STAAR Surgical Co (STAA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the STAAR Surgical third quarter 2011 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, Monday, October 24, 2011. I would now like to turn conference over to Doug Sherk of EVC Group.

Good afternoon, everyone. Thank you for joining us for the STAAR Surgical conference call and webcast to review the Company's financial results for the third quarter of 2011 which ended on September 30, 2011. The news release announcing the third quarter results crossed the wire about a half-an-hour ago and is available on STAAR's website at www.staar.com. We've arranged for a taped replay of this call which may be accessed by phone. A replay will become available approximately 1 hour after the call's conclusion and will remain available for 7 days. 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 a statement of historical facts is a forward-looking statement. This includes any projections of earnings, revenues, 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 of new products or the future actions of the FDA or other regulators, any statements regarding expectations for the success of our product in the US and the international market, the outcome of product research and development or any clinical study, 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 annual report on Form 10-K. 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. Now with that out of the way, let me turn the call over to Mr. Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Thank you, Doug, and welcome to all of those on the phone and the webcast, to the STAAR booth here at the American Academy of Ophthalmology in Orlando, Florida. We're fortunate that we have a live audience here with us also today, which includes employees, investors, customers, and maybe even competitors. Logistically, just a few things to point out to you. If you want to participate in the Q&A session, you'll need to be on the conference call line rather than the webcast. We will be taking questions here from those in the audience. We'll take the questions first from those on the call and then if we have time, we'll take those from the audience. There will also be, to note, a 10- to 12-second delay between the call-in line and the webcast line. So you probably don't want to watch both at the same time or you may get confused.

We also are fortunate today to have with us 2 of the members of our Board of Directors, John Moore and Mark Logan are here in the audience. And as normal we have our CFO, Deborah Andrews, who will be making some comments. A special feature though today since we're live here at the American Academy of Ophthalmology, is that we're going to have a round table discussion on the Visian ICL. We're going to have 2 very experienced Visian ICL surgeons, Dr. Roberto Zaldivar from Argentina, and Dr. Erik Mertens from Belgium. Hans Blickensdoerfer, our President of Europe, Middle East, and Africa will moderate that session. And what we hope is that through this round table, the comments you hear will help you understand why we're so enthusiastic about the Visian ICL, where we are today, but more importantly the future we think we have with this product.

If you look over the last several years, let's say 30 years, of refractive surgery, there have been several eras of technology where a technology will have a dominance during that period. There was RK for many years, and I know there are people here in the audience had that procedure. There was PRK, and now I think you'd say we're in the LASIK era. And around the world, particularly in the US, we've seen LASIK decline over the last few years. And what we think we can sense from what we hear and see, is that this may well be the potential for the beginning of the era of the ICL. Our agenda is, I'll cover a few operating highlights, as normal. Deborah will cover the financial results, and then Hans will have the round table and then we'll turn it over to questions and answers. So with that let's get started.

First, take note of the fact that mid last week we did put out a press release that in Japan, PMDA gave us notification that it was not going to be necessary for us to go before the approval committee to get the Toric ICL approved. That's good news for us. Our employees in Japan are working diligently PMDA to finish up the DFU and close a couple of files in order to get approval there. And I certainly have a strong sense we'll have approval of the Toric in Japan before the end of this year. Japan is a large opportunity for the ICL. Why? Because there's a very higher-than-normal prevalence of myopia in Japan and a higher degree of those that are myopic are in the high degrees of myopia. And then on top of that, with the Toric, those that are myopic, a higher percentage of those also have a stigmatism.

So now let's review the 4 key operating metrics that we've followed throughout the year. The first 2 are easy. Revenue, double-digit growth at 16%. Check. The second, ICL growth, 31%. Check. And you might recall that we raised our metric during the second quarter from 25% growth for the ICL to 30% growth, and we achieved that. The third metric is gross margin. We had a very nice expansion in our gross margin during the quarter. We ended the quarter at 68.5%. That's a 570-basis-point improvement from the year-ago period, and it's 170-basis-point improvement from the prior quarter. Now, so far year-to-date through 9 months, we're at 66.7% in gross margin, and we raised our metric last quarter to 66.5% for the year. So at this point, through 9 months, we're there.

The fourth metric is profitability. We raised this metric during second quarter to all 4 quarters and for the year. Yes, we were profitable for the quarter. We did achieve it. Though I will say it's not the continuous improvement in net income that I expected nor wanted to see during the quarter. Deborah will cover in detail some of the non-operating-related accounting charges which led to an $800,000 negative impact year over year and also the high tax rate that we had to pay during the quarter.

