STAAR Surgical Co (STAA) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the STAAR Surgical first quarter 2008 earnings release conference call.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded Tuesday, May 6, 2008.

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

Thank you, Operator, and good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call to review the financial results for the first quarter of 2008, which ended on March 28, 2008.

The news release announcing the first quarter results crossed 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'll get one to you immediately. Additionally, we've arranged for a tape replay of this call which may be accessed by phone. The replay will become available approximately one hour after the call's conclusion and will remain available for seven days. The dial-in number to access the replay is 800-405-2236, or for international callers 303-590-3000. Both numbers will need a passcode of 11099475, followed by the pound sign. This call is being broadcast live, and an archived replay will also be available. To access the webcast, go to STAAR's website at www.staar.com.

Before we start, during the course of this call the Company will make projections or other forward-looking statements regarding future events, including statements of belief about future sales earnings and other financial items. Any such statement that is not a statement of historical fact is a forward-looking statement, including the plans, strategies, beliefs and objectives of management, expectations for the success of any of our products, the proposed introduction of new products, government approvals or the performance of our foreign subsidiaries, future economic conditions or assumptions underlying any of the foregoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.

The risks and uncertainties include our limited capital resources and limited access to financing, the degree to which use of the ICL by U.S. doctors will continue to increase, potential delay in introducing new products due to regulatory and development challenges and our ability to overcome negative publicity resulting from warning letters and other correspondence from the FDA Office of Compliance. STAAR's financial condition can be adversely affected by general economic conditions and other factors beyond its control, including those detailed from time to time in its reports filed with the Securities and Exchange Commission. STAAR assumes no obligation to update these forward-looking statements to reflect future events or outcomes and does not intend to do so.

Now I'd like to turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Thanks, Doug, and good afternoon, everyone. Thank you for joining us today to review our first quarter 2008 financial results.

With me today is Deborah Andrews, our Chief Financial Officer. After my opening remarks, Deborah will cover the financial highlights of the quarter, and then I will add a few additional comments before we move to any questions you may have.

When we last spoke with you in early March, we closed that call by identifying five key metrics by which you could measure our progress throughout 2008. I'd like to first give you a report on our progress to date, while recognizing that these are measures from which you should see progress each quarter during the year. I should also caution that these are just our first steps, and we must continue to stay focused on our plan and execute throughout the year.

As we also said on our last call, we have heard the concerns from our shareholders that we need to avoid further dilution, and that is why reducing our cash burn quarter by quarter was the very first metric we discussed. There are two components to cash burn. One is expense control and the other is revenue growth.

First, in the area of expense control, our cost reduction efforts, which are focused on the U.S. operations, have started to generate positive results. Back in March we noted that our cash burn would be higher for the first half of the year, but the first quarter should be dramatically lower than our cash burn during the first quarter of 2007, and it was. Overall, our cash position declined by less than $400,000 during the first quarter. That compares to a cash usage of $2.7 million in both Q1 of 2007 and Q4 of 2007. Deborah will walk through the various aspects of our cash generation as well as burn from our operations in a few moments.

However, I'd like to note that our operating expenses in the U.S. are down 8% as compared to a year ago. The bottom line is that we're making progress at reducing the cash burn, but we have to stay focused on spending and committed to our reduction plans. Based on this progress and our outlook, we continue to believe we're on track with a plan which does not call for raising additional capital.

The second metric we discussed was continued gross margin improvement. We stated that Japan would help our gross margins, and we should start to see the beginning of that impact during Q2, Q3 and Q4. Well, our gross margin for the first quarter was down as compared to the first quarter of 2007, but that decrease was due to the low margin associated with the step-up of inventory cost that we recognized in the STAAR Japan acquisition, which we anticipated and Deborah will discuss further. If you were to exclude this one-time inventory impact, our gross margin percentage would have increased during the first quarter. We continue to believe we're on track to improve gross margin quarter by quarter over the remainder of 2008.

The third metric we discussed was to continue our strong international revenue growth. Here it might appear we fell a little short during the first quarter. Though the overall growth rate for international revenue was 27%, excluding Japan, growth was about 8% over the first quarter of 2008. We continue to expect to achieve our full-year goal of international revenue growth without Japan that matches or exceeds the level of 2007. It's important to note that Easter in Europe takes nearly a week out of the selling cycle, and this year Easter was observed in the first quarter, while last year it was celebrated in the second quarter. So while our first quarter international revenue growth outside of Japan looks relatively low, we believe comparable second quarter revenue growth should reflect progress. In fact, we had a very strong April internationally.

Our fourth metric was to achieve sales from STAAR Japan in excess of $12 million, and we believe we're on track to achieve that goal. The integration has gone well, and this remains to be David Bailey's number one focus.

Finally, the fifth metric we discussed was to grow Visian ICL sales in the U.S. as compared to the decrease which occurred during 2007. As we highlighted in this afternoon's press release, U.S. Visian ICL sales were up 9.2% as compared to the first quarter of 2007. Yes, the growth rate slowed a bit during March, because it was at double digits when we spoke with you early in that month. The main reason for that slowdown in growth rate was our resistance to pulling in bulk orders which we have traditionally experienced during the third month of each quarter.

We're very pleased that the Visian ICL has shown good growth in each of the first four months of this year, particularly given the industry reports that refractive procedures have declined anywhere from 10 to 20% and the clear softness in the U.S. economy. There was very strong interest in the Visian ICL at the recent ASCRS meeting during early April, and we have clearly seen sales increasing at a higher rate than what we experienced during the first quarter.

