STAAR Surgical Co (STAA) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Starr Surgical Second Quarter 2004 Earnings 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. As a reminder, this conference is being recorded Thursday, July 29th, 2004.

I would now like to turn the conference over to Mr. Doug Sherk. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. This is Doug Sherk with the EVP Group. Thank you for joining us this afternoon for the Staar Surgical conference call to review the financial results of the second quarter of 2004 that ended July 2nd, 2004. The news release released reviewing the second quarter results crossed the wire this afternoon shortly after the market closed. If you haven't received a copy of the release but would like one, please call our office at 415-896-6820, and we'll get one to you immediately.

Additionally, we've arranged for a taped replay of this call, which may be accessed by phone. The replay will take effect approximately one hour after the call's conclusion and remain in effect through 11:59 p.m. Pacific Time on Thursday, August 5th. The dial-in number to access the replay is 800-405-2236 or, for international callers, 303-590-3000. Both numbers need a passcode of 11002269#. This call is being broadcast live, and an archived replay will also be available. To access the Web cast, go to Staar's Web site at www.staar, S-T-A-A-R.com.

Before we get started, during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about optimistic sales, the expected timing of the FDA approval for the implantable contact lens and the company's beliefs 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 uncertainty. 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 forms 10-Q and 10-K.

In addition, the factors underlying the company's forecast are dynamics are subject to change. Therefore, the forecasts are to be assumed to be realistic only as of the date they are given. The company doesn't undertake to update them. However, they may choose to do so from time to time and, if they do so, they will submit the updates to the investing public.

Now, I'd like to turn the call over to David Bailey, President and Chief Executive Officer of Staar Surgical Company.

Thank you, Doug. Good afternoon, everyone, and thank you for joining us today. Today, we reported the results of our second quarter performance, which included revenue of $12m and a loss of 18 cents per share. First, some important news, which I know all investors will be interested in. We're very pleased to announce the FDA officials arrived at this facility just yesterday, and the re-audit of our Monrovia operation is now underway. While I do not have a further update for you today, we are very excited that they are here. We expect to file an 8-K as soon as we have the results of the audit.

Moving to the second quarter. The second quarter has been a time of significant rebuilding within the entire Staar organization, along with huge progress in the areas of compliance. During the quarter, we focused our efforts and resources on responding to the results of the internal audit we had organized earlier in the year in both Monrovia and Nidau. Although these were originally sanctioned in response to the warning letters we received from the FDA, we became committed to not only respond to the warning letters but to go well beyond those issues highlighted in the letters to ensure we put any and all compliance issues behind us for the long-term.

The increased expenditures associated with this broad-based review have had an impact on our second quarter financial results. We expect the increase in expenditures related to these programs to continue into the third quarter, then level out in the fourth quarter, when we will see consultant expenditures decrease and our organization return to a more steady-state, self-sustaining level of activity. While we recently reared capital through a private placement transaction, we provided ourselves with the financial means to allow us to continue to strengthen our existing compliance infrastructure and add resource as necessary. We firmly believe that this recent activity will provide a high return on investment for the company and its investors.

Even as we faced increased expenses, we were also affected this quarter by an exceptional weakness in the U.S. market. The weakness was driven by two key factors; compliance issues, which has created noise in the marketplace, and an inability to continuous supply of injector components to meet market demand. This latter issue is essentially behind us. Primarily due to challenges faced in the U.S. market, overall sales were down both year-over-year, as well as sequentially. While we continue to see very positive sales trends of both our ICL and our new pre-loaded silicon IOL in the international market, the U.S. market remains a challenge, but one that we have planned to meet.

The U.S. market decline has been a prime concern for quite some time and, during the third quarter of last year, we believed that our 5% U.S. sales growth was evidence that we were finally gaining traction. However, since that quarter, we have faced many unanticipated challenges, which have caused a further erosion in this part of our business. In previous quarters, this erosion has been at least partially offset by growth in our other cataract products, particularly one-piece collamer lens growth. However, we did not have this benefit during the second quarter because of the dual factors of supply and compliance issues highlighted above. I believe these factors are now behind us, and this, in addition to planned product introductions over the next six months, will strengthen our position in the U.S. as we near the end of the year.

Despite these disappointments, we were pleased to see sales of our specialty silicon toric and collamer plate lens products up through the first six months of this year versus the equivalent period in 2003. Looking ahead, although standard silicon business will decline, we expect the rate of decline to decrease as we roll out minor but important enhancements to our silicon delivery systems. In addition, we will introduce an improved injector for our one-piece collamer plate lens in September. This injector is being validated in-house and will move to field evaluations next month, and offers significant incremental improvements over the current offering. This will, once again, allow us to grow our collamer plate volume.

For a number of years, Staar has been behind the curve on competitive injector systems, and this has undoubtedly damaged our business. When we have fixes, currently in the form of pre-loaded, we have demonstrated we can execute and grow the business. Since the introduction of the new head of R&D in January and the changes we've made since, I am confident, or more confident than ever, that we are making solid progress and, as we roll out these improvements, we will effectively execute and grow the U.S. market.

