STAAR Surgical Co (STAA) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Third Quarter 2009 Financial Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

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

Thank you, operator, and good morning, everyone. Thank you for joining us for the STARR Surgical conference call to review the Company's financial results for the third quarter of 2009 which ended on October 2, 2009.

The news release announcing the third quarter results crossed the wire after market yesterday and is available at STAAR's website at www.staar.com. Additionally, we have arranged for a taped 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 operator will provide the dial-in information at the conclusion of today's call. In addition, today's call is being broadcast live and along with an archived replay will be available at the STAAR website.

Before we get started, during the course of this conference call, the Company will make forward-looking statements. We caution you that any statement that is not statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenue, sales, cash or other financial statements, any statements about plans, strategies or objectives of Management for future operations, any statements concerning proposed new products, government approval on new products or other future actions of the FDA or other regulators, or any statements regarding expectations for the success of our product in the US and international markets, the outcome of product research and development or any clinical study, any statements regarding the outcome of any pending legal proceedings, the availability of insurance coverage for any loss, any statements regarding future economic conditions or performance, statements of belief, and any statements of 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 that could cause actual results to differ materially from those described in the forward-looking statements. These risks are described in the Safe Harbor statement in today's press release and in the risk factor section of our annual report on Form 10-K filed with the Commission on April 2, 2009. Investors or potential investors should read these risks.

STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes, and does not intend to do so. In addition, today's presentation includes certain financial measures that may help you better understand our business, but that have not been prepared in accordance with GAAP. Any explanation and reconciliation to these non-GAAP measures has been provided in the press release issued yesterday afternoon by the Company. And that press release, again, is available at the website.

Preliminary results of research on the accommodating properties of the collamer lens materials provided for the information of investors does not constitute a claim of therapeutic benefit or indication for use. Please read the cautionary statement regarding this research in today's press release.

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

Thank you, Doug, and good morning, everyone. I would like to thank you for joining us today to review our third quarter 2009 results. We apologize for the unusual hour of today's call, but given our schedules this week, which includes Deborah's presentation tomorrow in New York at the Oppenheimer Healthcare Conference, conducting the call at this hour really became our only viable option.

Deborah Andrews, our Chief Financial Officer, is with me today. After my opening remarks, Deborah will address some of the operational highlights behind the financial results of the quarter, and then I will discuss a few additional developments before we move to any questions you may have.

Last quarter we broke a 25 quarter string of losing cash from operating activities. This quarter we began a new string. We now have two consecutive quarters of generating cash from operating activities. While we continue to generate cash from operations, our next focus is to reflect profitability, despite our non-cash charges which are about $1.5 million per quarter.

For the third quarter, we increased the amount of cash generated from operating activities to $464,000. And we have now for the year-to-date period, generated cash from operating activities. We fully recognize we have a lot more potential in the business and a lot more work to do, especially in the areas of gross margins and international expense management, and of course, profitability.

But given the economic environment, our new string is a significant accomplishment for the Company. At the same time, I believe we have several key milestones approaching which should enhance our opportunity to more fully achieve our potential. We will go through those dynamics during the call.

First, let me step back and provide you with an update on the five key metrics we provided earlier this year, upon which you could use to judge our operational performance and progress during the year. Our report card remains generally positive. Professors would probably give us a B. I might make it a low B. We have to do a better job. But here is why I would prescribe that grade to our job.

The first metric is to generate positive cash flow from operating activities for every quarter of the year. And as I just mentioned, we achieved that milestone in the third quarter by a healthy margin. Deborah will provide additional insight on this metric during her comments.

Our second metric is to improve our gross margin percentage of revenue each and every quarter. Here we fell short. I am disappointed, and we clearly have work to do. Our gross margin of 54.3% took a step back from 55.8% generated in the second quarter, and down from 57.7% reported for the third quarter of last year.

The major factor behind our poor gross margin performance came from our international operations. The majority of that shortfall came from Japan where average selling prices dropped to intense price competition. Deborah will address in more detail the gross margin issue, as well as our plan to correct the negative trend, during her comments.

Our third metric is to successfully implement the cost reduction efforts we initiated in 2008. We continue to achieve this metric. Global operating expenses were $900,000 less than in the third quarter of last year. Again, more work to do in cost reductions, especially in our international operations, but we achieved this metric, once again, in the third quarter, and year-to-date our operating expenses have declined $8.1 million, or 19.3%.

Again, let me say that again, year to our operating expenses have decline $8.1 million or 19.3%. Overall, I think that is a very good performance.

The fourth metric is our progress toward gaining key regulatory approvals for our Visian TORIC ICL in the US and both Visian ICL products in Japan. Here again, I believe we are meeting this metric as we are making progress. The progress in Japan for the Visian ICL submission continues to move forward. In the last three weeks we have received the marketing license for the injector systems for the Visian ICL and received several questions which would be categorized as label-related issues.

The Visian TORIC ICL will be reviewed after the ICL is approved in Japan. Now, in the US, during the 60-day period from mid-July to mid-September, we worked with the agency interactively to answer the questions they had on our submission.

I must say that both sides responded quickly and the dialogue has been quite positive and fair. We have had no additional questions since mid-September, and await the FDA's decision regarding next steps. We are not making any predictions, but we do expect to learn of their decision in the near future. Also during the quarter we submitted a PMA supplement for the preloaded silicone Aspheric IOL and expect to hear in the coming months.