One final item before Deborah comes up, to talk about the consolidation of our 4 manufacturing operations into 1 facility. We met with all of our employees worldwide at the end of September and told them that we had put together a plan to consolidate the operations into a Monrovia, California. And we believe, according to that plan, it will take us about 2 years. As we reported last quarter, the total expense over a 3-year period will be about $6 million which will show up on our P&L, but we show a separate line for that. So far, this year, we've spent $650,000 on this project straight out of our P&L, and I believe it was about $150,000 during the third quarter. Why are we doing all this? Well we expect during the period of 2014 to 2020 to experience over $100 million in savings from labor costs and tax. We also believe it will be a good driver to help us to continue to expand our gross margin so that we can get that up to the mid-and high 70% range.

Bottom line, this was another terrific quarter for STAAR. Thank you very much. Revenue growth as we wanted it, ICL growth, which is really the key value driver here in our business, continuously expanding that gross margin very nicely. If you look at the P&L leverage that we have. $2.1 million in additional revenue year over year, $1.9 million of that went straight to the operating income line. Cash generation, $2.5 million during the quarter. Total cash, $16.9 million, the largest amount of cash this Company has ever had in its 25-year-history.

Profitability? Yes, though not as high as I want it to be or I expect it to be. All good news, but we're not there yet. We have a lot of work to do. We have a lot of opportunity in front of us, and we think we have the folks in place and the technology and pipeline in place for us to execute on that. And with that, I'll turn the podium over to Deborah to speak about the financial results. Deborah?

I'll focus my comment today on some of the key financial highlights of the quarter. Revenue, expenses, net income, and cash. At $7.9 million, third quarter Visian ICL sales increased by 31% over the period a year ago. Sales of Visian ICLs represented 525 of our total ICL sales in the quarter. In out top 10 targeted refracted markets, Visian ICL sales grew 33% and 5 of the top 10 markets accounted for 85% of the total revenue for ICLs. IOL sales for the quarter were unchanged at $6.6 million from sales in the third quarter of 2010. There was a favorable impact from foreign exchange, largely due to pre loaded IOL sales in Japan. We continued to see IOL gross margins increase with improved mix towards higher-margin IOLs. Lower-priced non-preloaded silicone IOLs declined, while there was a significant increase in pre loaded acrylic IOLs. Finally, we began shipments of the nanoFLEX IOL in select European markets during the last week of the quarter.

Operating expenses increased 3% over the year-ago period. The increase was largely due to growth in general administrative expenses, which included incremental spending for bonus accruals based on our improved performance, and the costs associated with the initiative to consolidate our manufacturing operations to the Monrovia, California facility. Finally, we reported net income of $77,000, or roughly break-even per share compared with a net loss in the third quarter of last year of $1.2 million, or $0.03 a share. The results were largely affected by approximately $430,000 as a result of exchange losses as the dollar gained strength against the euro and the Swiss franc and the fair market value adjustments of outstanding warrants based on the increase in STAAR's stock price.

In addition, the provision for income taxes, as Barry mentioned, reflected a rate of 74% of pretax income compared with 40% during the first 6 months of the year. We generated $2.5 million in cash, cash equivalents, and restricted cash, and ended the quarter with $16.9 million of cash on our balance sheet. This is the highest level of uncommitted cash in the Company's history. Briefly, for the 9- month period, revenue grew 14% in 2011 to $46.4 million. Gross margin was $66.7 million compared with $63.5 million a year ago. And operating expenses increased 4%, reflecting incremental bonus accruals and initiatives to consolidate our manufacturing operations. Income from continuing operations for the year-to-date period was $1.2 million, or $0.03 a share. That concludes my comments, now I'd like to turn the call back over to Barry.

And with that we'll turn to the round table now, and Hans Blickensdoerfer will be our moderator. Hans?

Well we are very fortunate to have 2 global leading ophthalmologist's here with us today. We have Dr. Zaldivar, who is the Medical Director from the Mendoza Institute based in Argentina. And we have Dr. Erik Mertens, who is the Medical Director of the Medipolis Refractive and Cataract Institute based in Antwerp. We also have with us a patient of Dr. Mertens who recently had the new V4c, the CentraFLOW Visian ICL implanted, to talk to us about his experience. I would like to start with Dr. Zaldivar. You have been a pioneer in the development and the launch of the ICL technology a long time ago. Can you tell us how many ICL you've got in your experience?