Turning to the three-piece collamer, the injection system is on track and received 510-K approval during the quarter. As for the lens, we took the decision to modify and enhance the design. Although an R&D resource, despite recent additions, [inaudible] has been stretched and, in some cases, restricted during Q2 due to the compliance and audit activity. We have completed the redesign and it works well with the new injector as a system. However, as part of the new quality assurance process we have introduced at Staar, the timing for validation and final sign-off will take longer than our historical process. This is one of the first products to follow the new processes, so the exact timing is a little uncertain. All of this said, we expect to complete the process some time in the fourth quarter, and we'll keep the market posted.

In the international markets, we expect the pre-loaded silicon product to continue to exceed our expectations and to help us grow the business. Our strategic shift to cataract sales from-- of cataract sales from older, generic, non-proprietary lenses to new, high-value, high technology products, such as the pre-loaded, has been an undoubted success. We're working very hard to establish this product as the standard of care for IOLs going forward. As a result, R&D and engineering resources have been realigned to meet this critical goal.

For the ICL, we are delighted with the trend in the distributor markets and in the international market in general, and expect this growth to continue for the full year despite an inevitable slowdown related to seasonality in the third quarter. If we take the distributor markets alone, where we have the bulk of the ICL business, we [inaudible] revenue growth in excess of 30%. The growth is real and sustainable, and is not the effect of customer loading up inventories over the first six months. Instead, this growth is a result of a growth in real demand.

On July the 5th, we had a particularly unique endorsement of the ICL technology when one of our international trainers, the Swedish surgeon [Goren Helgeson], underwent bilateral ICL surgery. His correction was minus 2.75 diopters of myopia in one eye and minus five in the second. He is delighted with the outcome, and will be speaking of his experiences at AAOA in October.

Another exciting accomplishment during the quarter was the tremendous growth we continued to-- progress we continued to make on the compliance front, and the successful audit of Nidau, a critical milestone on the road to the ICL approval. As I mentioned earlier, we have significantly restructured in the areas of R&D, quality, regulatory, manufacturing/engineering, and complaint handling. Although our consultant from Quintiles has led this effort, we are steadily bringing this expertise in-house under the new structure.

With this in mind, we are currently recruiting for a senior head of regulatory and quality, and expect this person to be on board by the end of the third quarter. This role is currently being occupied by an outstanding individual who assisted in the Nidau audit, and who had a long career at J&J before becoming a consultant. This recruitment, and the introduction of Tom Paul as head of R&D, will eliminate the Chief Scientific Officer position within the organization. Meanwhile, efforts to restructure and realign departments continue at a fast pace and, at this point, most of the work is nearing completion.

All of these efforts resulted in a very successful audit of our Nidau facility in Switzerland, where we make the ICL product. I was present during the audit and was, of course, delighted with this outcome. As mentioned in an 8-K that we filed during the quarter, the audit resulted in no Form 483 observations being made by FDA. Every one of our employees should be proud of this achievement. In addition, it should be noted that we received a positive letter from the FDA regarding our response to the second warning letter that we discussed on our last conference call.

Finally, our discussions with the Office of Device Exemption regarding labeling and other related issues are continuing to progress, and lead us to believe our previously communicated timeline of a late Q3/early Q4 approval is very achievable. During the discussions, the scope of the approval agreed by the panel is not being challenged. The range in myopia, minus three to minus 20; the patient minimum inclusion age, 21 years; and the anterior chamber depth, less than or equal to three millimeters with minimal pre-operative endothelial count values, are all consistent with the October 2003 panel recommendation. We continue to believe that the rate determine [inaudible] will be the results of the re-audit in Monrovia, which is now underway.

At this point, I'd like to turn the call over to John to discuss our financial results in more detail.

Thank you, David. I have to take one minute to summarize some of the things that David said and put them a little bit into context and how they affected our financial numbers for the quarter.

During the second quarter of 2004, the company was very much internally focused on a rigorous and broad review and restructuring of quality, regulatory compliance and engineering processes, procedures and fundamentals. From a financial perspective, this was a period of investment in time, expense and capital. During the first half of 2004, the company's highest priority was to ensure that the issues addressed by the FDA and our consultants were thoroughly reviewed, and corrective actions taken. Our response was thorough, broad and systemic, and not merely a response to specific FDA observations.

These efforts interrupted the availability of some products during the quarter as we implemented process improvements and changes. We directed significant efforts and expenses at preparing for and undergoing the successful audit of our ICL manufacturing plant in Nidau, Switzerland. In the Monrovia, California facility, we have extensively prepared for the re-audit related to the warning letter, which is now underway. Unfortunately, each of these activities negatively affected financial performance in the areas of net sales, gross profit and research and development spending.

I'll take a few minutes just going over the numbers for the quarter and year-to-date period. Sales for the second quarter ended July second, 2004, decreased 7.2% to 12m compared to the second quarter ended July 4th, 2003. Currency had a $276,000 favorable impact on the results. Key factors in this sales decline were 26% reduction in U.S. silicon IOL sales, and a 13% decline in U.S. collamer IOL sales, partially offset by an increase in Cruise Control sales.