Finally, our fifth metric was to increase our share of refractive procedures in key markets. Globally, our Visian ICL unit sales increased by 15% during the quarter, while revenues increased by 5%. Year-to-date, our total Visian ICL units have increased 23%, while our revenues have increased 9%.

First, to look at these markets, let's look at the US. Visian ICL sales increased on a year-over-year basis by 4% and increased sequentially by nearly 10%. Units were basically flat during the quarter. Overall, we believe we continued to gain US market share during the quarter based on the refractive procedure data we have seen to date, which seems to indicate that procedures declined, in our minds, about 30% during the quarter.

I say that because LCA Vision has previously reported their refractive procedures declined by 29% in the quarter, though MarketScope is only currently projecting a 15% decline for the quarter. We will wait to see what TLC has to report. Year-to-date, our units are flat and revenues have increased by 2% which represents continued gains in overall market share.

Next, in Korea, where we believe we are nearing a 10% share of refractive procedures. Our units increased 17% during the quarter, while our dollars decreased 6% from the year ago period as a result of the continued investment we are making into market expansion with our distributor. Year-to-date, our units have increased by 70% and our revenues by 33% reflecting, again, gains in market share.

In China, both units and dollars tripled during the quarter. We have been making investments in this distribution channel as well. Year-to-date units have increased by 18% while revenues have increased by 62%, again, reflecting gains in market share.

Visian units sales in India increased by 41% over the third quarter of last year, while revenues increased by 31%. Year-to-date, units have basically doubled while revenues have increased 86%, again, reflecting a gain in the market share.

In Spain, we began the year with about a 5% share of refractive procedures. As many know, the economy in Spain has been very difficult this year. Visian units have declined 13% during the quarter while revenues decreased 19%. We believe refractive procedures have decline more than 10% in most regions of the country. Year-to-date, units have increased by 3% while revenues have decreased by 11%. We are still holding our share in Spain or perhaps slightly gaining share.

In Latin America, Visian units declined by 3% while revenues increased in 8%. Argentina achieved a 20% increase during the quarter. Year-to-date, units are slightly down 1% while revenues have increased by 6%. With some declines in refractive procedure volume, we believe we are still gaining share in Latin America.

Overall, we hit on four of the five metrics. I would still grade this as a B despite this disappointment over gross margin results. We will continue to focus on achieving all five metrics during the fourth quarter.

Now, I would like to turn the call over to Deborah for further review of the third quarter's operational and financial highlights. Deborah?

Thanks, Barry. Good morning, everyone. Given that we issued our results late yesterday, I would like to focus my comments today on some specific highlights as well as our strategy to address our gross margin.

Our big achievement for the quarter was the generation of $464,000 of cash from operating activities and the increase in our readily available cash position to $5.6 million from $5.0 million at the end of 2008. Based on this result, for the first time since 2002, we have achieved positive cash flows from operations, year-to-date, and we are well on our way to achieving one of our key metrics, which is to generate cash from operating activities for the entire year.

We expect this trend to continue into the fourth quarter, despite the ongoing cost of litigation. One major reason for this confidence is that we have recently received notification that dating back to July 1, 2009, our legal costs in connection with the Parallax and Moody trials will be partially covered by our insurance carrier. The other reason for this confidence is that we continue to watch our expenses and our working capital, in particular, our inventory.

Expense management was especially effective in our domestic operations where despite legal expenses, we reduced operating costs by $1.1 million or 20%, as compared to the third quarter of 2008. International operating expenses were up $200,000 or 4%. We are redoubling our efforts on containing costs within our international operations and expect to make progress on this metric in the fourth quarter. Overall, operating expenses fell to 60.8% of total revenue for the third quarter, compared to 65.6% in the third quarter of last year.

We also reduced our net loss for the quarter compared with last year. For the third quarter, our net loss was $2 million, or $0.06 a share, compared with our loss of $2.2 million, or $0.08 a share. $1.3 million of the net loss resulted from non-cash charges, including depreciation, amortization and stock-based compensation.

The third quarter is typically our weakest from a top-line perspective due to the seasonality we experience, especially in Europe. While our overall top-line performance was flat, we generated growth in what are typically our higher margin product lines, IOLs and ICLs.

During the quarter, we grew our global ICL sales by 5% and our IOL sales by 7.5%. While the rate of ICL growth was similar for both the US and international markets, IOL sales grew 14% in international and declined 8.5% in the US. Clearly, we are not where we would like to be with US IOL sales, but we have an initiative that we believe can help us regain momentum with standard IOL sales in the US, which Barry will review in a moment.

Increased sales of IOLs and ICLs were offset by decreased sales of other products. The deemphasized lower margin products account for 26% of total revenue in the quarter, down from 30% of total revenue in the third quarter of last year, and an absolute dollar sees lower margin products decline by about $800,000.

Despite our efforts to improve margins by deemphasizing lower margin products, we have not yet met our margin objectives, primarily due to intense price competition in international markets, in particular, Japan and Germany. Additionally, ICL average selling prices in international markets have also declined year-over-year as distributors deal with difficult economic conditions and fluctuating exchange rates. In other cases, like Korea, we have fueled distributor investments in market development with pricing concessions.