I started in 1993 and I have almost 18 years of experience and we are (inaudible).

This is a stunning number, 11,000 ICLs. Some of you will note that we just recently celebrated the 250,000 implanted in ICLs in the history of ICLs. That would represent about 4% total volume of regulations. By the way, have you removed any of those 10,000, 11,000 lenses due to loss of cells?

(Inaudible)

Would you recommend that a surgeon implants an interior phakic lens today?

I started with interior phakic lens in 1987. Now they have 23 years of experience with interior. We put about 2000 lenses, and the biggest problem with this lens, they have 2 biggest problems. One, (inaudible), deterioration with the time in many of the lenses, and also pupil vacillation. I abandoned this technique in 1994 because this reason, and I don't think opthalmology can solve this problem even now. I do not recommend. I do not put it and I am not going to put it.

During the recent ECRS meeting, you did present your experience, which you had 17 years ago with an ICL type of lens which had a hole in the center. Tell us a little bit more about that experience.

We'll start in 1993. And I will try to solve the problem of pressure at that time. And we do a discectomy at the beginning. But very soon, we realized that we can make maybe a hole in the middle that no one can detect it, even the patient, and we can avoid the problem of pressure and also circulation. And we did it in 1994, and we put 20 lenses in 1994. I have 16 years of experience with this patient. 16 years with patient with hole in the middle like the AquaFlow. The problem was in the company, we did not have enough technology at that time to do this, and it was very expensive to do it, and the instrument was what then abandoned the technology. Abandoned the technology before because it was very complicated to do a hole 18 years ago. The behavior of this place, and incredibly, in 16 years, I did not take 1 out because of any problem.

Not a single lens?

Not a single lens.

How far down do you go in the myopic range when you correct a reflective error?

I am very heavy a refractive surgeon. I perform many, many surgeries, probably until now, more than 150,000 refractive surgeries. I wanted to operate the most safe that I can. I don't want any problem with the surgery. That every patient that I have any single suspicions, I go as low as I can if I think I'm going to have problem with other technology. For example, many times I put the minus 1.5, minus 2 lens if I feel safer with this lens in any way. I also was an [accumulator] surgeon, and I was the first one to who cut the use of accumulator early because I know that accumulator is not for mid-sized or high diopter of myopia. It's only for low diopters.

The case AquaPORT is named after Dr Shimizu from Japan. Because of his clinical work, we did receive the CE mark recently. You have implanted a series of V4c, AquaPORT, the V4b, the previous version. What were IOP the results?

We start working in a very interesting way. We put V4c in 1 eye before being the other eye to try to see if there were any difference. In pressure in vision, in quality of vision and anything that they took us any attention. We find that most of the patients doing about the same in pressure. No pressure. And in the patient who have the AquaPORT don't have any directomy, that means it's a very big step forward because probably the most difficult part of the procedure is do the directomy. We avoid this part of the procedure. And also in vision quality. We measure with different measurement systems to try to see something different because the port or not, we do MTF, that is a system to measure the quality of (inaudible), this is a double-pass system, very sophisticated, to measure the [scattering]. And also with it [focus] MTF, one more. Points per rotation also, we measure, also, and we couldn't find any difference between both.

How do you see the advances of the ICL technology impacting the usage of the ICL in the future?

My clinic is like a lab. We start working in the (inaudible) very early, but what happened in my clinic happened later in other places most of the time. And I am increasing all the time the ICL for many years, I am more aggressive every time that the technique are more sophisticated, and we have less expectation of having problem. But every time we are more aggressive though, I think it's going to grow very, very hard in the near future because one of the most important things that we have now is doing the directomy in the surgery. And with the new ICL, that we have the pore, we don't need it, that we probably eliminate one of the most important cause of problems in the surgery.

Can you imagine that the ICL over the years develops to become the gold standard of refractive surgery?

I think it's going to be most of the cases. Because the other thing that I did not mention is we measure visual quality in all the lenses that I perform. In patients who have cataract, in patients who have laser and in other ones. I couldn't find the quality of vision with ICL. I couldn't find in any of the other procedures the same quality of vision that you get with ICL. The probably is related with the quality of the optic and also the (inaudible) that I use.