International sales of the ICL and toric ICL were up 21-1/2%, and the newly launched, pre-loaded IOL sales increased significantly as well. However, overall sales in the international markets were down 3.7% primarily due to declines in distributed products. For the six-month period, sales decreased .5% after giving effect to the 1.2m favorable impact of currency on the year-to-date results. In the U.S. market, total sales declined 7.6% due to a 25% reduction in silicon IOL sales. Partially offsetting this decline were sales increases in specialty lenses, Cruise Control and Viscoelastic. Including the effective currency, international sales increased 5.4%. ICL and toric ICL sales increased 21%, and sales of pre-loaded IOLs accounted for the remainder of the growth.

Gross profit margins for the second quarter were 51.1%. Margins were negatively impacted by the decline in U.S. silicon IOL sales, which carry higher margins within the [inaudible] in the U.S. The most significant impact on gross margins during the quarter were increased expenses associated with manufacturing/engineering, quality control and assurance, and the costs related to the three-piece collamer production capacity that has been idle during this redesign period of that system.

For the year-to-date period, gross margins were 52.6%, down from 54.4% in 2003. The factors for this decrease are essentially the same as those for the quarter. G&A expenses for the second quarter were 23,000, or 1% below last year. For the year-to-date period, G&A expenses were 248,000, or 6% down compared with the same period last year. This improved performance results from lower bank charges on the extinguished U.S. line of credit and savings due to reorganizations and closed subsidiaries.

Marketing and selling expenses for the quarter increased 747,000, or 16.9%, and 1,522,000, or 17.7% during the first six months compared with last year. These increases were due to headcount increases, promotion, training and travel in preparation for the launch of the Visian ICL. In addition, spending was up in the international markets partially due to the effect of currency.

R&D expenses during the second quarter increased 689,000, or 50% and, for the first six months, R&D spending increased 798,000, or 31%. Increase in spending during both periods related primarily to the hiring of consultants, increased travel, costs associated with cartridge redesign programs, and design activities surrounding our collamer three-piece lens and insertion system. R&D spending also increased in support of FDA audit preparation and FDA regulatory activities.

Net loss for the quarter was 18 cents compared with a net loss of 7%-- seven cents in the second quarter of 2003. For the year-to-date period, the net loss was 25 cents compared to 12 cents in the first six months of 2003. Total shares outstanding for the year-to-date period ended July 2nd were 18,655,287.

Cash used in operating activities was 1.7m for the quarter ended July 2nd, 2004. Cash used in investing activity during the quarter was 627,000. Of this amount, 404,000 was invested in property plant and equipment, and 282,000 in the purchase of a minority interest of a subsidiary. Cash provided by financing activities in the quarter was 12m. Private placement of 2m shares generated a net amount of 11.7m, and 265,000 was generated from the exercise of stock options. The net increase in cash for the quarter was 9.4m. Excluding the net receipts from the private placement, the company used 2.3m in cash during the second quarter of 2004. The company had 14.9m in cash, and 3m in bank notes payable at the end of the quarter.

Guidance for the balance of the year, we estimate that net sales for 2004 will be approximately flat compared to prior year, while the full year net loss is expected to be somewhere between 52 and 55 cents per share. We have excluded any potential U.S. Visian ICL sales from the advanced notes.

Turn it back over to David.

Thank you, John. We'll now open up for questions, operator.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you do have a question, please press the star, followed by the one on your pushbutton phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from John Calcagnini from CIBC World Markets. Please go ahead, sir.

Hi, good afternoon, guys. It's [Chad] for John.

Hey, Chad.

Good, how are you? I had a couple questions. On the R&D, looks like a pretty big jump this quarter. How should we look at that going forward for the next two quarters?

R&D was a spike for the quarter, Chad, and I don't expect that level of R&D spending to continue, although we will continue to invest at little higher level than you've seen in the past. But it's not going to be as big a number as we experienced in the second quarter.

OK. And then, as far as the FDA audit, I realize that you don't really have time-- a time frame per se, but typically, how long will a facility audit take? I know that in your guidance, at least from the press release, you guys are still looking for approval by the end of this year. But how long should it-- should we look at a week that they would probably be at the Monrovia facility, or how should we look at that?

Yes, Chad. Just to clarify, we-- our timeline was late quarter three/early quarter four window, which is consistent with what we gave on the last call. We're always looking for [inaudible], so hopefully approval will come before that, although that's all subject to audit. [Inaudible] allotted time would probably be five days for this kind of re-audit, but it could be longer, so I can't be held to that, but that's the kind of guidance.

OK. And then, John, as far as the shares outstanding going forward, based on your guidance, is-- should we look at that 18.9m, is that what you've got-- is that what you're using for your--?

--Yeah, it's very close to what we use to calculate those pro-forma earnings per share numbers.

OK. And then, could you run through the growth rates again on-- you run through some just revenue growth rates for, like, cataracts, toric and glaucoma?

Well, essentially, we're seeing that the business is going to be flat this year versus prior year. The cataract, you've got two trends going on, the base silicon in the U.S. is going down. Pre-loaded is going up in international. Collamer, which had been growing, was interrupted in Q2, although it was up marginally for the year-to-date. So, in general, cataracts, you've got some going down, some coming up, effectively neutralizing, and we're getting growth in the ICL in international, which is offsetting the loss of non-proprietary cataract other product in international.

I'm sorry, I meant for the second quarter. I apologize. With the-- did you say collamer was down 13%?

That's correct, Chad.

OK. And then, how about cataracts?

Cataracts overall, we haven't broken that out, Chad, in the guidance. We tend to pick out the product lines and group them together.