The third factor negatively impacting margins was the 43% growth in IOL sales in distributor markets which carry low gross profit margins compared to other countries where the product is sold. Some of this is seeding the market with our new acrylic preloaded technology. These negative factors were offset by somewhat higher IOL and ICL average selling prices in the US.

Our target for gross profit remains 60%. We will have to more carefully evaluate, globally, our pricing policies and special programs for all products, to ensure they meet our gross profit objective. It may be that we have to sacrifice some sales growth to meet our profitability objectives, while reducing our operating expenses.

Additionally, we need to see growth in US IOL and ICL sales where margins are high. Unit sales growth of all STAAR products is important to margins as well, in order to increase our manufacturing volumes and improve overhead absorption.

Finally, it is our ultimate objective to become profitable, regardless of what our margins or our sales are. To achieve operating profitability, our operating expenses cannot exceed our gross profit, and we have got to narrow the gap. We will continue to manage expenses and margin with this objective in mind and look forward to reporting our progress at the end of the year.

In closing, I would like to thank everyone at STAAR for their contributions, and now turn the call back to Barry for a few additional comments before taking your questions.

Thank you, Deborah. Before we open the call to questions, I would like to briefly update you on the activities at the American Academy of Ophthalmology meeting which took place last week. Two of the highlights for STAAR were the Visian ICL Experts Meeting and the release of the initial assessments of the nanoFLEX collamer IOL by cast.

First, we had a full day meeting on Friday, October 23 entitled the Visian ICL Experts Meeting, and in order to be diligent in our potential release of the TORIC ICL, our goal was to only have about 100 surgeons in the audience. We ended up having over 108 and had to turn folks away. The meeting was chaired by Dr. Rob Revere from Phoenix and included presentations by surgeons from the US, Argentina, Saudi Arabia and the Dominican Republic.

Presentations were made by three ophthalmologists from the military, which reflected patient visual results with the Visian ICL in the military of over 70% seeing 20/15 or better and 97% 20/20 or better. The soldiers treated also expressed a 100% satisfaction rating with the Visian ICL.

Now let's turn to the Collamer Accommodating Study Team, or CAST. The results presented on Saturday, October 24, and throughout the AAO Conference in San Francisco last week, clearly established the benchmark, which was the goal for this first phase of CAST.

This was not a full-blown clinical study, as all physicians continue to use their current surgical techniques, though all use the same visual testing standards. The CAST assessment, based on up to four months follow up on the 73 binocular near vision patients or 146 eyes, and 59 binocular intermediate vision patients, or 118 eyes, is quite encouraging and better than we expected when this evaluation began.

When compared with other standard IOLs, both the distance-corrected near vision and the intermediate vision assessments were superior. When the data was compared to current Presbyopic-correcting IOLs, the assessments were very encouraging.

Longer term, there are additional opportunities. Our product development team is engineering minor design changes to the current nanoFLEX for the purpose of a second phase assessment by the team that will include a clinical study by CAST members to determine whether these minor design changes can improve upon current results and position a redesigned nanoFLEX as an entry for STAAR into the premium IOL channel where the pricing is about seven times higher than a standard IOL.

We very, very much appreciate the work by our CAST members, and in particular, the leadership of Dr. James Lewis during this first phase. It is also of note, there was no compensation to any members of CAST for this work.

Obviously the CAST assessments are a very exciting development for us, and if you follow hockey or soccer, you will understand my metaphor of this development providing us with a second shot on goal, the first being the ICL. We look forward to reporting to you on our progress with CAST in Phase II, and with the nanoFLEX.

We believe these assessments have spurred a renewed market interest in collamer, and thus we are beginning a stronger marketing approach with our current nanoFLEX IOL. We are supplying our sales team with the standard near reading vision cards and asking surgeons to just try 10 nanoFLEX IOLs and compare to what they are currently using.

Remember, this lens also has the nanoPOINT Injector System, which allows insertion through a 2.2 millimeter incision and the lens also has NTIOL status.

In the not too distant past, STAAR had a 10% standard IOL market share, but we did not keep up with technology and our resource restraint in years past caused us to fall behind. Well now we have made progress in terms of technology. We currently have about a 3% share and each share gain is worth about $6 million in profitable revenues.

Regaining standard IOL market share would have an immediate and dramatic impact on our profitability. And that is why we are focused on maximizing our opportunities in this standard IOL market segment.

Finally, I would like to remind investors that Deborah will be presenting at the Oppenheimer Healthcare Conference in New York City tomorrow, Wednesday. I understand there are some one-on-one slots that could still be available if you are interested in Deborah. Please contact your sales contact at Oppenheimer or give Doug Sherk a call, and his number is 415-652-9100.

Now operator, we are ready to turn the call over for any questions from those on the call. Thank you.

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Steve Willoughby with Cleveland Research. Please go ahead.

Hi, good morning. Thanks for taking my call.

Hi Steve.

Good morning.

Hi, Barry. I'm wondering if you could talk a little bit more about the comment that was made regarding the legal costs being covered by your insurance carrier, and what that involves and how much they are going to be covering and what all that entails.

Yes, good question, Steve. So, I can talk a little bit more to it. I may not be able to give you a lot more answers. We have been given letters from our insurance carrier that they will cover expenses in regarding -- and the date, we think, is about July 1 forward of this year, expenses in the Moody case and also expenses on the appeal for Parallax. Now, the insurance company will cover certain hourly rates as an average. We are currently in negotiations with our carrier on that, but certainly at this point it is clear to us that the majority of our legal expenses from July 1 forward should be reimbursed by insurance. We just do not know exactly the total percent that will be end up being.