This strong momentum building for the Visian ICL in the U.S. has been created by several dynamics in our favor. The product has been featured on major television networks such as ABC News in San Francisco and Phoenix and the Fox News channels in Detroit and Orlando during the past several weeks. In addition, the NBC Today Show's coverage of live bilateral surgery in an office suite during March continues to create patient interest and open doors.

Visits to our website, www.visianinfo.com, have more than doubled in March and April as compared to the prior year. Later today is the second webinar in our nine-part ICL growth program series. The topic for this second part is, "My Internal Marketing Secrets to Cost-Effectively Gaining More Patients." The first topic focused on how to use the doctor's website to generate patient interest in the ICL. This program is being hosted by Dr. Brian Boxer Wachler.

Our new ICL organization has now been in place for six months and is operating more effectively each week. We also believe that Visian ICL is benefiting from the recent media attention on the LASIK procedure and the potential and actual complications associated with that procedure. During the FDA panel meeting on this topic, there was discussion that perhaps up to 25% of the patients who have received LASIK therapy would have been better served if they had not received the procedure. A majority of those patients, which in terms of numbers would represent somewhere between 300,000 and 375,000 patients annually, would appear to be excellent candidates for the Visian ICL. Our sales team is focused on helping doctors identify those patients, which is a key part of our Visian ICL growth strategy for the U.S.

To summarize, we're making what at this time is excellent progress on these key performance standards. We are getting some positive traction from our efforts. But we have to remain focused on our expense controls while we increase the revenues. Obviously, our financial statements for the first quarter have been made more complex due to the purchase accounting of the acquisition of STAAR Japan.

I'd like to turn the call over to Deborah, who will interpret those statements, and then I'll come back before your questions to review our domestic IOL strategy.

Deborah?

Thanks, Barry. Good afternoon, everyone.

I'll focus my comments this afternoon on some highlights to help you understand the progress we've made on a number of fronts.

Total product sales for the first quarter were $17,960,000, compared with $14,917,000 reported for the first quarter of 2007, an increase of 20%. Sales from STAAR Japan represented $2.8 million. The impact of changes in currency on sales for the quarter was $1.1 million. Total U.S. sales for the first quarter were $4.5 million, down 11% compared with the $5.1 million in the same period last year. U.S. ICL sales were $1.1 million, compared with $1 million in the first quarter of 2007.

Barry discussed the gross profit margin situation during his remarks. I'd like to reiterate that the decline in year-over-year gross margin was due to sales of acquired inventory of STAAR Japan which were stepped up to fair value on the acquisition date and when sold impacted cost of sales by approximately $1.5 million during the quarter. In an acquisition, the inventory held by the acquired operation is recorded at fair market value, or estimated selling price, at the time of the closing of the acquisition under GAAP, rather than the original cost. In the STAAR Japan acquisition, the step-up in inventory value to market value was for only 50% of the inventory due to our previous 50% ownership of the joint venture. The $1.5 million step-up in inventory was a non-cash charge, and the Company does not anticipate any further charges of this nature going forward.

We're beginning to see the efforts of our cost reduction program implemented over previous quarters. U.S. operating expenses decreased across the board during the first quarter of 2008 versus the first quarter of 2007. For example, our U.S. sales and marketing expenses were down about 14% as compared to the first quarter of 2007 and 23% as compared to the fourth quarter of 2007, even with the incremental expense of our direct ICL sales team added in the third quarter of last year. R&D expenses during the quarter, while also below the previous year's level, were negatively impacted by costs associated with a clinical audit for the Visian Toric ICL. Although the Company expects some additional clinical audit costs in the second quarter, they should be dramatically less than the first quarter level and lower going forward.

We expect to see greater impact from our cost reduction efforts in the second quarter and beyond due to the incremental cost reductions set in place during the first quarter and other cost reductions factored in throughout 2008. Overall, we're ahead of our plan to reduce costs, and we feel as though we're making strong progress. And, as Barry mentioned, we believe that if the current trends hold we will avoid the need to raise capital.

Other charges for three months ended March 28, 2008 included a non-cash settlement loss of approximately $3.9 million associated with the Company's acquisition of STAAR Japan. Prior to the acquisition, Canon Marketing Japan, Inc. had an exclusive right to distribute STAAR Japan's products in Japan on terms that were deemed unfavorable to STAAR Japan and STAAR when compared to the terms of a comparable at-market distribution arrangement. The $3.9 million loss represents the portion of the purchase price allocated under the accounting rules to the termination of the unfavorable pre-existing distribution arrangement.

At March 28, 2008, cash and cash equivalents were $10.5 million, compared with $10.9 million at December 28, 2007. We used $3.4 million in cash for operating activities during the first quarter, which includes $2.2 million used by STAAR Japan for operations and to repay Canon Marketing for inventory that was transferred in the acquisition. We used $2.7 million in cash for operating activities during the first and fourth quarters of 2007. During the first quarter, our cash position was positively impacted by $2.7 million net cash acquired in connection with the acquisition of STAAR Japan. Transaction costs associated with the closing of STAAR Japan totaled approximately $1.1 million and were as we planned. Approximately 50% of these costs have been paid, and the remaining 50% will be paid in the second and third quarters.

I'd be happy to answer any questions you might have about our financial performance but would first like to turn the call back over to Barry.

Thanks, Deborah.