Silicon, the overall silicon offering was down 26%.

OK. And toric overall was up 21-1/2%?

ICL as-- the revenue was up 21-1/2% year-to-date, roughly the same for the quarter.

OK, great. Thanks, guys.

Thanks, Chad.

Thank you. Our next question comes from Joanne Wuensch of Harris Nesbitt. Please go ahead, ma'am.

Hi, guys. It's actually [Eric] for Joanne. Question on the redesign for the three-piece collamer. What exactly did it entail, and why was it-- why did it need to happen?

Well, there's two elements to the product. One is the injection system, which we've reported on previously, which we got 510-K approval for and which we're molding parts for at the moment. So, that is well on track. We took the decision to try and enhance the three-piece to make it more compatible with the injection system and add a couple of enhancements, and we've been working through that.

One of the problems we faced, as I said in my text, is that R&D resource, despite being bolstered, is being pulled in the areas of the compliance, particularly the Nidau audit and the compliance activity here. That, in addition to the fact that we have a new quality system, which we're very pleased about, but it is meaning that our sign-off procedure and validations are even more robust than they've ever been. So, those two factors are giving us an uncertainty over exactly when we'll get introduction, but we hope that's going to be by the late fourth quarter, but we'll keep everybody posted.

But-- so, the enhancements on the lens were really just to make it more compatible with the injection system to improve the overall delivery and look at some general enhancements, which makes it more market compatible at the moment, angulations on optics, square edge, those kind of things.

Great. Thanks. And on your-- the toric ICL, the enrollment for the trial in the U.S., can you give us an update on where that stands?

Yes. To date, we've got 124 patients that have been included. That's 167 eyes have been implanted. Some of the patients have had bilateral, the others had their second eye done under a waiver. Of the 167 eyes, 115 are primary eyes, and the [inaudible] one year for the 125 primary eyes.

OK. So, everyone's all enrolled, then?

We've got a few more eyes to do on the primary, but we're comforted that, with the larger number of implants, the 167, it may be possible to pool some of those second eyes.

Great, thanks. I'll get back in queue.

[Inaudible.] Thanks.

Ladies and gentlemen, once again, if you do have a question, please press the star, followed by the one on your pushbutton phone. One moment, please, while we wait for our first question.

You do have a question from Mr. [Brian Delaney] of [Entrust Capital]. Please go ahead, sir.

Good afternoon, guys. Quick question-- did you guys make any acquisitions during the quarter?

No, no acquisitions. What transpired during the quarter was we have a-- there was a minority interest outstanding in our Australian subsidiary, a 20%, and there was prior agreements dating back to 1999 that authorized us to acquire that minority interest. Those contracts kind of came up, so we negotiated to purchase the other 20% of that. Now, it's contractually obligated, and we paid part of that, but there's some agreements tied to contract-- employment contracts that-- where the balance of it won't be paid until 2007. But, if the purchase in the [inaudible] 20% interest in our Australian subsidiary.

And how much was the payment?

This year, we'll pay approximately-- let's see, in 2004, we'll pay approximately 600,000 I believe, and in 2006 another 600,000.

OK, so the increase in goodwill related to this, the million-dollar increase?

That's correct.

Thank you.

Thank you. Our next question comes from [Tyson Halsey] of Halsey Advisory and Management.

Higher amount went to goodwill.

Please go ahead with your question, sir.

Can you comment on the growth rate of the ICL in Europe? Are you gaining any market share versus the Artisan lens, is my first question, from what you can tell?

Yes. The headline growth in revenue on the ICL, as we said, was just over 21% globally. If you break out the distributor markets versus others, that growth rate is significantly higher, as I indicated on the-- in my text. Our belief is that we are gaining market share, and we're also at the same time opening new markets. So, I talked on the last call about the fact that we were doing a training course in Russia. We've received our first order from a distributor during the quarter two on the back of that, and we're opening up some other distributor markets. Greece is another good example.

So, very pleased with the growth in the distributor market. It's higher than the headline revenue growth that you're seeing. If you segment out the pure distributor, it's nicely up and, as I also emphasized on-- in my text, that is, there will be an element of stocking, but if you look over the six-month period, we're getting very strong double-digit growth. So, it's our belief that we are certainly taking market share, and I think the market's also growing a little bit.

So, assuming-- moving onto the next question. So, assuming that you guys-- let's say you pass the Monrovia audit in the next three or four business days, what kind of timeframe can you expect, and perhaps expecting anything? Maybe there are no predictable guidelines for FDA behavior, but could you get approval on the ICL in, let's say, one week? Let's say you pass [inaudible] in Monrovia, or would it most assuredly be six weeks to two months? Do you have any sort of sense of how that process works on the FDA side?

Yes, we do, although it's difficult to predict, and it would be the latter estimates that you give, which is six-- the one to two months, although the window is pretty wide. But critically, we're focused on getting through this audit successfully. We're focused on continuing the discussions with ODE, which as I indicated in my text, are moving along in line with the approval recommended by the panel. So, I think the-- I keep going back to the window that we gave on the last conference call, which is late September/October kind of time frame, with the hope to be on the market by the end of October, which is the AAO.