And so eventually at some point in the future this will be cash coming back and will it change any expenses you are expensing right now, going forward in the next couple of quarters?

Well, yes, we certainly will get cash back during the fourth quarter.

Well, what we have done is we are recording a receivable in the quarter. So the expenses we incurred about $700,000 of expenses in the third quarter. And we recorded a receivable for about $300,000. Now that is an estimate. We expect that number to actually be higher than $300,000, but there is some uncertainty there so we were conservative.

Yes, and during the fourth quarter we will start getting the cash reimbursements from back to July 1.

Okay, that makes a lot of sense. And then just one other question for you on the nanoFLEX and you are kind of re-launching it in the US here. What metrics are you going to be judging to see how that goes other than overall sales, obviously, but are you targeting a certain number of doctors? Or do the sales reps have goals on how many they can get to try and do that free 10 lenses?

Well, I did not say the word free, but --

Sorry, not free. Sorry.

But yes, we -- the first metric we are looking at right now is consignments to new customers. And I think this has been a challenge for our US distribution channel in the last several years at STAAR is that we have not added new customers to our lines. So as we put in consignments for nanoFLEX for these trials, noting that they are new customers will be an important metric for us to follow.

Okay, that makes sense. Thanks very much.

Thank you, Steve.

Thank you, sir. Our next question comes from the line of Joanne Wuensch with BMO Capital markets. Please go ahead.

Thank you very much. Going back to the gross margin commentary that you had, can you give us an idea of how long, or a timeline that it might take to reverse the decline that we have seen over the last several quarters.

That is a really good question, Joanne. I think there are a couple of -- there were a couple of short-term things third quarter that had an impact. One is that, as Deborah said, the pricing competition in Japan has been quite intense. And we did go running after a pretty high volume deal that did not give us close to our typical margins in Japan. So I think management is clear now that running after that type of business, it doesn't provide us a viable margin. It is not something we want to do. I think the other thing that -- so that is quite short-term. And that will be reversed in the fourth quarter. Another impact, as Deborah mentioned, is in our European margins, where we are seeding the market with our distributors, meaning that we are giving them lower prices in some areas than we typically would for them to get started with our acrylic preload product. And that is something that will not change immediately, but probably over a three to four quarter period.

Okay, and who are you receiving this competition from in Japan?

It's pretty much across the board. I have certainly heard heavy pricing discounts from COA and also from HOYA in Japan.

COA and HOYA.

And I think some of the reasons could be, Joanne, is that those companies have relied a lot, the majority of their business has relied upon some of the electronics business. And that market is down considerably. So, from the outside looking in, I am seeing that their medical business is getting more pressure to them.

Okay, interesting. You are not seeing a similar type of pressure in Europe, it sounds like.

Well, not so -- no, we are not, but it is important that in order to follow our total strategy that we are focused on the countries where the margin are better. So that is another alignment of priorities that we are focused on with management.

Is there anything new on the legal process front, other than the insurance reimbursement, that you can give us an update on?

Well, we are currently into the, I guess this is actually the third week, though they are not full five days a week, third week of the Moody trial. And so far, I think we are -- we feel pretty good about where we are. As you know, we have new counsel in this case. We have Dan Callahan from Callahan and Blaine. And he is taking, certainly, some different perspectives on the case than what we took originally with Parallax. So, though I do not want to get into a discussion about what is going on in the trial, the judge has estimated that it will end on November 19. So we will see if we can stick to that schedule. She does seem to move the process along pretty well.

Okay, very good. Thank you very much.

Thank you, Joanne.

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

Thank you and I wanted to follow on about the discussion about expenses. You have got a nice trend of sequentially declining operating expenses. Can that continue into the fourth quarter into 2010? One wonders how much farther can you compress expenses, and then particularly mention trial expenses, which I presume will be higher in the fourth quarter.

Okay, first let me talk to overall expenses. I think as we kind of signaled through the script and through the past several quarters, we have done a very good job in the US, overall, of expense management. We have still not done as well in some of our international markets that we need to. So I do see an opportunity still, fourth quarter and remaining 2010, in our international markets to better utilize and be more efficient in what we do. So I am expecting that that will continue, maybe not to the same rate, because if you look at 19%, 20% year-over-year reduction year-to-date, that is a pretty good hit. I do not think we will be at that kind of level, Ray, but I still see opportunities for synergizing and eliminating expenses on international markets. Remember, we have got our costs, our Centers of Excellence project, COE, going on, where we are transferring silicone IOL manufacturing from Japan to the US. And we should see an uptick in our gross margin on silicone IOLs next year because of combining those volumes. And we should also see reduction in Japan, overall, in expenses for support for manufacturing that is no longer there. Now, overall, in the trial expense, first of all, obviously, it will have less of an impact on the Company than two or three weeks ago when we received a letter from the insurance company that these expenses would be covered. And I do not know what the percent is going to turn out to be, maybe 60%, 70% of our expenses will be reimbursed by our insurance carrier. So they will be diminished quite a bit. But our overall expenses for both cases were $700,000 in third quarter. I do not expect them to be that high in fourth quarter. There was a lot of preparation work by our new firm, in particular, during the third quarter. I think, overall, an estimated cost of the trial is about $100,000 a week is a fair number. And again, the majority of those expenses we would be reimbursed for.

