STAAR Surgical Co (STAA) 2009 Q4 法說會逐字稿

Welcome to the STAAR Surgical fourth quarter and 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)

This conference is being recorded today, Tuesday, March 2nd, 2010.

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

Thank you, Operator. Good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call to review the Company's financial results for the fourth quarter of 2009, which ended on January 1, 2010.

The news release announcing the fourth quarter results crossed the wire after market this afternoon, and is available at STAAR's website at www.STAAR.com. 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 Operator will provide the dial-in information for the replay at the conclusion of today's call. In addition, today's call is being broadcast live, along with an archived replay. Both 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 a 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 -- excuse me -- Governmental approval of new products or other future actions of the FDA or other regulators, any statements regarding expectations for the success of our product in the U.S. 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 Factors section of our Annual Report on Form 10-K filed with the Commission on April 2nd, 2009, and quarterly report on Form 10-Q filed on November 12th, 2009. Investors and potential investors should read these risks. STAAR assumes no obligations 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 or reconciliation of these non-GAAP measures has been provided in the press release issued this afternoon by the Company, and that press release again is available at the website.

With that, let me turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical Company.

Thank you, Doug, and good afternoon, everyone.

I would like to thank you for joining us today to review our fourth quarter and fiscal year 2009 results, as well as update recent corporate developments. As we've been doing on this call, I'll start out with a review of our performance against our key metrics which we established at the beginning of the year, based on a performance for each quarter and add the ending annual performance on this call. After my opening remarks, Deborah Andrews will address some of the operational highlights behind the financial results for the quarter, and then I'll discuss the transaction of our German distribution business, followed by your questions.

Finally, I'll ask you to stay on the line today at the end of the Q&A for maybe the best part. I will end the call by stating our key metrics for 2010.

Now, for the fourth quarter and full-year 2009 review. Given the economic climate and the multiple distractions and challenges of the business, we believe we did quite well over the past year against our metrics. The first metric was to generate path cash flow from operating activities for every quarter of the year. During the fourth quarter, we generated over $1.1 million of cash from operating activities. You'll recall we did miss the first quarter, though we cautioned up-front that the first quarter would be our toughest. We achieved our goal for the final three quarters, and for the year. I've marked this as a quite positive overall result and achievement. I'd also note the last time this was done was in 2002 at STAAR.

Our second metric was to improve our gross margin percentage of revenue each and every quarter. I'll have to say we did not meet this metric in the fourth quarter, or for the year. The good news is that the fourth quarter gross margin was 140 basis points higher than the third quarter. However, it was lower as compared to prior year. Our gross margin for the year was essentially flat to 2008, though the numbers might lead you to believe we actually improved. Deborah will discuss the fourth quarter and full-year gross margin in more detail in a few minutes.

Our third metric was to successfully implement the cost reduction efforts we initiated in 2008. We've really excelled in the management of these operating expenses throughout the year. For the quarter, our operating expenses -- by that, I mean G&A, sales and marketing, and R&D -- excluding those non-cash other charge items, were about $700,000 less than the prior year, which translates into a 5% reduction. For the year, there were some -- for those same expense lines, our spending was approximately $5 million less than it was in 2008. That is a 10% reduction from the prior year. We successfully achieved this metric each quarter of the year, and for the full year. I'm quite proud of the team.

The fourth metric was our progress toward gaining key regulatory approvals, including for our VISIAN Toric ICL in the U.S., and both the VISIAN ICL and the VISIAN Toric ICL in Japan. We continued to make progress in this area in both the quarter and for the year. Though it was not during the fourth quarter, we did achieve marketing approval for the VISIAN ICL in Japan last month. As a matter of fact, we expect to ship our first VISIAN ICL from Japan to Japanese customers on Friday.

In the U.S., we continue to make progress with our application for the Toric ICL. Additional questions have been presented by the FDA, and we're in the process of responding to those at this time. Also in the U.S., we submitted our clinical protocol for our CAST II study, and continue to work with the agency on our PMA supplement for the preloaded silicone IOL. In Japan, we're preparing additional clinical data to present to the authorities regarding their consideration of our application to market the VISIAN Toric ICL in that country. I believe we've made good progress on this metric during the quarter and throughout the year.

Finally, our fifth metric was to increase our share of refractive procedures in key markets. Globally, our VISIAN ICL unit sales increased by 38% during the fourth quarter. For the year, total VISIAN ICL units increased 26%. That's despite the declining global refractive market. Bottom line is that VISIAN ICL products increased market share even in this market. When the market returns -- and it will -- we will be very well positioned to participate in that upturn.

Now let's look at the key countries in which we expected growth in 2009. First in the U.S., we were really surprised by the continued decline of refractive procedures during the quarter and the year. According to MarketScope, refractive procedures declined by 12% during the quarter and 30% for the year. During the quarter and year, we outperformed the market and gained shares, as our units were stable in both periods. It's just amazing to me as we sit here today to say that the U.S. refractive market has basically been cut in half during the past two years. Despite the market fall, the VISIAN ICL has increased market share. This was also without the benefit yet of the VISIAN Toric ICL.