I'd like to spend a few moments on reviewing our new strategic roadmap designed to return the U.S. IOL operations to profitability. During the first quarter, our rate of cataract sales decline in the U.S. did decrease, but our objective is to reverse this declining trend. As we reported a few weeks ago, we did receive NTIOL designation for the Collamer Aspheric IOL from CMS, and we've started to see an increase in our average selling price during April. This approval for NTIOL reimbursement means that Medicare will provide an additional reimbursement of $50 for the Collamer Aspheric lens when provided to a Medicare patient in an ambulatory surgical center. ASCs perform more than one-half of all cardiac surgeries in the U.S., according to market scope, and the majority of STAAR's current IOL business is in the ASC segment. The NTIOL subset for reduced spherical aberrations, in which the STAAR Collamer Aspheric IOL has been approved, will allow this enhanced reimbursement through February 26, the year 2011.

We also submitted a new NTIOL application for our STAAR Collamer Aspheric Single Piece IOL, which can be injected through our new nanoPOINT delivery system, which only requires a 2.2-mm incision. The next steps in our U.S. IOL strategy include pursuing additional NTIOL submissions as well as executing on clear regulatory pathways for the Collamer Toric IOL and the preloaded silicone IOL offerings. Successful execution of our strategy will rationalize our IOL product line offering to four products, all premium priced, and should enable us to generate profitability from this product line. The next step will be to globalize our marketing efforts on these products, which will increase our production, allowing even lower cost of goods for these products.

In summary, we are encouraged by our accomplishments to this point of the year. There is still much to be done, and we have to remain focused on the fundamentals. However, we've dramatically cut costs, built Visian ICL sales volumes in the U.S., set in place a roadmap to return the U.S. IOL product line to profitability and are generating the [envisioned] benefits we expected from STAAR Japan. We're carefully watching our spending and cash position and continue to believe we will not need to return to the market to raise additional capital to fund our current operations.

At this point in the call, I'd like to turn the call, Operator, over to you to take any questions the audience may have.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

The first question comes from the line of Joanne Wuensch, with BMO Capital Markets. Please go ahead, ma'am.

Thank you for taking my question, or questions. Your $10 million or almost $11 million SG&A run rate in the first quarter, should we think of that -- how should we think about that decreasing over the coming quarters as you implement your restructuring plan?

SG&A run rate in Q1, how do we expect that going forward? Sorry, Joanne, I'm just repeating it for Deborah.

Well, we expect SG&A to decrease throughout the year as our cost reduction measures take effect throughout the rest of this year. We're still looking for a decline in this area, excluding the effect of STAAR Japan, which I think that we disclosed the effect of STAAR Japan in the press release.

Okay. I'm just trying to figure out how fast you can cut costs -- how meaningfully and how fast.

Pretty significantly. We factored in pretty significant cost reductions into our operating plan. We're on track with those cost reductions. We haven't really provided any forecast, and --

I mean, but would you -- let me ask the question a different way. Would you be surprised if your SG&A as a percentage of revenue was 45% by the end of the year, fourth quarter run rate, exiting? Or is that too optimistic?

It's achievable. It's possible.

Okay. The other thing I wanted to ask you was, in terms of your Toric ICL, I know that's a focus for you. Where are you in your FDA discussions?

Okay, good question, Joanne. This is Barry. I'll take that. As you know, we're going through a process with a third-party audit firm that reports directly to the FDA. And, of course, as Deborah pointed out, those are fees for which we're paying. The third-party audit group is a company called Promedica. They are currently in-house, meaning here in Monrovia, and I believe that today should be their last day going through the audit of the data. And in the next few weeks they'll be completing the secondary data audit, which includes going through our quality management system.

At the end of that time, they'll be prepared -- will have to prepare, I should say, a clinical section for resubmission using the new database, and we would expect that we would be able to complete that, based upon current plans, during the third quarter. The auditors have told us, as I think we've confirmed on prior calls, that thus far their findings to date have generally been related to not having followed good clinical practices, and it's not expected to result in any material change in the study endpoints from a clinical perspective.

Okay. Thanks very much. I'll get back in queue.

Thank you.

Thank you. The next question comes from the line of Jon Hickman, with MDB Capital. Please go ahead.

Hi. Can you hear me?

Hi, Jon. Yes.

Hi. Going back over my notes from last quarter's call in March, you guys stated that you thought you could take $5 million to $6 million of operating expenses out during the year. Is that still valid?

Absolutely.

That's still the target.

Yes. We're -- as Deborah pointed out, we're on -- we're doing better than our plan to achieve that number, and also you'll recall from the first quarter discussion or during the first quarter that some of those plans were implemented during the first quarter, so you will not have seen a full quarter implementation of quite a bit of that cost cutting and will start to see a full quarter in second quarter.

Okay. So that forecast still holds.

Yes.

Okay. Now, Deborah, if you could help me out. It appears that you had -- I don't quite understand this step-up. So when you bought STAAR Japan, that inventory now got marked to market, so on an accounting basis, what you actually paid for it was meaningless, right?

Right. Correct.

So, but that doesn't affect -- I mean, that didn't affect what you -- I mean, the real money that you made in selling that inventory. So if I was to --

No. No, I mean, a selling price is a selling price. We just didn't realize any margin on those products that were sold in the first quarter, effectively.

Yes, but that's -- I mean, but that's all accounting. That's not --

Yes. Exactly.

-- (inaudible) dollars, right?

Yes. From a cash standpoint, we still realized the sales.