You would be reimbursed, but it would still show up in the operating expense line and then be reimbursed separately below the line or how would that work?

No. Just like this quarter, as Deborah was trying to explain, we had $700,000 expenses, but we did take a $300,000 credit as a conservative estimate to what we will be reimbursed once we have agreed with the insurance carrier on that hourly rate. So, that would be the same -- what you will see going forward would be on the P&L only a net reflection of what we will actually have to pay. But then you should see an increase in cash in fourth quarter as the result of payments going back to July 1 for legal expenses.

Okay, well that sounds positive. When do you expect that CAST data will meaningfully support IOL sales? You offered some interesting perspective in your prepared remarks about going from 3% share to 10% share. That is awfully exciting, so can you elaborate on when do you expect to see it affect, and then if you were to go from 3% share to 10% share, what would that do to your revenues?

Okay, well 10% is a target out there, and to make everyone mindful that STAAR used to be in that ballpark, so it is not unheard of for us to potentially get there. We are in the process of taking baby steps now in order of moving there. And that is why my discussion with Steve is, right now, is the key metric for us is new customers to STAAR getting consignments. I will tell you that yesterday morning, I spent about 45 minutes on the phone with our Western regional manager, and Rick has been with us for a long time and in his voice you could hear the enthusiasm because of what has changed. Instead of his reps having to run out and track down doctors and try to get trials, physicians are calling us. He gave me an example yesterday of a doctor in Beverly Hills here in California that came to our booth and said I want to try the nanoFLEX lens, and could you try to schedule something? And so, our manager and rep got together and they said they would call the doctor back with a date. Well, the doctor called us on Monday saying, okay, when is that date? And I am glad to say that our rep will be in there on Thursday trying nanoFLEX with that account. So we are seeing, without anything in the numbers, we are seeing at least a change in the attitude of our customers or potential customers. And that is quite encouraging. If you look at a percent of the overall market as MarketScope looks at IOLs in the US, a 1% market share increase would be worth about $6 million.

Does that mean that the market in the US, you believe is $600 million?

That's data, according to MarketScope, their latest 2009 report.

And that has been updated higher, I presume, than previous estimates?

Yes, Ray, that is the number of total IOLs, which would include the premium IOL channel that nanoFLEX does not compete in today.

Okay.

So that is the total IOL channel.

Got it, great. And then, let's talk about seasonality a little bit. We know that seasonality affects the third quarter, but we have also got the tough economy affecting the third quarter, and pricing pressures affecting the third quarter. How much of this was seasonal and how much -- what should we expect for fourth quarter bouncing off of a seasonal third quarter?

Well, I think if you look at our past in terms of what a typical recovery is from a seasonal cycle, I would use that as kind of the same --

Yes.

-- metric to look at. Deborah, do you have any --

I agree. I agree. I think historical trends pretty much paint that picture. It shouldn't be any different.

Well, in the very last year, your revenue was basically flat from third quarter to fourth quarter. I am presuming that that will not be the case this year.

Well, typically the fourth quarter is up.

Yes.

Okay. And does that increase volume and then also increase gross margin?

It should.

It should, okay. So, without providing items, can you give us a little color to what the fourth quarter might look like?

Well, we are not making any predictions, Ray, at this time. As we said, our focus is on profitable sales and we are going to need to really evaluate what we are going in the fourth quarter to ensure that we meet our targets or get closer to our targets than where we have been.

I think, also, Ray, I would add that if you look at what the team has been able accomplish at STAAR over the past year, that even on the same amount of even flat sales, we have got a business that we can get to profitability. So, we do believe our sales will increase. It has to be the right sales. And we have been focused on trying to eliminate some of the lower margin sales that that really did not make sense for the overall business.

Well, even a modest increase in top-line and your focus on margins I would presume that margins should be materially higher in the fourth quarter.

I think we would agree and that is the efforts we will make.

Okay, great. Thank you and good luck.

Thank you, Ray.

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

Good morning, Barry. Good morning, Deborah.

Hi, Larry.

Barry, a couple of questions for me. One is -- what I wanted to ask is people have been talking about the CAST progress are pretty excited, but there has also been a concerned raised about the issue is this off-label promotion? Are you running a risk of running afoul of FDA before you have a change in the label? I am sure you have thought about this. I imagine you are being very careful about this, but I would love to hear what your thinking is so that someone doesn't turn around and say STAAR is miss promoting or inappropriately --

That is really a very, very good point, Larry. And, obviously, we are in an awkward situation which is not typical of what you see in the medical device or even in the pharmaceutical area. We are doing some assessment of a current product that is on the market which only has a certain label claim that it has. And we have spent a lot of time with our sales force, and our regulatory guy has spent a lot of time with me, as has Charles from legal, trying to make sure I say the right things and that our sales reps say the right things. We are not making any claims outside of what our current IOL claim is for nanoFLEX. But we are focused in on the visual results. What are the near vision results? What are the intermediate visual results? And sharing with or publicizing what surgeons have found in their own practice and then asking a surgeon to try it in his own practice is, in our mind, not an off label use, or even suggesting an off label. I think we are going out of way to say that we do not have a premium IOL today. We are not competing against the products in that channel, and the standard IOL channel is big enough for us and profitable enough for us. And that is our focus today. If we are able to get a premium IOL claim for nanoFLEX HD or nanoFLEX 2, whatever it is we are going to end up calling it, then when we are in that market, we will shout those claims, yes. But we do not have those today, and that's a really good question, and I can tell you it has been a real point of clarification with our sales force and our management teams in how we position this.