Two quick ones. I think that I've heard one way or another that you're looking for, ultimately, growth out of the three-piece injector, maybe ramping your revenues somewhere in the 5m per half range. Is that about right? And I guess that would translate to almost 10m or, ultimately, 20% growth in terms of your cataract business. Is that a safe assumption going forward?

We've always said that we believe that the three-piece collamer with an injection system gives us about a conservative $5m opportunity in the U.S., given the size of the new materials segment, that that completes it. We know we were doing well with the plate. We believe the enhancement for the plate injection system and the fact that we're past the issues that affected it in quarter to should return us to growth with the plate. And then, on top of that, we think the three-piece opens up another $5m opportunity.

Unfortunately, we are struggling with an exact date to bring that to market. We're very pleased with the injection system and the fact that this approved. We're finishing off the lens, but yes, around about a $5m opportunity that that opens up, yes. That's consistent with what we've said in the past, Tyson.

A lot of people own the stock for the opportunity in the ICL's, and you have been having some training courses. Can you give us an idea of how many doctors have now spent, what is it, $1,900 per course to attend the training courses, and are those training courses filling up?

Well, we are limited now in our ability to run training courses because we-- up until now, we've done them either outside the U.S. or at centers that are involved in clinical trials because our certification process ensures that they see live surgery, and so the only way they can see that within the U.S. is within a center that's doing live surgery. So, for example, at Toric Center, we ran a course a couple of weeks ago that one of the toric center sites where they would see toric live surgery.

Once the approval is obtained, our ability to run those courses significantly jumps. So, I think the most further number is, year-to-date, we've added an additional 178 surgeons in total, and I think the last number we recorded was high 300. But we've added 178 year-to-date to those courses, and once approval is obtained, we expect that to jump significantly. So, we'd expect, based on the timelines we've given, which is a pre-AAO approval of ICL, we'd be expecting to add in excess of five to 700 doctors by the end of the year.

That sounds like good momentum, at least pre-market. Thank you.

Thank you. Our next question comes from-- is a follow-up question from John Calcagnini from CIBC World Markets. Please go ahead with your question, sir.

OK, Chad again. Yes, on gross margin, for the third quarter, do you see that-- do you see having any of these increases in other costs of sales going into the third quarter? In other words, do you see maybe a little bit of a ramp-up in the third quarter and fourth quarter going back to the level of what you had, say, the previous-- say in the first quarter, or even the fourth quarter in that?

Yes, Chad, very similar to the R&D situation. There was a bolus in the third quarter relating to some expenses now. It will improve a little bit in the third and the fourth quarter, getting us back a little bit of margin. But I wouldn't look for significant improvements in that gross margin until next year.

But Chad, we would expect it to pick up a little bit and Q3 and Q4 from where we were in Q2.

Absolutely.

Sure, OK. That's what-- yeah, OK, great. Thanks.

Thank you. Our next question comes from Mr. [Marvin Purling] from ING. Please go ahead, sir.

Hey, guys, how are you?

Hi, Marvin.

Good. The FDA is finally here.

Are you delighted?

Yes, and in light of that, maybe you can give us a little bit of color on how you're ramping up the sales force and what your plans are in regards to that. And also, I guess in some of your thinking with regards to the cataract numbers, with the hopes of sales ramping up there as well, are you contemplating and putting into your plans the pull-through that you might get from the cataract surgeons that you're selling the ICL to as well?

Yes. Well, as John reported, marketing and selling, you can see that we're investing significantly ahead of both the ICL introduction and the enhancements on the collamer plate and the collamer three-piece coming to market. So, we were up almost 17% for the quarter, and about the same for the same period last year. That really involves two major things, the education department for the ICL and the proctors, and the direct heads that we added in certain geographies in the U.S. where we had little, if any, presence from an independent point of view.

So, in terms of-- and then, there's an element of investment in international as we're driving that international ICL sales and the pre-loaded sales through the distributor markets and moving away from some of the generic cataract products. If we-- ironically, if we held on to those other products, which we could have done-- we made a strategic decision to move away from them-- we'd have been growing revenues reasonably in international, over and above where we are. So, marketing and selling investment is pretty significant. What we have to do is bring the product to market.

Now, we're using that investment, particularly with the trainers and proctors in the U.S., to run the training courses, to add the doctors into the pool of those people who have been through phase one training. It then changes on approval to proctoring, where they're attending surgery with the individual doctors. So, we made the investment. We're geared up to make the most of that. What we have to do is execute to bring those products to market. Unfortunately, we've had some distractions with that in terms of dealing with the compliance issues, which are somewhat self-inflicted. We're pleased with that progress. But once that-- once we move past there, I think the changes we've made in the overall structure, particularly in R&D and engineering, will propel our new product development at an even faster rate. Because, if I add up the time that R&D and engineers have been involved in compliance activity in the first six months, it's been huge. Necessary, but huge, and that has slowed up some of our development activity.

Now, we've worked very hard to stay on track, and we've done a reasonably good job. The three-piece collamer injector is a good example. But that being [inaudible] to marketing investment is there. The direct sales people and into the education proctoring resource. We can't make full use of those until we bring the enhancement [inaudible] to the open market, but it's all there ready to go as soon as these approvals come through, so we're very focused on it.

Did you say that you had the 510-K approval following the injector? That's what I heard in the beginning of the call.