And you still realized the margin on a cash basis.

Yes. Right. Correct.

So if I was going to look at this income statement from a cash point of view, I would have to back out the $1.5 million of inventory adjustment there --

Correct.

-- and the -- is it $3.9?

Yes.

Yes.

Of costs associated with the distribution accounting, right?

If you were to do that, you could do that. Yes.

Okay. So, but that, I mean, because those are both non-charges, okay?

That's correct. Right.

Yes, you're correct.

Okay. So that -- and then, so you knew these two charges were going to hit your line this quarter?

We knew that we would have purchased accounting charges, and we -- I did make mention of them in the fourth quarter call. We didn't know exactly the extent of them or what they would be, exactly. It was a very complex transaction. But, yes, we did know they were -- we were going to have them.

Okay. And then my last question, Barry, is I didn't quite get what you meant by saying that your Visian sales would've been higher in the U.S. except for you didn't take the bulk orders at the end -- in the end of March?

Yes. Good question, Jon. Historically, the Company toward the end of the quarter has -- in the U.S. has taken orders in bulks, meaning there may be 30 to 50 ICLs in one order. And typically this comes from two or three different customers, and there's a little bit of a price break that's given. This is in anticipation of patients that are moving forward. And I think as we said on the last quarter call, our move is to get away from that type of repositioning of sales, if you would, and trying to clarify the exact usage of lenses.

So it's obviously a temptation at the end of any quarter to take an extra 50 or 100 ICLs or more. But we're really moving away from that. There are a few accounts we're required to do that in. For example, with the military they'll typically buy in bulks of 40 or 50 at a time, and that's the only way in which they purchase. But our regular routine customers we're trying to create those sales based upon demand rather than the bulk before the demand.

So this gives you a better -- I mean, you sacrifice the volume for a better price in --

Yes, for a better price, and I think it more truly reflects the usage. You know, one of the things, if you looked at the ICL sales in the U.S. historically, there are three months in a quarter, obviously, the first quarter is typically the lowest quarter -- I'm sorry, the lowest month of the quarter. The second month is typically a little bit higher. And then you'll see the peak for the quarter always comes in the third quarter. Never before have we seen in our history here with the ICL that the first quarter of a new quarter would actually exceed the third month of the prior quarter. And that's what happened to us in April, and that was part of what I said alluding to the increase in percentage in April. So our April sales were actually higher than March, which is very -- has not been typical in the past.

Okay. That's it for me. Thanks.

Thank you, Jon.

Thank you. The next question comes from the line of Bill Nasgovitz, with Heartland Funds. Please go ahead.

Hi, Bill.

Hi, there. Well, it's great to see some top line growth. Could you -- where was Japan a year ago? What's the run rate in Japan?

Last year's sales -- well, their sales had been about $10 million, let's say, in the $10 million a year range. It was a little less than that, I think, last year.

Yes, a little less than that. But remember, Bill, that was to a marketing group, whereas now in Japan we're going direct to the consumer, basically. So there'll be a step-up, if you were trying to do a comparison.

Okay, so apples to apples, what would it have been, then? So $10 million was really --?

Well, I think the number from last year, if you look at our -- I believe it was about $8.1 million Japan did through distributors. So maybe add another 20% or something like that, 20 to 25, whatever the distributor would take, the distributor's margin.

Okay. So you're looking for 20% growth, then, in Japan this year?

Well, certainly over -- I think (inaudible) -- our target is --

Yes.

-- $12 million.

Right.

$12-plus million in Japan.

So you're right, that $8.1 is probably somewhere between $10 million and $10.5 million.

Okay.

Yes.

So you feel you're on track there? I mean, that seems like a --

Yes, we're definitely --

Yes, we -- yes.

In terms of --

We spent a lot of money and stock for it, so, I mean, this is a big part of STAAR's future, isn't it?

Yes, well, there are a lot of pieces to that acquisition, Bill. As Deborah says, our sales were $2.8 million first quarter. That's right on our target for exceeding the $12 million mark. But there are other reasons that the Japan acquisition was important to us. Some of the intellectual property that we acquired we've already found to be very helpful. We just recently won in Europe a battle over some patent rights against Hoya on the preloaded technology. So we know this puts us in a much better position from an intellectual property position, particularly on preloaded technology. It also unties our hands, Bill, in terms of moving forward in the future with any type of alliance or strategic relationship the Company might want to develop.

Okay. And can you just talk a little bit about Japan -- Germany, rather? What's happening there, and what's the potential, what's the game plan?

I think in Germany it has historically been almost a pass -- it's a distribution arm, if you would, almost a pass-through is what I started to say. Because for the most part they haven't sold STAAR products. So one of the key focuses we have in Germany is to sell more STAAR products in Germany. We're investing in a refractive sales team, an ICL sales team, in Germany. We're starting to see an increase in the ICL in Germany, which will be very helpful. And we're expecting that to really show significant progress the back half of this year.

Yes, we actually hired our first refractive specialist in Germany last year, and that investment, I think, has really paid off. We've seen double-digit growth ever since we made that investment, and it was -- we had significant increase in ICL sales in the first quarter, so that seems to be looking pretty good. I think the cataract market is a little soft right now, and they've had over the past years some difficulty in that market. But --

One of the things we're working on in Germany, Bill, with the IOL product line, is getting them an acrylic preload product. And we're in the process of doing that. As you may know, we do some [Vitreon] work with NIDEK on a preloaded acrylic lens, and that should also help the softness of the cataract line, because they previously just had the preloaded silicone product to sell.