I'm sure many of you watched Saturday evening as the VISIAN ICL crossed the Gold Medal line in the eye of US bobsled captain, Steve Holcomb. Steve suffered from myopia, or nearsightedness, which threatened his able to continue his quest for a Gold Medal in the four-man bobsled competition. He had a VISIAN ICL implanted, which helped -- allowed him to continue his dream. Steve spoke on an interview with NBC on Saturday evening describing the successful surgery. All of our employees at STAAR congratulate Steve and the entire team for their tremendous display of courage and talent, as they achieved the gold medal with their victory in that race.

A majority of the fourth quarter increases seen in the VISIAN ICL line were due to our results in Korea. Unit sales in Korea increased by 141% during the quarter, and 56% for the year. We believe this positive momentum in Korea is due to the investment made in that market earlier in the year. We may recall we reduced the price of the VISIAN ICL to the distributor in Korea, and that allowed that distributor to make some key investments; well, those investments are paying off. In the fourth quarter, units and revenues were more in sync with growth. Based upon the market share data -- MarketScope data, we believe that our market share is now over 10% in the Korean market. If we can get to a 10% share level in each of the Top Ten refractive markets, the VISIAN ICL becomes a $200 million product.

Now, an update on other key markets that we targeted in 2009. In China, units increased by 131% for the quarter and 37% for the year. MarketScope reported an 11% increase in the market; that reflects a market share gain for the VISIAN in China. In India, our units increased 39% for the quarter and 79% for the year. According to MarketScope, the market increased by 1% during the year; again, this reflects market share growth for the VISIAN in India. In Spain, our units had a slight decline for the quarter and a slight gain for the year. Spain's economy is in a real distress mode currently, and MarketScope reports a 22% decline in that market; thus, again, market share gains for the VISIAN in Spain. In Germany, our units declined 9% during the quarter and declined 1% for the year. MarketScope reports a 12% decline in that market; market share gains for the VISIAN ICL in Germany. In Latin America, units declined -- VISIAN units declined by 20% in the quarter, which resulted in a 4% decline for the year. There's not good data for these markets in order to gauge our market share, but we believe we gained share there also.

As you can see, we gained market share in basically all of these markets. This is another metric that we achieved for both quarter and the year; but more importantly, points to the acceptance of the VISIAN ICL technology worldwide. Overall we performed well in four of the five metrics, the main miss again being gross margin.

After the Q&A, let me remind you, again, to hang on, stay awake, and I'll come back and cover our key metrics for 2010.

Now I'd like to turn the call over to Deborah for a further review of the fourth quarter and fiscal year operational and financial highlights.

Thanks, Barry. Good afternoon, everyone.

Given that we've issued our results this afternoon, I'd like to focus my comments on some specific items. Our highlights for the quarter financially centered on top-line sales, gross margin, continued strong expense management, and cash generation.

Starting with the top-line, sales were up $1.7 million or 9.2% compared with the fourth quarter of 2008. The unfavorable effects of currency reported in the first and second quarters of 2009 reversed entirely in the fourth quarter, and mainly impacted IOL and other product sales in the fourth quarter. ICL sales generated strong growth and were up $1.6 million or 36.9% from the fourth quarter of 2008. Unit volume grew 37.6% due to continued growth in international markets, particularly Korea, where unit sales increased 141% compared with the fourth quarter of 2008. ICL ASPs were down just slightly, due to the higher mix of sales from Korea, where prices are lower than in other parts of the world.

On the IOL front, sales were up 5.3% due to the favorable effects of currency. Unit volume decreased 12.5%, mainly in the U.S. However, ASPs for IOLs in the U.S. grew 22% and 3.7% internationally, which largely offset the effect of lower volumes. In the U.S., our strategy to focus on NTIOL products led to the increased ASPs, and we expect this trend to continue into 2010. Additionally, during the fourth quarter we more effectively managed prices internationally, despite pressures that continue, particularly in Japan. We expect the decline in U.S. IOL sales to reverse during the course of 2010 under our new sales leadership, and as the nanoFLEX and its attractive properties become more broadly acknowledged. As we've educated our sales team about the results from CAST and initiated the nanoFLEX challenge, which encourages doctors to try to nanoFLEX with ten patients, we expect better top-line performance for IOL products in 2010, along with continued ASP expansion.

As we've noted throughout 2009, we've deemphasized the sales effort behind lower margin non-lens products, which accounted for 24% of total revenue in the quarter, down from 29% of total revenue in the fourth quarter of last year. Sales from these products declined 7.6%, or approximately $400,000 from the fourth quarter of 2008. We did not make the progress we had hoped to make in 2009 in improving our gross profit margin. Our gross margin for the quarter was 55.7%, and while improved over the third quarter gross profit margin of 54.3%, it was lower than Q4 2008 by 140 basis points. For the full year, our margins were essentially unchanged from the prior year at 55.6%, when $1.5 million in purchased accounting charges are deducted from cost of goods in the prior year.