That is a great answer. But one wonders how you control sales people when they walk into the doctor's office. You and I have both been in the device industry for a long time and we know that salesmen get enthused and want to say things, perhaps, that they shouldn't be saying. So it sounds like you have got to continue to work on the sales force to be sure that they are very appropriate in what they say and what they do not say.

Absolutely, and we have steered, tried to steer them away from ever using the A-word, accommodating word --

Yes.

-- and just a focus on near visual results and intermediate visual results.

Yes.

Again, as I said in the beginning, the CAST Phase I was not a clinical study. It was just an assessment. We are very happy with what that assessment brought to us, but now as we go to Phase II, then we will get into a full-blown clinical study.

Okay, second question, on Japan. You discussed -- in the press release you discussed in your remarks, you discussed answers about what is going on in Japan. Should -- is this an isolated quarter of where someone just got very, very aggressive or should we expect for the next few quarters the comparisons in Japan because of aggressive price cutting will continue to put your international growth margins under pressure?

I think it's yes and yes, Larry.

Okay.

First of all, in the third quarter, Japan sales increased by 20%. So, you have got to feel happy with that. But one of the ways we got there was we went chasing after some pretty low margin business because of the intense pressure. I do not think you will see us in fourth quarter and first and second quarter of next year going after that kind of business like we did in the third quarter. And that is why Deborah said some of the top-line numbers may not grow as quickly or be the same, but we are working toward the efficiencies and getting to operating income and a profitable business.

And we did see some of this in the second quarter, but we were not certain if this was something that was going to -- if this was a trend that was going to continue for a short period of time or what, and obviously, it continued to affect us in the third quarter.

One other quick question and I will jump back in queue. Barry, on Japan, you have had many months now since the acquisition of the joint venture. It would seem to me that things have gone generally well, or better than even expected. I would just like your color on Japan at this point, kind of a mid-year or late-year assessment of that deal.

I think anytime you make an acquisition, and maybe even more so when you make an acquisition in Japan, because of the cultural differences, because of the distance from the corporate office in the US, it is very difficult. And as I did last year, again, I will congratulate David Bailey on the work that he did with Japan and bringing that into the organization, so I think in the first year and a half, going on two years, that has gone well. But I will also emphasize now we have to go to a second phase. And that is now we have to start looking at Japan a little bit differently. We finally have broken some barriers down with our Centers of Excellence project. In Japan, those engineers are great on delivery systems. And so we are really focused that group now on collamer delivery systems in terms of a preload, how about a preload of Visian ICL product. For example, today in the US and in some other countries, we have to ship a batch -- a second ICL to an account in case it is dropped during loading or something happens. If our Japan team can come up with a preloaded ICL injector system, that eliminates a lot of our costs going forward. So, we want to focus on what they do well and transferring the IOL volume to the US is really going to have a nice impact for us on the gross margin of those products next year.

Great, Barry. Thanks.

Thank you.

Thank you. Our next question comes from the line of Rich D'Auteuil with Columbia Management. Please go ahead.

Good morning.

Hi, Rick.

Couple of things, maybe you can bring us up to date. You have mentioned Centers of Excellence. If you would give us a little more detail on what inning we are in there, what you can quantify in savings, ultimately. I think you thought that would be the case by early 2010, and then back into what impact, incrementally, that can have on grow margins?

Real good question, Rick, and good analogy with the World Series going on. I would say we are in about the seventh inning stretch of the Centers of Excellence project as it has been defined today, and that is between the US and Japan. The reason I say as it has been defined today, I think we will continue to look under the label of Centers of Excellence, other opportunities to synergize our expenses. And this is just step one. By the end of this year, we should have about 95% of the silicone lenses that we sell in the US and Japan manufactured in the US. And we do expect, during the first and second quarter, to start to see an enhancement in our gross margin on those sales. I think one of the things we have to also focus on as we are making these changes in technologies, is our operating expenses in each one of these facilities. And so that is where a lot of work in the eighth and ninth inning has to be done in both Japan and the US as we finalize what we are doing.

Just to get into specifics, is it something that can add 300 basis points to gross margin, 400 or 500, just give me order of magnitude.

I'll let Deborah comment.

I would say, anywhere from 300 to 500 basis points we could see, but we still have work to do. We also have the transition of injector manufacturing to Japan. And that is much more involved than the IOL manufacturing because we are already set up in the US. So there will be some costs there as well. So I would expect to see the benefits of this project more in the second half of the year than in the first, although we should see some.

Okay, FX is not really mentioned a lot here. Anything you can tell us as it relates to currency?

Well, FX improved significantly in the third quarter. And we expect it to improve again in the fourth quarter versus last year. Our -- we had, actually, a gain on FX of about $55,000. And for the full year we had a loss of I think about $1.2 million unfavorable effective currency. Our -- the Japanese yen was particularly strong in the quarter. And that offset a much smaller, unfavorable effect of the euro, so overall, again, a gain.