You may have heard that we believe we are close to receive the approval of the Toric ICL in Japan. Given the higher level of experience you have with Toric ICL, versus aspartic ICL, can you talk a little bit about your expectation, what you would see to happen with the Toric ICL in the Japanese market.

I think all the market, but Japanese more because they have more myopia, more myopia with stigmative, I think the growth is going to be very dramatically. Because Toric ICL allow us to correct one of the biggest problems that we have in combination with myopia, that is a stigmative, in one time, with very high precision and very high quality of vision, that I assume that the growing is going to be probably duplicated or triplicated.

So you wish you were operating in Japan?

I'd like to be in Japan because there are more myopia than any place in any place in the world.

Now to Dr. Mertens. Well, you were the first surgeon in Europe to implant the CentraFLOW technology. Can you tell us how many of the CentraFLOW ICLs you have implanted?

Yes, I was able to participate in the pre-marketing release of this exciting new technology. Until now I implanted 48 ICL type 4c. So far we didn't encounter any problems, no IOP rise, very satisfied patients.

You have also implanted some lenses in the V4b and the V4c. In the V4b and the V4c version, did you notice any differences?

When stepping into a new kind of technology, I'm always very anxious and very afraid that something goes wrong. That's why I in my first 2 patients, I implanted in 1 eye version 4b, so within the (inaudible), and the other eye, version 4c. Those patients did not know in which eye was which version. And I specifically asked them 1 day, 1 week, 1 month after surgery, do you experience any difference in vision? Any difference in visual quality? Any difference in visual symptoms from driving a car at night? And they did not experience any difference. Also when measuring the IOP, inter optical pressure, there was no difference between the 2 eyes. And even after implanting those 2 patients, I was so happy with the results of the 4c, that I only kept on doing both eyes with 4c. So I did not implant the 4b until now again.

With the expanded range approval of the ICL, how far down to you go in the myopic range when you treat a refractive error?

Well, actually, in my private clinic, ICL and laser surgery, LASIK and PRK are given to the patient on the same level. With means when a minus 1 myop walks in, he's as eligible to receive an ICL as a LASIK. So for me it's the same. But the visual quality is much better in the ICL when myopia is minus 4, minus 5 and above. I'm not doing laser surgery anymore above minus 6 diopters myopia because quality of vision is so much better with the ICL. And as you will see with my patient who is sitting next to me, that I go very low when implanting the ICL. When the patient, of course, knows what it is and is understanding that the visual quality will be very good.

If we do look into the future, how do you think the new advances with the ICL will impact the usage of the ICL?

I start with the ICL about 2002, 2003, so 9 years ago. And at that time, my volume of phakic lenses with respect to my total volume was only 6%. So over the years, in last year, I did more, 32% of my cases were already ICLs. So it's growing rapidly in favor of phakic lenses because of the advantages. The ICL is now like laser surgery in terms of when the patient comes in the clinic, examinations we do are exactly the same as with laser surgery. So my efficiency is as good as with laser surgery, but the results are better.

You have passed already the 30% ICL, whereas 70% of LASIK. Can you imagine to see this number further grow and if so, is 50%, is that a doable ratio?

That's a very good question actually. When starting the 4c 3 months ago, actually, those last 3 months I'm surpassing 50% with ICL. So I'm already there. And of course, in the near future, to even be higher than that.

You recently implanted these new advances in the ICL in Hasan, who worked for a distributor of opthalmic products in the Netherlands, he is with us here today. Thank you for coming. I would like to pass it over to Dr. Mertens for asking a few questions.

Hasan, welcome here. You were a very low myop, as you know, you were only minus 0.75 of a diopter in 1 eye, with a cylinder of minus 1. The other eye, also minus 0.75 of sphere, and a cylinder of minus 1.25, so very low myop. Why did you choose the ICL over LASIK surgery for you?

Because I work for a distributor in opthalmology products, I'm very close to the industry. So I heard about the great results that patients have with the new Visian ICL, so I wanted to see for the myself. And also I preferred it above having a flap in my cornea which is necessary when you get a LASIK procedure. So I felt much more comfortable with the Visian ICL.

The reversibility of the ICL procedure also was appealing to you?

Yes, definitely. It's easily removed.

Your surgery was about 6 weeks ago?

Yes.

Can you describe your vision today as compared to prior to the ICL surgery with your glasses.

Yes, it's way more clear. Way more brighter as well. And actually, 1 day after the surgery I could recognize my mailman for the first time who walks across the streets every day. And it was amazing to me.