So how many salespeople or techs do you plan on adding, then, in Germany this year?

I don't remember the number, Bill, off the top of my head. Yes, I'm not sure. I could get back to you.

Okay. Thank you.

Thank you, Bill.

Thank you, sir. The next question comes from the line of Raymond Myers, with Emerging Growth Equities. Please go ahead.

Thank you, and good afternoon.

Hi, Raymond.

Hello.

Hi. I was hoping you might update us on the direct sales force in the United States. How many reps are there now, and qualitatively how is that strategy working? And maybe, if you can, quantitate any metrics around that.

Okay. I think, Raymond, during the first quarter, the sales organization was basically intact that we described on the last call, and that was a total of 15 employees. It's a mixture of refractive sales managers, application specialists and practice development managers. One of the structural changes that's been made in the last several months has been that the refractive sales manager actually has two legs to his team that report directly to him, and that would be the application specialist -- the application specialist focuses on proctoring on clinical things, helping the practice either get started or helping the practice as they ramp up their volume. The other leg is the practice development manager, who works on helping the practice develop their marketing, developing their in-office actions in terms of how they handle patients and move them through the process.

So the regional manager works with those other two legs to develop a regional strategy that's based upon really focusing on key physicians. This is a change from our prior strategy of trying to really focus on the number of physicians we've trained. We're calling it "Find the 40." That's the strategy they're employing, is finding the 40 key surgeons in the U.S. that are of the right profile, and the profile means that they have a pretty good refractive practice now, they probably need to own their ASC so they have easy access to do the Visian ICL procedure, or help them plan to develop an in-office suite so they can do the procedure in their office, and that they have a commitment and they share a real commitment to put the ICL as the key component of their refractive strategy. And if they commit to that, then our strategy is to just go promote the heck of them, support the heck out of them, and all of those clinical practice development and sales efforts that may be required within the practice.

And we're making good progress on that. It's a mind shift for our sales team. Because you get a call and you want to go do -- you want to talk to each individual and support each individual, but we only have 15 people, so the focus is to just find the 40.

And how have you -- what kind of traction have you had in finding the 40? How many of those advocates have you identified so far?

Well, we -- you used the right word, Raymond, advocates -- we group our users into some buckets that we call nichers, users and advocates. We finished the year with 18 advocates. We added seven advocates during the first quarter. In April we added two more. So we're up to 27 advocates right now.

That's remarkable growth. Are those advocates you added -- how many so far this year? Nine?

That's right. Seven first quarter and two in April.

So you increased your number of advocates by 50% in the first four months of this year.

That's correct. One of the other things you may have noticed that we've done is we've changed our website. Historically, if you'd gone to the www.visianinfo.com and looked for a surgeon in your area they would have been alphabetically listed. They're now listed based upon their volume.

Well, this all sounds like good traction, very good segmenting -- segmentation and identification of the -- of your target market. My second question, or the second of the first two questions I asked was about qualitatively, how is the direct sales force performing? This is a good metric. Can you add anything else?

Well, we do know that this group that's gone from 18 to 27 are growing at a faster rate. And we do see very visible signs. When a surgeon moves into this advocate rate and really adapts the ICL into their practice, they can have dramatic growth. And I'll use an example in Phoenix, our leading physician in the Phoenix area. And he presented at our ICL users meeting pre-ASCRS.

Last year in 2007 he was averaging probably around 10 to 15 ICLs a month. And he incorporated the changes in his practice necessary to really make the ICL a key part of his refractive offering. And his volume in January was 40 ICLs. In February he went on a mission trip. He was gone for two weeks out of February, so he only did 15 ICLs in February. And in March he was back to 42. So we can see in a practice how someone who really starts to embrace the technology can just take off.

Well, it sounds very encouraging. Thanks again.

Thank you, Raymond.

Thank you. The next question comes from the line of Larry Haimovitch, with HMTC. Please go ahead.

Hello, Larry.

Good afternoon. Man, it's a bummer being so late in the call when most of the -- all the great questions have been asked.

I'm sure you'll have a great question.

Well, actually, I don't know. Deborah, on the inventory issue in Japan, that was a new one for me. I hadn't heard that you had to mark it to market. But nonetheless, are we through all the inventory now, and will you -- will the accounting go back to the more normal last in, first out, etc.?

Yes, normal margins going forward.

Okay, so basically you chewed through that in the first quarter, and that's done now.

Right.

Okay. Barry, overall qualitatively, never minding the quantitative numbers that were asked earlier, are you pleased with what you've seen so far in Japan?

Yes. Obviously, any time you make an acquisition you're going to have surprises, and you're going to have challenges you didn't expect. But as I said in the text, this is David's number one objective. David has been close to this market for many, many years, and he's working very closely with that organization, as is Deborah, to make sure that we don't miss a beat. We were very pleased with the first quarter results, and we're pleased with where they're tracking thus far in second quarter.

Okay. Now, when you look at the U.S., the performance was a little bit better, certainly, especially on the Visian side, which had pretty good growth. When you view your issues there, Barry, how much are issues that are internal to STAAR, and by that I mean distribution issues, sales issues, etc., versus external issues that there's competitive inroads into some of the areas that you were stronger at in years past?