Yes, we did. We got the 510-K. approval on the Collamer three-piece injector. We're building parts now, and what we are now focused on is finalizing that delivery of the three-piece lens, which we've done a redesign for. We're pretty fixed on the redesign. We're running through now-- that whole development through our new quality system, which as I said earlier, is going to be one of the first or the second products that's going through that, and that's taking a little bit more time than we would have anticipated. But nevertheless, we're doing it. We're very pleased with the way we are doing it.

All right. Is that going to be a pre-load?

No, it will not be a pre-load, but it will be-- we believe and hope it's going to be a very competitive delivery presentation.

Great, thanks a lot.

Thank you. Our next question comes from Mr. [Larry Hemovich] of HMTC. Please go ahead with your question, sir.

Good evening, gentlemen.

Hey, Larry, good afternoon.

David, obviously the ICL on its own will be a very significant approval for the company. To what extent do you expect that will drive the main product line today, that is, it will give it a renewed momentum and vigor? Or will it be the opposite, which would be that the salesman will be so busy promoting the ICL that they'll be distracted from the IOL sales?

Good question, Larry. I think two elements. The reality is, in the first part of the rollout, the real determining step on the pickup of the ICL is the [inaudible], and that involves the salesman for sure, but it involves the proctors who are within the education force. So, the proctors have a sole job, and it is to take the doctors through peer, too, and they are not in any way distracted by that, by any other product. And so, I think you won't find a distraction there.

And there is, however, one other factor that, undoubtedly, doctors who are interested in the ICL will obviously try and use that to leverage interest in other products. But, I think Nick has got it nicely positioned in that the sales force needs to make most of its compensation off the base, with the ICL adding to that so that we ensure we get a balance between sales activity and proctoring activity by the education group.

And follow-up questions at David or John might be, to what extent does the increased production that the ICL will bring will start absorbing more factory overhead and help your gross margins over and above the obvious growth margin contribution of the ICL, which we know is going to carry a high margin?

Yes. Larry, obviously that particular product is manufactured in Nidau, Switzerland. The cost, certainly we'll get some economies with volume, clearly overhead absorption is one. In the first six months or so, mix is going to be the biggest improvement to gross profit, and that's the fundamental outstanding gross profit margin that the ICL carries on its own. And then, after three to six months, given our inventory levels, cost reductions and efficiencies and all the things-- you know, Larry, when you start out a product in larger quantities for the U.S., there might be a few hiccups here. But, fundamentally, yes, overhead absorption will become better in Nidau, Switzerland, but I wouldn't look for that for a while. And-- but, just the very mix of that standard margin or that margin into our company will remarkably move the gross profit line.

Larry, just to that point, we saw seven consecutive quarters of gross margin improvement, and you've seen a hiccup to that recently. But, through the mix and through the volumes, we have effective gross margin improvement later this year and certainly early next as these products come through. But, the ICL, as John said in the past, is made on exactly the same equipment as our collamer IOLs, and so there's definitely going to be an absorption improvement. I mean, John's right, that you won't see it immediately. The mix issue you'll see more quickly, but it will certainly underscore a reducing cost of goods from the factory in Switzerland.

Great. And then, one final question would be I'm sure you're giving a lot of thought to ICL pricing. We haven't seen the Artisan lens approved yet in the U.S., so you don't know where they're going to price. But, any updated thinking on pricing for the product once it's approved?

Just consistent with what we've said in the past, between a range of five to 750, probably at the higher end.

Little higher than 750, that would be the high end, do you think?

Well, I mean, we've got-- we don't-- I don't want to be premature on this, but I'd stay with what we've always said, which is that range. We'll certainly go above 750 for the toric, which we'd expect approved about a year later because it's a custom-made device, and we've seen that improved pricing in the rest of international with about a 40% premium.

Great. Thanks, guys.

Thank you. Our next question comes from Neil Braddisher of Broadway Capital. Please go ahead with your question, sir.

Yes. I guess I'm not particularly surprised about your guidance. You've actually been around this $50m level not only last year but the last three years, and the loss is similar. But, 2005 looks as though it's going to be a completely different year. You're just talking about the margin potential, the ICL, and I think everyone's got sort of their ICL models, ramp-up rate and margin. But, I'm curious about what kinds of margins you're likely to get on the new IOLs, the three-piece, and once you have all the injectors out. And obviously, you've got to bounce back in terms of the overhead absorption on the three-piece line. You mentioned that was depressed in the quarter. But, what kind of margin impact does that new product introduction set that you've got later this year have separately from what's going on with respect to the ICL?

Yes. On the new cataract products, on the collamer three-piece, we'd expect to be benchmarking 60-plus percent margins, particularly in the U.S., possibly as high as 65. You're seeing the effect of the-- the lack of absorption of overhead of that collamer three-piece [inaudible] in the gross profit numbers [inaudible] the overhead picked up, and we've always benchmarked around that 60 to 65% on that cataract.

On the ICL margins are going to be significantly higher than that, and so that's why John highlighted the mix issue to get to a-- our target has always been to get to a blended margin in the low 70s.

OK. And that's-- so, even without ICL, you can get well into the 60s, but with ICL, which is obviously much higher, you get into the 70s?