There were a number of factors that positively impacted margins for the year, such as increased sales of ICLs and TICLs, increased ASPs of U.S. IOLs, and decreased sales of non-lens products. We expect those positive factors will continue into 2010, and we'll see the benefit in improved margins as a result. The negative factors that impacted margins included manufacturing yield issues, decreased IOL and ICL ASPs internationally, and increased cost of goods in Germany mainly due to fluctuating exchange rates, among other things. We believe these issues are under control, as evidenced by the improved margin in Q4 versus Q3, and that we'll see further improvement in 2010.

We remain vigilant about expenses during the fourth quarter, reducing our SG&A before other expenses by $655,000 or 5.2% over the fourth quarter of 2008. For the full year, we reduced our SG&A before other expenses by $4.9 million or 9.2%. With the litigation for the most part behind us, we expect a significant decrease in legal expenses in 2010, which should result in lower G&A by approximately $1.5 million dollars. Despite the significant legal costs incurred during 2009, we are very close to our target for SG&A before other expenses as a percentage of sales of 60%, reporting 60.8% of sales in 2009, compared to 67.7% of sales in 2008. We expect further improvements in this area in 2010.

Other expenses in 2009 include the $6.6 million judgment plus costs associated with the last of the sales rep litigation. Also included in other expenses for the quarter was a $600,000 amortization charge for patents that were determined to have a shorter useful life than originally estimated.

We're exceptionally pleased with our cash results for 2009, reporting cash provided by operating activities for the full year of $1.4 million, compared was cash used for operating activities in 2008 and 2009 of $8.2 million and $11.2 million, respectively. This is the first time the Company has generated cash from operating activities for the full year since 2002, and this -- and we believe this demonstrates the tremendous operational progress we made in 2009. We exited 2009 with $13.7 million of cash and restricted cash, and with the proceeds from the divestiture of Domilens should increase our cash position to approximately $25 million, which will provide us the financial flexibility to deal with the legal judgment and make reasonable investments in our core product lines.

Finally, it remains our objective to become profitable in the short term. Assuming reasonable improvements in gross margin and continued management of expenses, we believe this is a realistic goal for 2010.

In closing, I would like to thank everyone at STAAR for their contributions, and especially to my friends at Domilens who I've had the great pleasure to work with over the last ten years.

Now I'll turn the call back over to Barry for a few additional comments, before taking your questions.

Now let's turn to the announcement of the Domilens transaction which we are making today. The purchase price is approximately $14.3 million based on yesterday's exchange rate, and based upon the performance of Domilens over the next three years, STAAR can earn up to an additional $900,000 during that timeframe. Combined with our year-end cash position, upon closure of this transaction we would have approximately $25 million in cash, cash equivalents and restricted cash, as Deborah mentioned.

Domilens is a very successful opthalmic distribution business in Germany, which generated about $24 million in net sales during 2009. There were a couple of key factors that led us to conclude, over an evaluation period that basically extended over the past couple of year, that it was in our best interest to maximize the value of this asset. First, this transaction enables our entire organization to focus on developing, manufacturing and marketing the best ICLs, IOLs and delivery systems for refractive and cataract surgeons and their patients. The transaction frees up management time to focus on our core high-margin ICL and IOL product lines. It also frees up resources to enhance our R&D development efforts in these core technologies.

In 2009, STAAR made progress in our core technology arena. The results of the CAST surrounding our nanoFLEX intraocular lens has brought a new high regard for STAAR's product development capabilities, and these proceeds will enable us to focus some resources on these type of activities.

The second factor is that some resource can now be allocated to a more aggressive sales and marketing effort in key markets, to increase revenues in our refractive and cataract IOLs and ICLs. These products generate gross margins which range from 55% to 90%, as compared to the average 45% gross margin generated from the Domilens business. While this transaction lowers our revenues, it will enhance our gross margins, and we remain positioned to achieve profitability during 2010.

Finally, while our objective remains to find a solution to the outstanding litigation during the mediation process that has been scheduled for late March, this transaction provides us with resources required to post an additional bond, and put this in a box for the next two years, as our attorneys vigorously pursue the appeal process, if that becomes necessary. During those two years, very little management focus or legal fees would be necessary.

A couple other notes on the Domilens transaction. First, as part of the agreement, Domilens will continue to be the exclusive distribution partner of STAAR Surgical in Germany and Austria for the next three years, for our VISIAN ICL product and both our acrylic and our silicon preloaded IOL products. After the initial three-year period, Domilens will have a non-exclusive distribution right for STAAR products, and we always have the door open to potentially extend that. Domilens is a very customer-focused distribution channel, and their organization obviously knows our products very well, and we look forward to an even more successful relationship with the Domilens management team and employees.

To help understand the impact to the Company going forward, I think it's valuable to look back to the history of Domilens for a few minutes. STAAR purchased this business between 1998 and 2003 in three stages, for a total of $8.3 million. The main objective was to use this channel to introduce new STAAR products to the market. To be fair, we've been less than successful in those objectives over the past 12 years. During the past five years, Domilens generated $7.6 million in cash from operations, which is an average of $1.5 million per year. With Domilens continuing as our distribution partner in Germany, we expect to increase the sales of STAAR products which will further reduce this cash-flow loss. The purchase price is $14.3 million at today's exchange rate, again with the potential earn-out of nearly an additional $1 million.