Well, clearly we're still working through some of the issues in our U.S. distribution group, and those involve not only what I mentioned earlier in regard to really helping the refractive team understand their mission and what they need to do in order to accomplish that. And I do -- there are calls held every other week with the refractive team in the U.S., and I've sat in on those calls. I can hear the progress they're making in understanding what they're doing, and I can hear by the activities they're doing that that progress translates to what they should be doing in the field. But it's a process in terms of getting there. It's a change in their mindset.

Secondly, with our independent group, I think they're starting to understand more what role they play with the ICL and understand how they can be compensated for their efforts. We did roll out a new compensation plan for them, so that if they're really a player in the ICL market within their distribution area, they can make very nice commissions on the product.

Great. And then one final question. If the quarter was an absolute blow-out amazing unbelievable quarter, we'd score it a 10. If it was a disaster and things were horrible, we'd say it was a 1. In your mind qualitatively, how do you feel about the quarter, Barry?

I think about a 6.

Six. But you're hard to please, aren't you?

I am, but, you know, we're making progress, but we've got to be cautious. We've still got a long way to go. This is just one quarter or four months behind us. I can tell you that the momentum is moving in our direction, not just in the market but amongst our employees. Our employees are starting -- you know, you get a few wins and you start to develop a little different attitude. And we're seeing that around here. We're seeing it in the field. But we've still got a lot of progress to make.

Yes. Good. I just want to ask one more quick question, and then I'll jump off. Sorry. And that was, you made an interesting comment earlier. We heard about the LASIK panel, obviously. It wasn't very pretty in some respects. But to what extent is that going to really help you with the ICL? I mean, clearly the consumer economy is miserable now, and the fact that you were even up 10% is a terrific performance in that environment. Do you look at that as a nice opportunity that LASIK kind of took it on the chin a little bit and this should help the ICL?

Well, there are several dynamics, as I mentioned, in our favor. It's really hard to gauge how much each dynamic is impacting the positive trends that we're seeing. But we clearly know that this is one of the positive dynamics for us -- the number of calls from physicians, the number of increased hits on our website. April was just a dramatic month for us, and we've seen obviously increased interest. It comes from all these different sources. But this is a part of it.

I mean, the Phoenix -- the piece that Dr. Rob Rivera did in Phoenix on the news channel there, he had a patient who actually was a LASIK candidate, and this patient chose the ICL over the LASIK. And that's the kind of examples we need to show the marketplace, rather than trying to segment this product only for the very, very high myopic patients and those with only thin corneas. You know, the Collamer material is an excellent material. And ophthalmologists have been inserting lenses into the eye -- into eyes for years and years. And this is an excellent procedure that doesn't take anything away from the cornea and positions the patient for future refractive procedures or cataract procedures in the future without any changes in their current corneal structure.

Great. Thanks. Congrats on the progress.

Thank you, Larry.

Thank you. The next question comes from the line of Rick D'Auteuil, with Columbia Management. Please go ahead.

Yes, I'm not sure if this one's been asked, but related to your new strategic roadmap on the IOL product line, the focus is -- or you reference rationalizing the product line and focusing on the premium price point. What happens to the commodity products? Are they taken out of the product line? Are they still being offered but not focused on? And then what's the independent reps' reaction to whatever that decision is?

Okay, good questions, Rick. And, you know, the IOL line for STAAR, as you know, the last couple of years, has been a real challenge, and we've made some progress. But I think -- and this roadmap has been presented to all of our independent sales reps. It's been presented to our Board. So I think everybody's on board with the direction in which we're headed. And it will be to move away from those products.

You know, if you look at STAAR historically, I hate to say this, but in many ways we've been a bottom feeder provider in the IOL market. We've sold some silicone lenses at very, very low prices, and we're moving away from that. We're walking away from prior deals at very, very low prices. And we're going to move away from the current silicone offering that we have, and in 2009 -- at some point in 2009 I hope the only silicone we offer is in the preloaded version. Same thing with the Toric product. I would hope in 2009 the only Toric product we offer is of the Collamer version. So the idea is to rationalize this thing down to four products, increase our volume, sell at a price we make money, and turn this product line around.

Does that mean -- obviously, most of what you do today is non-premium products, and really all of these things are on [the come] except for the one that you just got approval for, right?

Well, the other exception, Rick, would be the current silicone Toric IOL, which we've worked with the FDA on what our pathway will be to convert the Toric approval for silicone to a Collamer, which we think will be a much better product in the market. And then you're right, the second one is the new NTIOL status that we have on the Collamer three-piece lens. We have put in submission for NTIOL on our single-piece Collamer lens, and then the last addition would be a preloaded silicone aspheric lens with NTIOL.

Okay. Kind of going back to the independent reps, they don't need to carry the -- if they're representing you, they don't need to carry a commodity silicone-type product that's not priced at a premium? They can just have the premium products?

Well, you know what's happened, and we've all seen -- maybe not all of us would've guessed what's happened in the U.S. market and how much of it has turned toward premium or NTIOL reimbursement. Our sales force is excited about getting lenses that they can go back and sell on features and benefits and get a better price for than just selling on price. So we want to get out of this market of just selling on price.

Okay. The second question I have relates to the charges and all the noise in the quarter. What can we expect in Q2? I understand the inventory mark to market doesn't -- isn't a factor in Q2 and some of the Canon-related stuff isn't a factor in Q2, but three months from now, what will we be seeing that relates to charges that are identified today?

Well, there shouldn't be any more acquisition-related charges. We still have maybe a half a million of cash required to pay for some of the transactional fees. That was about a million, of which we've paid one-half. But I think in general, Rick, what you should see is you should see our gross margin improving -- and I mean improving on what it would have been if you took out the stepped-up inventory, not from a 43% level but from a 50%-plus level. You should see that improving. You should see our expenses to continue to decline. And you should see our revenues increase.

