistic that that would become a competitive to Lasik on this sort of nine dioptis, nine or ten dioptis?

Yes, on the IOL, you want a system that's simpler and more effective to use and the preloaded that we sell in international that we don't yet have in the US, is kind of a perfect example of the simplest, most effective system to use for the doctor. It has very little room for error and it's very quick and effective to use. So all of your systems you want to improve to make them be simpler and more effective. Ironically, we've only got the most simple and effective to use that we are selling at international, and yet in the US we don't have access for that system, we have systems that we had for a number of years, where there is room for improvement to make them simpler and more effective to use. So, that's what we are focusing on. We stated on prior calls that our goal is to make the preloaded standard of care across all IOLs simply because it is the most effective system to use. The lens is already, for example Simon, the lens is already in the injector, so if you remove the potential error when the doctor takes the lens out of the package and puts it in into the injection system that's already clogged with some error. So simpler and more effective is where we are trying to drive and they are the competitive issues. The reality is there is a few systems out there from our competitors that are a little simpler and more effective to use in the US market. Actually the tables are turned in international, we've probably got the simplest and most effective and least error-prone system available. So that is the answer to your first question. Is there any follow up on that Michael? Simon, sorry.

Thank you sir. Mr. Bailey there are no further questions at this time. Please continue.

There was a supplementary that Simon asked -- one minute that I didn't -- can ICL realistic -- we see -- taking implants in the ICL as being a complementary product to Lasik. We see that surgeons want an alternative to choose to use with certain patients and they will start to do that at the higher levels of myopia. However, the fact is as we saw in the clinical trial that these patients, who for physiological issues are not suitable candidates to Lasik even at the lower ranges and so the ICL will offer them an alternative. So the wider approval range from our point of view is very good because it gives the doctor the choice across a wider range. And so, we feel as complimentary to Lasik but to certain patients that will mean at the lower dioptis the doctor will chose the implant versus Lasik because there is some predetermined physiological issues, for example you might find a low myopia dry eye, in which case they will chose the implant. So it's complementary that the wider approval range gives the doctor the wider choice. I think there was a statement that we didn't have any more questions, Operator?

That is correct sir. There are no further questions at this time.

Good. I just wanted to thank everybody for their participation and remind you of the investor meeting that we have on Monday morning at . Thank you all for participating.

Ladies and gentlemen, this concludes the STAAR Surgical first quarter 2004 earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 followed by the pass code 575774. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 followed by the pass code 575774. You may now disconnect and thank you for using AT&T teleconferencing.