The Domilens organization is full of very good and loyal employees dedicated to their opthalmic customers. I'd like to to personally thank, as Deborah did, the management team and all of the employees at Domilens for their efforts over the past 12 years. We look forward to continuing to work them to promote STAAR products in Germany and Austria.

Now, Operator, we're ready to turn the call over for any questions from those on the call. Thank you.

(Operator Instructions)

The first question is from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead.

Thank you. I know you want us to wait until the end for your components for next year, but I do have to jump in here and ask what you are thinking about gross margins? What is it that you think held you back in meeting your goal for 2009, and can you give us some idea of what it might look like in 2010?

Yes, I think a couple of things, Joanne. Thanks for asking the question. So I will jump ahead. One of our metrics is around gross margin, as you suspected, and our metric around that is that we would expect our gross margin range to be in the low to mid 60% level during 2010. Now, if we look at what our expectations are for 2010, we -- we really didn't have expectations for revenue growth in Domilens. The revenue growth had been projected outside of Domilens; and as you would imagine, that comes from the products that have a gross margin range of 55% to 90% any way. So that is obviously higher than their 45%. So that's going to help us a lot.

Then also remember, we have the COE project that we successfully executed on in 2009, and that's certainly going to help in our cost of goods for our silicone product line.

We also have projects underway to extend the shelf life of certain of our IOLs. Our inventory provisions are quite high, as a result of relatively short shelf life compared to silicone IOL products, and this should make a significant difference in our gross profit margins. We also have opportunities in reducing our royalty expenses going forward, and we'll be looking at that in 2010.

And for clarification, Domilens, you are keeping them as distributors in Germany and in Austria, but which regions are you buying them out of?

That's where they had been. That's where their presence has been, so they're basically covering the same area as they had as in prior years.

Okay, so it's just a buyout and then a three-year bridge. Is that the way to think about it?

Well, I would say this is a buyout, and a partnership that is beginning to develop with the same team that has been there, and it's going to exist exclusively for at least three years, and then non-exclusively for another two years. But if they do a good job for us, they can continue longer.

Okay. And then final question, you said you received some additional questions from the FDA on your Toric VISIAN. Could you give us some idea of what those questions look like? Thank you.

Yes, most of the questions were around labeling. Most of the questions were, you've asked for this label based upon this; we suggest you change the wording to this. There were a couple of questions we'd been asked before and responded to, so those were pretty easy to handle.

I would say the one key question that we're working on, Joanne, is around endothelial cell count, and we are focusing some outside resources on that, some of the leading experts in the field. So we're interpreting some data and giving additional information back to the FDA. I won't know until the end of the week when we think we'll be able to respond, since we have at least three outside folks helping us with this, but I'll have a clearer picture come the end of the week.

Thank you.

Thank you.

The next question is from the line of Raymond Myers with Emerging Growth Equities. Please go ahead.

Thank you, and congratulations on everything.

Thank you, Ray.

Nice job. The first question, what happens to revenue through Domilens post-transaction? If they're still going to be selling your products, I presume there will be some revenue from Domilens, perhaps at a different gross margin? How do we think about that?

Well, start -- revenue from STAAR products was about 7.5% of Domilens' sales, which as we said was about $24 million last year. Their gross profit margin on those sales -- our gross profit margin on those sales was probably about 50%, 60%.

Of our products.

Right.

Okay.

And those will continue.

Right. So the way to think about it is that maybe a 2.5% reduction in your revenue from Domilens?

Yes.

Good.

What does STAAR have to do to earn the $1 million earn-out?

Well, the earn-out is based upon the Domilens performance on a bottom line that's being called EBIT, and there is a definition of that that you can see later in our 8-K, and certainly in our 10-K filings later this month; but it's basically the plan that we had had for Domilens for the next three years, its achievement of that on the bottom line. And if we do, we get these pay-outs.

There is some language in the agreement that allows us to catch up, if we miss a year. So it's obviously in our interest to continue to work with them, to help them achieve the numbers that we had planned for the organization.

And when's the first milestone where you might receive some of that money?

It's an annual milestone. So it would be the end of this year, and there are three years involved in these milestones.

Okay. Great. Are all of your products included in the three-year exclusive license, or are some of them excluded?

It's just the five products we mentioned, though it can expand, and we also have a gentlemen's agreement that we'll sit down with new products and talk to them about it, though we're not obligated to use them as a distributor. Obviously if they continue to do a good job with us, we'll be interested in continuing to work with them.

Okay. So you will not be starting your own direct distribution sales force anytime soon in Europe?

Certainly not in Germany anytime soon. I think a lot of -- you know, the next three years it's exclusive with them, so there's no option to do that. So a lot will depend upon the success level of STAAR products in Germany and Austria during that three-year period.

Okay, understood. One area that intrigues me is your growth in Korea, and now -- can we bridge that to Japan, now that we're starting there? So let's talk about that for a minute. How much larger is the Japan market than Korea?