Will there be any restructuring charges in Q2 related to the expense reduction efforts?

No.

No.

Okay. So today, sitting here today, Q2 ought to be a clean quarter.

Right. We should start seeing what we think is our normalized quarter in Q2. We don't expect any unusual charges.

Okay. That's all I have. Thanks.

Thank you.

Thank you. The next question comes from the line of Tyson Halsey, with Halsey Advisory and Management. Please go ahead.

Can you hear me?

Hi, Tyson.

Hi, Barry, how are you?

Good. How are you doing?

Good. I have to say after the last couple of years, FDA problems and earnings, I kind of stopped trying to track the ICL momentum. But it really appears as if there is a significant uptick, and I'm sure I'm not the only person who'd really like to see whether we're modeling a hockey stick in acceleration and a great potential at hand. And with that in mind, can you tell us how many ICLs were sold in the quarter, and where the ICLs per doctor stand?

I didn't understand the second part, Tyson.

In other words, how many ICLs are the doctors selling, let's say on a per week or a per month basis?

Okay. The first part, we don't report the units that we sell. You could do some pretty easy math using an average selling price to determine how many units we sold. When I spoke earlier about the advocate group, which has grown from 18 at the end of the year to the end of April now 27 physicians, those physicians as a group average over 100 ICLs per year.

Okay. That's very helpful. What opportunities do you envision with the Collamer? I mean, there are people out there who really think this is a tremendous material with great opportunity. Can you tell us what you see there?

Yes, and we all agree with what you said, Tyson. I think one of the things that we really have to work on is delivering that same message to the marketplace and getting it across effectively. I think one of the things that has hurt us in the past has been delivery systems. That's been topics on these calls, I'm sure, many times. I think if you were to ask any of our independent reps, thus far they're very pleased with the new nanoPOINT injector system through the 2.2-mm incision. But of course that's for the single-piece Collamer, and that's the product that we just submitted a few weeks ago for NTIOL submission on. So if we're able to get NTIOL approval on that product, that's one that we should really have some fun with in the marketplace and I think really help promote the overall benefits that the Collamer material has to offer.

Secondly, we're working on a new delivery device for the three-piece Collamer, which already has NTIOL. So even though we've seen very good increases in our three-piece Collamer lens with NTIOL, we're expecting to see more increases once we get a better injector system. We're expecting to have that late second quarter or early third quarter for the marketing team.

I would say also, Tyson, that there were two buzzes that I picked up at ASCRS. One was around the ICL. The second was around the Collamer material. We had several physicians come to us and talk to us about the kind of intrinsic accommodating properties that the Collamer material has. So we're currently in discussions with several physicians on how to work with that material and how to look at those accommodative properties and package that into a product in a short period of time that we might be able to take to market.

[I can tell] it's a little sensitive, but I'm going to throw it out up there anyway, and could you compare and contrast what you might be doing differently with your predecessor, David Bailey, domestically? And I'm going to break it down to make it easy in terms of FDA, new products, customer contact and maybe contact with the sales force.

Well, I would only say this. First of all, there were a lot of good things in place when I came here. And that's one of the things I found. And just getting everybody together, working with the same message, with the same objective, certainly helps to make a lot of difference. But we had a lot of good things in motion here when I got here. But, you know, I'm a U.S. guy, and that's what I know best. And I also started as sales guy. So I like the sales organization. I can understand them. And, yes, I've spent quite a bit of time with the sales organization. The distribution issues have been real that we faced here. And I enjoy that. So while Dave stays focused on the international market, I'm taking the time to really invest in the U.S. market, both understanding it and helping to move it along.

And here's another question. Could you explain to me how you're increasing sales? Because I know I was worried, and I think other institutional investors were also worried, given the departure of, I guess it was three, RMRs, how it is that you are picking up sales? Where is it that you're seeing the strength that in spite of their departure you're seeing some momentum, which I congratulate you on?

Well, I think a couple things, Tyson. With the independent reps, we went to a model whereby there's a STAAR employee who manages them, and that's different than what it was in the past, even though we had some very good RMRs that represented this Company, there's no doubt about that, and they did a very good job in the sales field. And we suffered in '07 because of their losses. And we're working now to regain that momentum. And you regain that by building relationships with them, helping them. You know, these guys want to sell products. That's how they make money at the end of the day. So if we're able to get injector systems to them, if we're able to get new products to them, if we're able to get NTIOL approval to them, that just gives them the opportunity to make more money. And if they're able to make more money, then I think they'll go out and fulfill the objectives that the Company wants them to within their area.

Last short question, how are you running with this new split sales force that was put in by David Bailey? I think some people questioned whether that made sense. I mean, what's your read on it at this juncture? Do you like it? Are there good elements? Are there things that -- well, are there good elements to it?

Well, I think if we all were to start on a clean piece of paper today we'd probably all design the sales organization differently. But it is what it is, and that's what we're working with. But what I am pleased is that I am seeing progress every week in terms of what the direct refractive team -- how their actions are in line with the strategy and what we want to accomplish. And I'm also seeing week by week the independent reps understanding more where we're trying to take the product line and what their role is in the ICL, ICL product. And I think we'll just continue to see progress as we move along. But that takes a lot of communication, a lot of efforts. We're now holding every-other-week calls with the independent reps, too. And they're our eyes and ears out there in the field, and it's important for us to communicate and listen to them, and that's what we're trying to do.