Yeah. I would say without ICL, we can get to the 60-- at 60 or low 60, and with ICL, dependent on the amount of mix, and we'd always targeted 40% of our turnover coming from refractive ICL-- toric ICL, that would give you a blended margin very high 60s, if not touching the 70s.

Yes. One other factor on margins to look, as you move forward into '05 and '06, what we've seen, we have the ICL, which we all know has wonderful margins which will, by mix, automatically improve our gross margin. We have three-piece collamer lenses which have great margins. And then, the third factor is just the U.S.-- the margins in the U.S. on literally every cataract product are best margins globally. And you've seen international increase and you've seen U.S. decline. That is kind of a global negative mix. As we just get growth back into the U.S. business, and that will also just, by itself, improve gross margins, so that's another thing that we're battling right now, is, as the U.S. declines, with the best gross margins, it pulls our margins down, Neil.

OK, that's very helpful. On a related issue, I sort of have this image of your sales force kind of pleading with customers to still implant your silicon products. While you don't yet have a full collamer product line at a time when the overall market has been shifting away from silicon. To the degree that you guys have had pretty strong customer loyalty but, nevertheless, considerable declines in the silicon business, once you have your full collamer line available, does that imply that you see a pretty rapid shift of your customer base? Obviously, there's people that are silicon fans, but a more rapid shift of your customer base. And if so, what are the dynamics there in terms of price? As I recall, they're higher, and also margin, if you see a pretty rapid shift of your existing customers from silicon to collamer.

Hey, Neil, this is Nick. To answer your question, the answer would be yes. In fact, there will be some customers that are already reflective of-- that we've lost right now, that we will see-- that we feel pretty good that we're going to be able to go out and get specialty lens business in the collamer area with them when we have these systems available and the new lens available. There will also be customers, because of the nature of the beast, with silicon. As some of these customers are on the low end of the pricing side, so we definitely get a premium and upgrade from a price, but we'll also have a mix in some of the higher volume accounts where they will use some of the specialty lenses in-- so, we should see some-- a decent boost in that regard-- while still being able to maintain some silicon business with those customers through the mix of hospital versus AFC, a lot of these customers with silicon are in high-volume AFCs.

What I would add to that, Neil, on the back of what Nick said, is I think we have got a huge amount of customer loyalty linked to our-- particularly to our independent sales force, and we're very pleased and proud of that. Certainly, with the lack of the three-piece collamer and with the interruption in supply we saw in quarter two, I think our channel is primed for us to be able to increase sales once we actually bring those products to market and execute on that. And whenever we have done that, we've seen pretty quick pickup.

A good example is in the Facor [sp] disposables where we talked about Cruise Control. That has grown rapidly, and it's grown through penetration in our existing customer base because of that loyalty. Same's going to be true as we bring new lenses or improvements and enhancements to the market, and that, plus the fact that there is a switch, an inevitable switch from silicon to new materials, means that there's an even bigger emphasis on us to broaden that new material line with a collamer three-piece, and to have-- to get back to the collamer one-piece [inaudible]. That improved and enhanced system for the plate, which will be fill trailing next month and rolling out in September, is certainly going to help us access some of that loyalty and access it pretty quickly. Same's going to be true on the three-piece, where the field are, in general, telling us that we've got a significant opportunity with that. We just need to bring out a competitive system in a [inaudible].

So, in rough terms-- and I realize there's a bunch of different products and pricing structures involved-- but in rough terms, how much higher on a unit basis are collamer prices versus silicon prices, and how much different are the gross margins?

Well, the new material segment, I would say is at about a 40%-- 35, 40% premium on selling price to the silicon segment on end-user selling price. In terms of gross margin, there's a slightly different picture. Generally, silicon is cheaper to make than the newer materials until you get into larger volume, and we would expect to get into larger volume when you put together the three-piece, the one-piece and the ICL by mid-next year, reasonable quantities, assuming the kind of approvals we've talked about, which ICL, October; collamer three-piece coming in quarter four sometime, and the plate going back to grow.

So, we get some of the revenue mix benefit in the fourth quarter, and then we don't get the margin benefit really till the middle of the year?

You should get the margin benefit before the middle of the year. You should start to see it Q2 next year.

Got you. OK, thanks very much.

Yeah, just quickly on the difference. Obviously, they're both-- we're talking about the U.S. market companies, that-- margins for the cataract business. We're talking about one lens that carries a premium, but we have two very distinct manufacturing processes. The collamer is lathed. It's more expensive to manufacture. The silicon is fundamentally molded. It's very inexpensive. David's right. As we get our lathing capacity up, that will just, by itself, improve the margins and probably get to a point where the collamer premium lens carries a better margin than our current silicon, maybe couple of quarters down the line.

Any more questions, operator?

Yes, sir. We have a follow-up question from Mr. Tyson Halsey from Halsey Advisory & Management. Please go ahead with your question, sir.

I have two questions, and it somewhat relates to what appears to be a large short interest. I think that it's down to 2m from 3m but, nevertheless, and people have been on the short side. They may even be on the call, for all I know.

But, one has to do with the size of the ICL market, and if you could address that and perhaps reference what the industry sources are saying in terms of the potential for the ICL. And then, secondly, you recently did a secondary at 625. The stock closed around $6. If you were, let's say, to have a clean Monrovia audit, would you go to the board and ask whether or not you could authorize a stock repurchase, let's say at or slightly below six, which would be accretive?