According to MarketScope, Japan, there are about 430,000 procedures a year in Japan, and about 110,000 procedures in Korea. So it's about -- what is that, a good three, three and-a-half times the size?

Okay. So Korea is already a significant contributor to STAAR, and yet,it's a third the size of Japan. What do you have to do to achieve similar success in Japan?

Well, that's really a great question, but I would expand it beyond Japan. Obviously, our employees who manage Korea and our Korean distributor have done a lot of good things. As a matter of fact, we have the U.S. national sales meeting, which starts here tonight, and we have our Korean manager, who will be here presenting what they've done. So the Company is looking at -- you know, there was -- I hate to use this word, but there was almost a tipping point early in 2009 in Korea; you know, we basically doubled our market share there. We were 5% or 6% in 2008, and now, based on the MarketScope data, we think we're about an 11% share of refractive procedures.

So we're trying to learn from some of the things they did there, and that is another good resource or another good area in which we plan to dedicate some of the proceeds from the Domilens transaction, is to try to model, to learn from that, and expend that into other markets. Because, as I said, you know, I've been talking in the past about getting to a 5% level in the Top Ten countries; if we can get to a 10% level in the Top Ten refractive markets, that's $200 million in terms of VISIAN ICL sales at, as you know, very good margins.

Absolutely.

Let's turn over to the cataract lenses, the IOLs, for a minute. I'm hearing noise kind of at the doctor level that awareness of your products is increasing, and I think it's partly because of this CAST data, and there are certain prominent doctors that have begun using the STAAR product, but also hearing from just people on the street, people I know, mention. "Oh, by the way, I got the STAAR lenses." I'll tell you, a year ago that never happened. What are you seeing with the release of the CAST data, has there been a good market reaction?

Well, we have definitely seen an increase in our nanoFLEX product. It began in December, and we had about a 10% or 12% increase in December in nanoFLEX. Again, for those who are not aware, that's our single-piece Collamer Aspheric lens. That's why this year, in January and February, we've seen about a 14 or 15% gain in nanoFLEX. It does take some time to seed the market, but December was right after the academy. So I don't think that there's any surprise, based upon that was when we released this CAST data, or CAST information, that we generated interest.

We are training the sales force this week in the U.S. on what we're calling the nanoFLEX Challenge, which Deborah mentioned. Basically, we're going into physicians and challenging them to just try ten eyes -- ten patients, ten eyes, however they want to translate it. Implant a nanoFLEX, and compare it to the near and intermediate results that you get with the lens you're currently using today. We've opened up a website in which they can put their data on there, and then we'll -- it will be visible to all of the physicians, not only their own data as it compares to the CAST data, but globally in terms of the U.S. data, how it compares to cast. And I can tell you that the initial -- and I think we have about ten surgeons that have already joined.

We just started this a couple of weeks ago, and we're training the sales force this week on it. But we've already seen in the first four or five that signed up reactions like, "You know, there's something wrong here. This product is doing what you said it does. That's not typical in this market."

So we are -- we are getting some good interest, and we hope this campaign will further increase the amount of interest we're seeing in the U.S.

Okay, good. Are you seeing any rebound in the overall refractive market, which has been so devastated by the economy?

I hate to even answer that, Ray, because I really thought we were starting to see it in the fourth quarter, but I was -- I was really shocked by the LCA-Vision numbers, by the MarketScope numbers. Now, they are a little less in the fourth quarter, if you believe MarketScope, down 12% versus 30% for the year; but it is going to come back. I can't tell you when that's going to happen, but we're continuing to plant the seeds and do the things we need to do, so when it returns we'll be better poised.

I will say in the U.S., we are doing some things. As you know, we hired Don Fagen as our new Vice President of Sales for North America. Don knows the refractive market very well. We are hiring some direct reps, additional reps in the U.S., because you're going to hear us talk more in 2010 about our revenue line, which we -- which I've really shied away from speaking about during the first two years I've been here, but I think we're now positioned that we can focus on increasing the revenue of these core products.

But you mentioned, in Korea, there being kind of that tipping point of awareness. I wonder if -- are we perhaps reaching a tipping point at least in refractive awareness, where people are now becoming aware that LASIK is not nearly as safe as it used to be, and that if you want to preserve the epithelial cells, then maybe you would want to use a lens?

Those are all good points and, you know, we will continue to to work with our physicians in building their practice. Getting the Toric will be very helpful, as we're able to further penetrate our market share in the U.S.

It sure would be. When can we expect that? I know it's been a long time in coming.

Well, maybe I've misread the tea leaves, but I thought we were very close to approval. As a matter of fact, in mid-January, we got a letter from the agency which detailed a post-approval study they were asking us to do, and we were supposed to have a that back to the agency February 5th. But we were waiting for them until we got this last set of questions, so obviously that's put hold until we're able to respond to these questions. But -- we don't think it's that far away, but I'm out of the predicting business.

Yes, well what does it tell you that you got a letter detailing a post-approval study? I wouldn't imagine that's normal for the FDA to send a letter about a post-approval study, unless they were planning on approving?