When you told me that, I was also amazed. Because I used to hear that when I implant an ICL minus 6 and above. Then patients come in and say, I see much better when I look in the garden. For the first time in my life I see the leaves on the trees. But you as a minus 1 also telling me that was a surprise to me.

I can definitely say to me that the vision is better than before when I wore my glasses, and also I'm not limited by the frames of the glasses now. So I can see for 360 degrees actually, so that's also a plus.

Of course, and also you had a stigmatism. And we all know that when you can correct a stigmatism in the eye, the results, the vision will be better than when wearing contact lenses or glasses. One final question. Would you choose to have the Visian ICL implanted again?

Definitely. Without a doubt.

Well, that's great to hear. Thank you very much for the statements. I'll pass it back to Barry,

Now for those in the audience, if you have any questions, there are notepads here that will be available for you to write a question on. And with that, Operator, we're ready to open the line to any questions from the participants.

(Operator Instructions) Joanne Wuensch, BMO Capital Markets.

Thanks for taking my questions. Sounds like you're having fun down there.

We're sorry you're not here, Joanne. But we understand your 8-year-old had a birthday, so congratulations to him.

I have questions about the 31% ICL growth rate. Can you give us a growth rate in the US and OUS?

Well the US was down. The civilian sales of ICLs in the US was up 1%. I believe in total the US was down 13%, mainly because of military. And I believe outside the US was 33% growth, yes.

And can you remind us how foreign exchange moves through your P&L?

I'll let Deborah respond. Of course it positively impacted our revenue line, as we said in our release. It also negatively impacted our expenses and it did have a little bit of impact on the gross margin line. Deborah?

Hi, Joanne. Just to reiterate, yes, we have transaction-related expenses that hit below the line in other income and expenses. Also within that number are the translation effects of our euro balance accounts, our Swiss franc accounts and any associated AR that might be in euro or Swiss franc. We have to translate that to the current rate so that may or may not be an actual ongoing loss. That could revert if the dollar weakens against those currencies. But at the operating income line, I think there was about $80,000 of translation gain that was in the P&L.

$80,000 of translation gain in P&L?

Yes. So the effect of the sales, the increase in sales, was offset by increases in expenses, and at operating income there was about $80,000 more of gain in the P&L versus expense.

Do you think your guys are in a position shortly to start giving guidance with your feet underneath you?

You don't consider our metrics as being guidance? If you're not giving guidance, you can't miss it. So far we've done well with the metric and we've raised them where they've been necessary, and I think we've been fair when we've missed them, we've said we've missed them. We did, as you know, and you helped through the thought process, we thought about it at the beginning of last year. We'll think about it at the beginning of 2012. Bur right now I like the way we report.

One last question. Can you quantify, in any way, a qualify absolutely, the 4c session, the 4c impact?

During the third quarter?

Yes.

There was virtually no impact during the third quarter. We were only shipping product to doctors like Dr. Mertens here, who were in the pre-marketing launch. We began the official production release to all customers the first week of the fourth quarter.

Chris Cooley, Stephens Inc.

Hope you guys have a good time there versus earnings season here. Just 2 questions if I may. When you look at the Visian growth in the quarter, I believe Deborah mentioned that 85% of that volume came in 5 of the top 10 markets. Could you maybe address or provide some additional color from that concentration of revenue, and why it was so tight in the current quarter? And I just have 1 quick follow-up.

I think this goes back to a point we started to make during the second quarter. As we know, in the top markets in the world, Korea has just done an outstanding job with the ICL product line. And now we're starting to see a lot of other smaller Korean markets, if you would, that are developing. And you see those in China, in India, good growth in Germany, the UK, the Middle East, and that's what is exciting for us in terms of as we look at the future, is we see all these other small Koreas developing to provide that growth. And I believe 4 of those 5 countries were also stand-out producers during the second quarter of the year, so they seem to be on a pretty good curve trend line.

And then I'll do 2 additional and I'll get back in queue. Could you maybe just give us a little bit more color, an apples-to-apples, when you think about the core cataract business? Obviously now more focused on the higher margin and clearly differentiated nanoFLEX technology versus some of the older IOLs. More commodity orientation. Just trying to tease out an organic growth rate on the nanoFLEX offering. And similarly could you give us a longer-term view about the operating structure? You continue to deliver great leverage to the P&L with the top line growth. Help us think about what kind of an operating margin is realistic when we think out about 2 to 3 years once you've done the plant consolidation, you've seen the ramp-up in the ICL and you've gone ahead and made the migration on the IOL side, as well.