I think you've got IOL market, Tyson.

ICL market.

Well, we look at it from a point of view of the general Phasik [sp] implant market, and I see no change to the kind of references we've given previously, where we said that we figure it's a $200m market worldwide in a reasonable period of time. That's consistent with some of the other companies that are in the-- in that market space. In the U.S., we kind of segmented the market according to the range of correction, so we've highlighted those patients in the-- what people would regard as the higher levels of myopia, minus seven and above, and then the lower range. As I said in my earlier remarks, our discussions with ODE [sp] as we move toward the approval give me no reason to believe that the indications will be any different from those indicated in the panel, so I would expect a wide-ranging approval. Thirdly, surgeons will use it at the higher level first, and then I believe, based on their experience with the ICL, they'll migrate down. I think it's interesting, the example I gave during my prepared remarks, where we have one of our surgeon trainers, trained about 180 people-- surgeons-- had minus 275 and minus five, slightly above, had bilateral surgery. I actually had the pleasure of seeing him when I was in Nidau. He was having his checkup with a Swiss ophthalmologist. He was delighted with his outcome. He'd actually expect himself to get monovision. He slightly undercorrected in one eye, so he actually had reasonable reading correction with no glasses as his accommodation was losing through the age process. So, we think there's a very significant market, $200m a year. I don't disagree with the AMO's point on that. And in terms of potential patients in the U.S., with that market segmentation, it's huge. Even if there are more [inaudible] rates, we'd be looking to add some very high numbers. Nick, do you want to add anything to that?

Tyson, between minus three and minus 20, there's about 12m candidates in the United States, and we were looking at excluding some of those for socio-economic reasons, and to take a look at minus seven and above, a market of about-- a little over 3m people, and in the minus three to minus seven, another 4-1/2m. and so, we were looking at penetration rates of half of a percent to .8% in those, which would yield what we'd shown in other presentations of a potential of up to 98,000 procedures in a year.

Tyson, on the question of stock price and buyback, etc., I think part-- on buyback, we'll just keep our options open. We're very focused on making the investments that we've made in the first six months pay a dividend by getting new products to market and turning the sales lines to give us profitability and positive cash flow. At that point, we'll keep all options open for sure.

Thank you very much, and good luck.

Thank you.

Thank you. Ladies and gentlemen, once again if you do wish to ask a question, please press the star, followed by the one on your pushbutton phone. If you wish to decline from the polling process, please press the star followed by the two. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers.

OK, operator. I think if we have no more questions, just gladly close the call by thanking everybody for participating, and we look forward to keeping people updated with the results of our audit and the-- our progress going forward. Thank you all very much.

Actually, sir, we do have a question.

We can take that if we're still online.

OK, we do have a question from Mr.[ James Waddell].

Hello, James?

Yeah, I guess the star, one and so on, I was a little slow on that. But anyway, I did want to ask a follow-up question, the very last question. It related to the short interest, which was represented as being very high. Would you describe a little bit as to who you believe your major competitors are? I'm not as familiar with this as perhaps some others, but-- and what might have led to that larger-than-average short interest.

OK. I don't really want to get into comments about the stock market, but just in terms of the competitors, happy to give some input on that. The major competitor we see is the Artisan lens, which is an iris-fixated lens. Our ICL sits in the posterior chamber. Difference between the two is surgical technique. The ICL is much more related to state-of-the-art cataract surgery. The Artisan goes through a much larger incision and, based on the data that was presented to FDA, induces far more astigmatism. That's who we compete with in international and, as we said earlier, the growth rates we're getting, particularly in some markets, encourage us to believe that we're gaining market share. In the U.S., that product will be distributed by AMO. They are very close in the approval process. They want to panel later than us but haven't had some of the issues around compliance that we have. I think indications are that they're hoping for approval in Q3. Our indications are late Q3/early Q4. Our basis for competition will be with them. We'll be pleased to compete. We believe we have a superior technology based on aesthetics, how patients look after the surgery but, more importantly, the reduced trauma of the surgery. The ICL is a three-millimeter incision, 10-minute surgery on average. I mentioned that the surgeon had bilateral surgery within 30 minutes. And so, we would be competing on the basis of surgery time, aesthetics, and reduced trauma.

The other critical thing is our next-generation ICL is in the pipeline. It's the toric ICL. It corrects astigmatism as well as spheric elaboration. We're in clinical trials, as we talked about. We anticipate approval. Assuming the ICL got approved, about a year later. The toric ICL is extremely unique. To use it, you need an astigmatically neutral incision. That is beyond the capabilities of the competitor product at the moment, and for the foreseeable future, particularly in the U.S. market. So, we think we have a huge competitive advantage there. So, that just paints you a little bit of a picture of the competitor.

Thank you, that's very helpful.

You're welcome.

At this time, we have no further questions.

Great. Thank you, operator. Pleased to take that last question and, once again, would like to thank everybody for participating, and we look forward to keeping you posted with the updates on the audits and the ICL approval. Thank you. Bye-bye.

Ladies and gentlemen, this does conclude today's conference call. If you do wish to listen to a replay of this conference, please dial 1-800-405-2236. International participants may dial 303-590-3000. Please enter access code 11002269. Thank you.