Well, that's the way I read it. So obviously I misread it. That's my mistake. We do have the organization poised to go with it. You know, tomorrow morning, I've got to stand in front of the sales force and tell them it's not approved. But, you know, I still think we're closer every day, and it's not for any fault of our folks here at STAAR. John Santos has led a focused, concentrated effort, and we've responded to every question we've had, and we've just got to continue to act in that professional matter.

So that's great. Thank you, Barry.

Thank you, Ray.

The next question is from the line of Larry Haimovitch with HMTC. Please go ahead.

Good afternoon. Barry, first of all, congrats on some of the progress you've made. I know you didn't achieve all of your goals in 2009, but I know you achieved several of them, and I'm sure you feel good about that.

The fourth quarter of some of these overseas ICL markets was particularly strong. You did mention kind of a tipping point. Was there an approval of the Toric ICL in those markets that kind of tipped it over? Was there anything unusual in that quarter? I don't mean to sound like a skeptic, but sometimes companies have inventory-building or stockpiling that goes on that builds a quarter, makes it look better than it would normally would be?

That's why I gave you the quarter and the annual numbers, because it's not that. I can tell you that January and February have been record months out of our AG facilities. As a matter of fact, I should have mentioned it, but the fourth quarter was a record month in terms of a quarter -- a record quarter in terms of revenues for the VISIAN at $6 million. That's the first ever -- first time we've met that mark.

But there is -- you know, we've looked at Korea. We're continuing to look at Korea. They've had -- there isn't any new approvals in these countries that we've talked about. But it does take a little bit of time of building the story. And obviously in Korea, they've done a lot of the right things. So we want to try to model that in some of these other key markets.

Barry, in Korea, you said your market share at year-end was 11%; what would you estimate the U.S. year-end market share was for the ICLs?

1%.

1%. But Korea does have the Toric as well as the regular ICL, so that probably makes some difference, doesn't it?

Yes, that's correct. And you can see in the Korean numbers, when they got approval for the Toric a few years ago, that it did spike, it did increase.

Right. So that should -- that should help.

Any other things you can shed on the litigation? You did mention there's a big conference coming up in a few weeks that hopefully will resolve things. Any other color you can shed on the progress, or anything that you can talk about publicly, Barry?

Well, only that, you know, our attorneys are working and coordinating these -- the mediation, which is scheduled for March 29th and March 30th. We think all of the right players are going be there. Again, our objective is to get to a settlement. But we know now if we can't, you know, unlike what some attorneys have said, STAAR's not going bankrupt, and these guys aren't going to own STAAR. So if need be, we'll fund the bond, and we'll put this thing in a box for two years and see what happens.

Okay.

You know, the first case we won on appeal. That doesn't mean we'll win the second and third one on appeal, but if we have to go there, we're now able to go there.

Okay. And I'm going to ask Deborah one quick question, and then I'm going to jump back in the queue, because I'm sure there are some other questions. And that is, Deborah, if you tried to look at 2009 as if the Domilens transaction were to have happened January 1st, 2009, I'm assuming that we would back out roughly 92% or 93% of that $24 million in sales, and that's what STAAR's actual sales would have been?

Right.

Okay. So that's -- in terms of modeling for 2010, we should think about that as a way to get to -- you'll probably help us on guidance on sales, but in terms of getting to the 2010 guidance that's a good way to kind of look at 2010?

Yes, and in our 8-K that we expect to file in the next four days, we'll be providing pro forma financial statements, so you'll be able to see exactly the effect of Domilens on our financial results.

What's the estimated closing date for that transaction?

It closed today.

Oh, it already has closed, okay, great. Thank you very much.

The next question is from the line is from Steve Emerson with Emerson Investment Group. Please go ahead, sir.

Deborah, could you hazard a guess as to Q4 cash flow ex the German lens company?

Yes. We would have actually earned $281,000, or used $281,000 in cash from operations.

So cash from operations would be a negative $285,000.

$281,000, yes.

Okay, and could you give us going a couple of quarters backwards, if you have it in front of you?

Ex-Domilens, we would have generated $274,000 in Q3.

Excellent.

We would have used $124,000 in Q2, and we would have used $213,000 in Q1. So the total ex-Domilens of cash usage would have been $344,000.

Okay. Thank you very much.

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

Congratulations, Barry.

Thank you, Tyson. Good to hear your voice.

It's been a long time. What is it, we've been talking about the plate lens and the accommodating nature of it, and the ICL actually selling; I feel finally vindicated.

Tyson, I do have to thank you. You -- when I first came to the Company, you directed me to Dr. Sam [Avicci] in New York, and actually the Chairman of our Board, Don Bailey, and I had dinner with Dr. Sam Avicci during my first year here, and it really got to thinking about what the opportunity was. So I must thank you for that.

You're welcome. It's amazing, almost at this time last year, Deborah Andrews, Charles Kaufman and you were talking about the prospect of bankruptcy to avoid the Moody case.

Yes. I don't think it's in our cards today.

Yes. The business is in a significantly different place than we were --

Oh, I know it's in a significantly different place. I mean, you know, shortly thereafter, when Pequot announced they were closing, they had 2.3 million shares to sell, and can you tell me which investors you told that you knew that stock was placed well?