Okay. Barry, I think you referenced $700,000 spent in the quarter on both cases. I guess I wasn't aware that there was really anything that active on the Parallax case. What is going on there?

Well, you are right, and a very, very small portion of that $700,000 was on Parallax and we do have some briefings that will be due during fourth quarter on Parallax that we will be moving forward on. That will probably start to speed up as we go forward. Overall, that is still about an 18-month process from this point. And as I think we have said overall, that though the attorneys have estimated less, our estimate for the total cost for the Parallax appeal will be about $400,000.

And we now believe that is 60% to 70% covered by insurance?

Correct. Correct.

Okay, the -- Germany was also mentioned as a source of gross margin issue. Maybe you can bring us -- what is going on there? Is that all pricing or --

Yes, it was primarily pricing. They have a little bit of -- everybody has a little bit of cost issue because of currency fluctuations to the extent that they buy in foreign, buy products or whatever in foreign currencies, but most of it was pricing.

We did have an inventory write-down in Germany. I thought we did, yes, about $100,000. No? Okay, sorry, my mistake.

That must be fourth quarter, right, Barry?

No.

No, but it was an email flying around somewhere. I guess Deborah straightened it out and it wasn't.

Okay, and then, I want to say maybe this time last year there was a strong effort to get the technology label on your IOLs and get away from the commodity IOLs. What percent of your IOL business today is, has that $50 premium attached to it?

Yes, that's -- we are talking about NTIOL status and both of our collamer lenses are single piece, which is the nanoFLEX, are three-piece, and our silicone Aspherics all have NTIOL. We will have to come back and give you a percent. I do not know off the top of my head, but obviously we have been getting a better price on our NTIOL lenses. I think, as noted in the release, our US gross margins have continued to go up, and that has been a very nice positive quarterly trend. NTIOL status has been very helpful in that regard as has our focus on managing our cost to goods.

The nanoFLEX, and I understand from a prior question that you are not claiming anything there at this point, but order of magnitude, you mentioned six, seven times, I think, some of the accommodating lenses that are on the market are being priced at, and so order of magnitude, that is a different world than even with the $50 premium we are looking at from, if it were to get the NTIOL. So what does it need? It needs to get another label?

Well here's the -- the process we have to go through, Rick, and this is our Phase II of CAST, is that, if you would, it is like 2a and 2b. 2a is assessing some of the minor design changes in that our engineering team has come up with and compare that against the benchmark. Phase I was just a benchmark to find out where we are with our current product. Now, then we will take this 2a phase and compare it to where we currently are. And if we are able to enhance the visual results from where we are with our nanoFLEX, then we would go into a full blown clinical study which would take us about 12 months to do. Then that data would be presented to the FDA to seek a new label claim, whether that label claim is less spectacle dependence or whether that label claim is accommodation, whatever it might be, we do not really claim what the label claim is if it gets us into that channel. So, if we are able to get the label claim, then we take that label claim to CMS and then CMS will give us a ruling whether we are in the premium channel. And the difference in price is, and you pointed it out very nicely is that in our current nanoFLEX with NTIOL, it's a $140, $150 lens. Now that is a good price for us and we make a good margin. We can live off of that. But if we can get into this premium channel, then the pricing is more like a $1,000 to $1,200 a lens.

Okay.

And to answer your question, Rick, about 50% of our sales, IOL sales in the US currently is on the NTIOL product.

Is that disappointing a year after the push?

Oh no. We have to carefully transition our customers to these new products in order to minimize the risk of obsolescence on the other products that we have.

Okay, so that also should contribute --

So the transition is going well and I think we are right in line with where we wanted to be.

A couple of other things on the premium channel, Rick, too, is the fact that there is no sun setting of the life of the premium channel like there is with NTIOL. So that would be important for us. Now MarketScope, which is by most of us in the industry, feel like it is probably the best market research available or information that is out there. Their feeling is in the year 2014 that about 14% of the market will be in this channel, but that will represent 45% of the overall revenues for IOLs in the US.

Okay. Again, the 60%, I would think by going -- by the end of 2010, do you expect to be 80%, 90% NTIOL or premium? I guess you wouldn't be premium at that point, but --

I think it will actually be sooner than that because as we are managing our inventories down --

Yes, our transition is supposed to be complete --

Yes.

-- by the end of June of 2010.

Okay. So what does that do, just order of magnitude? I know that's not a big part of revenues today, but domestic IOLs as it relates to the whole picture, but what would that do to the gross margin towards your goal of 60%? Does that move it a percent or --

Well, I would think in the US market, just isolating that because it is a two or three point difference, and I think we probably have seen that kind of impact so far from what we have done with NTIOL.

Okay. All right.

In the US.

So, I guess it's not, as we pick apart the pieces, it is not crazy to look at 60% after we just put down a 53.4% gross margin.

No, no, I remain confident that we can get to 60%. That is an achievable target. We were at 57.7% last year and we have got a number of new products, hopefully TORIC ICL approval on the horizon, all those things should really improve our gross profit margins and get us to 60% and beyond.

Okay. Thanks.

Thank you, Rick.

Thank you. Our next question comes from the line of Jack Fraser with Seamark Capital. Please go ahead.

Good morning, guys. I wonder, Barry, if you could just walk us through again and refresh us on what is required from a training perspective as you introduce surgeons to the nanoFLEX using the nanoPOINT?