Thank you, sir.

Thank you.

The next question comes -- is a follow-up question from Bill Nasgovitz, with Heartland Funds. Please go ahead.

Yes. Realizing that Barry, you're the new guy on the block here, but just looking through the Proxy, I find it amazing that two guys listed don't own any stock. They've got options on 100,000 shares, Mr. Duffy in particular, and others. And I'm just wondering when we might see insiders and directors, officers, have to buy stock to align interests with public shareholders. What's your view of that?

Well, good question. I think one of the things, Bill, that we've suffered from in the past here is that we haven't had any periods in which insiders could buy. And I can tell you that many insiders have come to me and said, "When do I have a window? When can I start to buy?" And I think we have a window that hopefully is going to come up in the next few days here. But we haven't had an identifiable window where insiders could purchase. So hopefully in the future we'll see an increase in that.

Well, that'd be great, the sooner the better, and perhaps some guidelines that directors can take compensation in stock, too, right?

Yes, Bill, we've developed that. And our Board now has the option to do that. We've publicly disclosed it. I know our Chairman, Don Bailey, he currently takes his compensation in the form of stock.

That's great.

And others are considering that. As you also may know, both Dave and I are taking part of our compensation in stock.

Well, that's good to hear. So it'd be great if the Chair of the Audit Committee, Mr. Duffy, owned a bunch of stock versus just options. And the head of Compensation is David Morrison?

That's correct.

And where does he reside?

In England.

Is that a good place for the head of Comp to be domiciled, for efficiency and cost and -- we're a company that's hanging on here, right? Travel must be a fairly big budget. I hope he doesn't travel first class.

No, it is not -- it certainly hasn't been a problem in the past. David has been available. And I think if you look at his attendance record it's been very, very good. David manages his expenses very well. But I would add this. You know, the profile of the Company has changed considerably. We're now 75% of our revenues are from the international market. So it's clearly important for us to make sure that we have Board members that understand the international market and understand where we're going.

Well, that's a good point, but maybe he shouldn't be Chair of the Compensation Committee.

Well, David does get to the U.S. quite a bit. He does have other business interests that get him here. But I can say this, the Chairman of the Comp Committee, I have not had any issues in communicating with him any way, in any form whatsoever, and he usually comes over like he is next week. We're going to spend an afternoon together on Wednesday before our Board meeting and annual shareholders meeting on Thursday.

Well, perhaps, and I don't mean to put you on the spot, perhaps it's better with Don. But I'm glad that you've made some -- STAAR has made some move here to align its officers' and directors' comp with public shareholders, and I think there's a lot more to do, and the sooner the better. I think it would only benefit all shareholders.

I think also, Bill, I should note -- and a lot of these things are very easy to pass by, and we don't notice them -- but in our Proxy Statement for next week's shareholders meeting, there was a change made in the compensation philosophy of the Company, and the number one driver behind compensation for our employees now is our results. It's results driven. And that is unlike what it had been prior.

Okay.

Thank you.

Thank you, sir. The next question is from the line of Jon Hickman, with MDB Capital. Please go ahead.

My question was answered. Thanks.

Thanks, Jon.

Thank you.

(OPERATOR INSTRUCTIONS)

The next question is from the line of Tyson Halsey, with Halsey Advisory and Management. Please go ahead.

You were just about to answer my easy question, but Bill Nasgovitz asked some excellent questions, as usual. It seems as if things seem to be going rather well. And from the last quarter's conference call it sounded as if the break-even would be when the revenues got up to about $72 million, which seemed predictable in the fourth quarter. Do you think that you could hit a break-even in the third quarter?

Tyson, I appreciate your comments, and I agree, we have made progress, but I still will caution we've got a lot to do, and there's a lot on our plate, a lot of challenges. I think we're up to it, but we've got to stay focused in order to accomplish those things. And I wouldn't want to project anything.

I'm not asking you to project. But it seems as if that there -- I said "could," and it sounds like that's more possible, given your momentum.

Well, let's both hope we get there.

Yes, Tyson, that's not likely. Our break-even scenarios were based on we didn't include STAAR Japan. So those numbers would be different, because we've added a lot of incremental costs associated with STAAR Japan.

We'll stay focused on the ball.

Okay. I just recalled the revenue side being $12 million on top of the $60 previously, and you said $72 million in revenues would be a break-even. Maybe I misunderstood that. So you're saying there are expenses associated with STAAR Japan that are still going to be rolling forward?

Not costs -- not acquisition, but just their expenses, their SG&A.

Okay. All right. I may have misunderstood. I'm sorry.

We'll keep working.

Thank you, sir.

Thank you.

At this time there are no further questions. I'd like to turn it back over to management.

Operator, I believe there is another question from Rick D'Auteuil.

He left the queue.

Okay, thank you.

Okay, good. Thank you, Operator, and I want to thank all of you for being on our call. I want to remind you that our annual shareholders meeting is next Thursday at 10:00 a.m. here in Monrovia at our headquarters. And we'd certainly invite any shareholder that has interest to attend the meeting. Look forward to seeing you. If you have any questions that we've not completely answered or any additional questions, please feel to give Deborah or I a call in the future, and we look forward to talking to you about our second quarter results in about three months. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the STAAR Surgical first quarter 2008 earnings release conference call. You may now disconnect. Thank you for using the Teleconferencing Center.