I'm not sure I understand the question, Tyson.

It just seemed kind of unusual, there was that 10 million share day where the stock ran up about threefold on June 11th, and then you were able to do this shelf. I'm just wondering, who knew that at the time when you had a shelf, that that stock that Pequot had would not hit the market?

Well, I don't think that stock ever hit the market, Tyson.

No, it didn't. You told me that you heard that they had found a place for it, and it wouldn't hit the market.

No, no, no, no, no. Tyson, I think you're confused with something else. Pequot dissolved several of their funds, but the fund in which our stock was held is now I think [Nantucket Hill]. It's the same folks we're dealing with there. Those shares never exchanged hands.

They just spun off the funds.

Well, that was a good thing. Well, congratulations.

Thank you, Tyson.

You've done a great job.

Thank you.

Your next question is from the line of Jack Fraser with Seamark Capital. Please go ahead.

Hey, guys. Congrats. A couple questions tied to -- I think you heard earlier, you made mentioned to Joanne that some of the FDA questions might surround the issues of endothelial cell loss. Did I hear that correctly?

Yes, there's one question which we think is the key question we're working on, yes.

Okay. And I gathered from your comment that that question requires the input of two or three outside experts, which might obviously influence timing. Away from that question, or those questions around that issue, can you share with us anything about the challenge of answering the balance of the other FDA questions?

Minimal.

Okay.

As I said, the majority of those are all around label claims, and so, would you be happy with this instead of this, or please change it from this to this.

I see.

Yes.

So that, coupled with the potential discussion of Phase IV monitoring, is where your relative upbeat view of things has come from, then?

I'm not sure what you mean by --

In other words, over time, it has felt like as a team, you all have been relatively upbeat about your prospects with the TICL.

Yes.

And I take it, it is from these components where that comes from?

Yes, I think that's fair. As I've said before, I think we've had very good communication with the FDA. I think they've been fair with us, they've been fair with us, they've been reasonable. We thought we were near the end of the track and then, you know, we got a delay here with some more questions. But we are handling that.

We do have to use outside resources on endothelial cells. There are only a few folks who are experts in this area, and counting endothelial cells, both pre- and post-op, is a challenge. It's very subjective, and if you are looking at patients over an extended period of time, you need to use the same instrumentation, it has to be calibrated correctly, all of those kinds of things. So thank goodness we have folks out there who can help us, and we're probably working with the number one expert in the field, who's worked with the FDA on this issue multiple times.

That's great. On the endothelial cell loss issue, it's my understanding that potentially a large competitor conducting a clinical on a Fakik IOL suffered endothelial cell loss to the point where maybe corneal transplants were required on an unscheduled basis. Is that the case, or -- and I gather that would obviously be an anterior chamber format, which is so different from your posterior chamber patents?

Well, we have heard that. Obviously, there's no way we can confirm it or not. But we have heard that one of the competitors, and you're right, is working on anterior segment lens, that means it sets above the iris, which is obviously closer to the endothelial cells, that they've had two corneal transplants in their clinical studies with the FDA. Again, that's just what we've heard. I cannot confirm that.

In the years -- eight, nine years that the VISIAN ICL has been in the global market, we're not aware of one corneal transplant that has ever happened.

That's super.

And we try to stay close to that. So I mean, if that is true, that did happen in -- it's reasonable the FDA would be asking more questions about endothelial cells, and we're working to coordinate the responses to them.

Okay. Great. I just want to switch gears briefly to the IOL, where you seem to be exhibiting some acceleration through the nanoFLEX and nanoPOINT. The momentum that you've begun to see is thus far, as I think Ray Myers may have mentioned, is perhaps arising out some of the CAST data, and you obviously are in discussions, as you said, with the FDA on protocols for a CAST II study. Can you just put around -- for us all, some bookends around the timing of a CAST II study, and the process that would be involved?

Yes. There's two studies that we're looking at. We have submitted the protocol for CAST II, and CAST II is really taking the findings of the CAST and putting it into a protocol, clinically-oriented, so that it would allow us to potentially go to the FDA for any type of claim improvement on that product.

Cast III is a newly-designed nanoFLEX lens that we have ready to go now. You know, if this works, the direction it would be heading in is the product that would evolve from CAST III would potentially be a product that we may be able to go to the FDA for additional claims that would put us in the premium channel category.

And that would obviously then point to some differentials and ASPs?

Yes. The premium channel for IOLs in the U.S., for example, you know, is $800 to $1,200 a lens; whereas as the typical standard channel for cataract IOLs today is in the $100 to $200 range.

Big difference.

And then this last question. With the developments and success of raising cash resources with which to handle some of the various agendas in front of you, can you share with us a little of your thinking with respect to what will be -- what should we think will be added in 2010 with respect to direct marketing resources?

That's a good question. I did mention that in the U.S., we are making some additional staffing in terms of distribution. We've got to go at it slowly. I mean, we don't have a war chest of money here. We've got to continue to manage our expenses very effectively, as the team has done. But we will be evaluating other markets in which we will make additions. But until this thing closed, you know, we obviously couldn't talk to the rest of our employees about this, and so we'll be looking at that closely over the next couple of months.