Yes, good question. Anytime a surgeon is using a new injector system, it does require for our rep to be there, ideally, the day before to work with the scrub nurses, those that are handling the lens and handling the injection of the lens into the inserter, and then also time before surgery with the doctor to make sure he understands the right angle and approach of the injector which is the part he has in the overall procedure.

Okay. So, it's -- as we think of these doctors introducing the use of the nanoPOINT into their own practice, it's not a bit jump?

No, it's not a big jump.

Yes.

The bigger part is probably training the scrub nurses and those who handle the injection into the injector.

Okay. And then, just switching back to Japan, it has been talked about a good bit, but listening to what you are saying, we have had a significant one time piece of business that was put on the books in Q3 which pressured gross margins down, and all of us, of course, are trying to extrapolate a trend on gross margins. And you have made very clear that that is not going to repeat in Q4. Are you able to delineate for us how much that piece of business in Japan compressed gross margins in Japan?

Well, first let me go back. I think there are two pressures we are talking about in Japan. One is going after a particular set of volume business. The other is just the overall pricing intensity in the market. And as we see it now, the pricing intensity is probably going to continue for a few more quarters out. We will just to see that evolves, but for us, making sure that our management team in Japan is not chasing after some of this much lower margin business, that is an immediate correction.

Okay. As great a job as you have done in controlling costs and taking costs down, which I compliment you on, all of you, it occurs to me that we are not in market with an evolving message, around three, I will call the new points of attention for the surgeons, and that is, one, the nanoFLEX and the nanoPOINT, and the nanoPOINT small incision, obviously, being a big selling point, two, collamer, and three, what seems to be a somewhat sustained and now maybe even accelerating growth and interest in the ICL line. After you have gone through such an effective period of cost reductions, my concern is when do you recognize the need to actually increase costs to meet growth, because after you cross a tipping point, that growth can come pretty quickly. Can you just walk us through how you monitor that, Barry and Deborah, and then what your perception or confidence is about the ability to lay on infrastructure and resources in the event that we cross through the tipping point with the doctor communities and volumes begin taking off?

I think those are real good questions, Jack. Clearly, and let's just talk about the US market first. When we are able to obtain approval for the TORIC ICL in the US that does create a tipping point for us in terms of demands on our distribution at the same time as the nanoFLEX starts to become more readily available, and new consignments, that does take upon their time. So there will be, and this is one of the things we are assessing right now with our management team. We spend an evening and a full day in San Francisco with 10 of our key global managers in the Company just really trying to assess, getting our expense levels down to what makes sense for the business, then here are our priorities going forward. Any additional expenses should only be toward these opportunities and priorities that we have overall for the business. So we are in an assessment period right now as we are going through our 2010 budget and as we have our December board meeting coming up to help see that direction. I think it is also fair to say, at this point, and that we will probably talk about more after the first of the year that we are really looking more at setting a strategic course for the STAAR business that puts us on a long track viability rather than being one that has been perhaps one might say, historically more shortsighted, and establishing a vision and a strategic pattern that our managers understand where we are going, and where investment should be made. That is the important thing. You throw a lot of money at things, but if you do not throw them in the right avenues, then you are not going to get anywhere.

Sure.

So as we stretch the business down in terms of expenses, I think then it is easier for our managers to see where we need to make investments. Now, on the other hand, in international markets, as we have said, we still have cost reduction efforts we have got to put in place and still have to manage better. And I think that will continue through 2010.

Okay, that is helpful. And just one last question, and Deborah, this might make you a little uncomfortable. You mentioned the 60% percent gross margin objective, yet, I just want to make sure I am not thinking this through incorrectly, when I think through the cost savings in the gross margin recovery, you are talking about when you complete the rationalization of the Centers of Excellence program. And then we layer on top of that the changing gross margin mix from products as we see rising success from the nanoFLEX and the ICL line and the like, that tells me that our longer term destiny is actually north of 60% in gross margins and maybe even quite a bit north. Can you just help me think about that a little bit?

Oh, yes, absolutely. 60%, to me, is more of a short term objective.

Okay.

As I said, we were nearly at 58% in the third quarter of last year, so 60% seems like -- and again, the market situation hit us in the third, fourth, quarter of last year. That was not anticipated and that has had negative effects on our margins, especially in the ICL where our volumes, although good for this economy, are not where we expected at that time. So 60% is really a short-term goal, and I see our margins at 70+% if we start hitting our objectives in terms of getting these approvals on ICL and start growing our newer IOL product lines.

Okay, that is very helpful. Thanks very much and congratulations, guys, on the quarter.

Thank you, Jack.

Thank you, and as there are no further questions in the queue, I would like to turn the call back over to management for closing remarks.

Thank you, operator, and thank you, everyone for participating in the call this morning. If you have any additional questions or would like any clarification on anything we have said today, please feel free to give Deborah or me a call. Goodbye for now. Remember Deborah will be speaking tomorrow at the Oppenheimer Healthcare Conference in New York. And we appreciate it very much. Thank you.

Thank you, ladies and gentlemen. This concludes the STAAR Surgical third quarter 2009 financial results conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 and enter the access code 4169709. Those numbers again are 303-590-303 or 800-406-7325 and the access code is 4167909. I would like to thank you for your participation and you may now disconnect.