Got it. Super. Thanks again, and congrats.

Thank you, Jack.

(Operator Instructions)

Operator, if there are no more questions, we can go to the 2010 metrics.

We do have a couple of questions standing by. Would you like to go ahead and take them now?

Okay, if we can quickly take them. I don't want to lose the whole crowd.

Okay. The next question is from the line of Wayne Schroeder, a Private Investor. Please go ahead.

Hi, Barry and Deborah. I like what I'm hearing about the results.

Three quick questions, Barry. You were asked earlier about the comparison between Korea and Japan. Does MarketScope also have figures for China comparable to --

Yes, the China market, Wayne, is the second-largest market in the world. You know, interesting enough, it rivals what the numbers are for the U.S. today, but China is about 725,000 annual procedures, today MarketScope's projection for 2009 in the U.S. was 728,000. So it's very close to the U.S. market now.

Okay, cool. When you -- earlier in previous conference calls, you had said that when the ICL was approved in Japan, you had a 60-day plan to put it into effect. Does that mean there won't be any revenues from ICL sales for 60 days, or --

Yes, a real good question, Wayne. No, we expect that we'll have our first revenues starting Friday. We -- that means products shipped directly from Japan to Japan customers.

Remember, we have about 15 surgeons that had been approved in Japan prior to approval to implanting the lens. We do have a 60-day plan, though, to educate additional physicians, and that's really where I think we'll start to see the uptick. But we will start seeing revenues beginning Friday in Japan for the ICL.

Okay. Very good. The last question is, with the approval of the TICL in the U.S., is there a similar 60-day ramp-up or is it quicker than that?

It's much quicker in the U.S., because we have over 500 surgeons trained today, and we have close to 200 surgeons now, plus we're going to do more training in Boston, who have had the additional incremental training for the Toric. So no, we have physicians who are ready to go, they have patients that they're eager to call back. So I would expect in the U.S., there will be a quick ramp-up.

Cool, very good.

I wanted to let you know, too, I was out running on the mountains here in Phoenix, Arizona, and I heard an ad on the radio from Barnet Dulaney, and it was the first ad that I had ever heard where they, instead of saying, "We do LASIK and we also do the ICL," they said -- basically, ICL was the headliner in this one.

Well, Rob Rivera there, and Scott Perkins, are two of our key implanters, and they have done an excellent job over several years. So I'm glad to hear that. Thank you, Wayne.

Okay. And that's all I have. Thanks.

Thank you.

The next question is from the line of Mark Malcolm with -- a Private Investor. Please go ahead.

Thank you very much. This is -- a couple quarters ago, you talked about a lot of pricing pressure in your -- on your -- in your IOL segment in Japan. Was that also with respect to the preloaded IOLs that you sell there? And do you expect that to impact on -- eventually in the U.S.?

Well, yes, it does. As a matter of fact, Mark, the only IOLs we sell in Japan are preloaded. And there has been pricing pressures in Japan this year, you'll remember third quarter, we kind of dipped down and got into the ugly pricing with some of our competitors. We withdrew from that during the fourth quarter. We do expect that it will continue to leak over into 2010. But we expect it to accrue -- you know, to improve, and hopefully, you know, stay at -- get to a stable level by mid-year.

Is there only one competitor in the preloaded, or are there other competitors?

In Japan, there are a couple of other competitors with preload, and in the -- I didn't answer your question on U.S. pricing pressure. We don't expect to see additional pricing pressure in the U.S., based upon the current reimbursement rate, as long as that doesn't change.

I understand. But when you get to that -- do you expect to expect to be able to do an NTIOL on the preloaded in the U.S.?

Yes sir, we do.

That's all I have for now. Thank you.

Thank you, Mark.

Okay, Operator, if we could, let me go to our metrics that we've established for 2010. We'll write them down, and you can write them down.

The first is to generate global double-digit, yes I said, revenue growth, from our core products. That's the VISIAN ICL and IOL. So we are shifting a focus to our top-line.

Second, as I said to Joanne a while ago, our overall gross margins for the year, we expect to be in the range of the low-to-mid 60% level, and that compares to 56% in 2009.

Third, we aim to make progress toward profitability during the year, and to achieve profitability for the full year.

Fourth, as we did last year, we'd like to generate cash from operations for the year, despite the loss of the Domilens contribution.

And last, we'd like to further improve our balance sheet during the year. We've got some obligations that we'd like to retire, without any further dilution of our shareholders.

With that, I'd like to thank you, Operator, and thank all the participants today, and we look forward to reviewing our progress with you at the next time in May. But if any of you have any additional questions or would like some feedback, please feel free to give Deborah or I a call.

Thank you, and good evening.

Ladies and gentlemen, this concludes the STAAR Surgical fourth quarter 2009 financial results conference call. If you would like to listen to a replay of today's conference, please dial 1(800) 406-7325 or 1(303) 590-3030, and enter in the access code of 4221517.

ACT would like to thank you for your participation. You may now disconnect.