First, with the IOL line, our IOL sales quarter-over-quarter were basically the same, basically flat. But there was a mix change, which really helped in expansion of the gross margin. You heard the good results overall in gross margin. And when you dig down into the numbers, about half of the growth is attributable to the ICL and that gross margin and that mix, the other half is to the IOL. As you well know, we've been working out of some of the lower gross margin IOL business the Company has had and moving it more to the higher gross margin. That was a big part of the reason. We had a significant decline in the stand-alone silicone IOL business, which tends to be the cheaper, lower gross margin. That decline basically made up by the increase in our preloaded acrylic IOL product outside the US. So overall, we like the trending of the business. That's a very stable part of our business, and it's not impacted by the economy. We're getting it up to gross margins that make sense for us as a business. And then we supplement on top of that the ICL growth that we see coming.

In terms of the operating structure looking forward, one of the things we've tried to say is to look at our business very simple over the next 2 or 3 years, is that we think our ICL business can continue to grow in the range of 20% to 30% a year. I think that's fair evidenced by the fact that we're over 30% so far this year. And those gross margins are about 85%. We believe our IOL business can grow 5% to 10% a year. We grew 7% last year, so we think that's certainly reasonable and fair, given the fact that we just the last month of the third quarter shipped the first nanoFLEX products to Europe. And also we still believe that before the end of the year, we've got a good shot at getting the nanoFLEX Toric IOL approved in Europe.

So that will really help in terms of margin of IOLs in Europe, and also allow us to enter some additional markets in Europe that we can't enter today because a distributor has to make money and we have to make money, and the nanoFLEX Toric is a product in which both sides can win. When you draw those numbers out, you can decide the growth rate. The gross margin on IOLs in 55% going to 60%, just leave the gross margins on ICLs at 85%. But we certainly see the opportunity to get to a net income line of in the 20% to 25% range.

Now as we continue to grow the business, we're going to invest. So maybe not all of that will drop to the net income line, as we've seen in the first 2 quarters of the year. And we're going to pick our opportunities. We're working on the 2012 budget, and you will see an increase in our sales and marketing line and some of the markets that we spoke about earlier that are accounting for some of the pockets for gross in ICL, and some of the other markets where we see additional opportunities. Hopefully, that answers you questions.

Bruce Jackson, Morgan Joseph.

Turning to Japan, how does this impact your launch plans? When do you think you might have the product on the market?

Well, I think based upon the news we got last week from PMDA, I think it's fair to anticipate that we'll get approval in Japan before the end of the year. So I think that product should be available to start shipping the first quarter of next year.

In terms of reimbursement, is that already in place?

For the ICL in Japan?

Yes.

It is an elective procedure in Japan. There's no reimbursement for there the procedure.

And then turning to Korea, does the new trade agreement help you in any way?

Do we have a new one?

Yes, we do.

I think we've been a little busy preparing for this small show we have every year. And it came right in between the one in Vienna, ESCRS. So I don't believe there's any advantages in the new trade agreement with Korea. But we're very happy with our Korean business and distributor, and we look forward to continuing to grow together. They're at about a 15% market share now in Korea, our highest market share market. So we're looking forward to continue to grow that business with them.

And then turning to the United States, do you have any update on the situation with the FDA and the Toric ICL?

Good question, Bruce. And it's been here asked on the floor here several times and at dinner last night several times with a group of surgeons that I was with. A couple of things. First of all, our last response to the FDA on a question regarding Toric was about 3 months ago. And that question again was on the same topic of patients in the window versus outside of the window. You may or may not have noticed though this morning on the FDA website, there was an update on our second post-approval study that was a requirement of the ICL. There were 3 studies, if you may recall, back in 2005 when that was approved. The ICL, the original ICL, was approved in the US. The first one is complete.

The second one, which dealt with a 5-year history on endothelial cell counts and cataract formation. The FDA sent us notification last week that that has been satisfied. Not been yet completed, but satisfied in the sense that we've provided all the data and they're satisfied with what they had given us, and that what we have to work with them is any changes in the DFU as a result or not, and that will take place in the next few weeks. So that second post-approval study will be marked complete.

Now, what does that mean? What we'd like to think it means or what we think it means is that a year ago when we were dealing with the FDA almost daily on the issue of endothelial cell counts, that we think, hopefully, the FDA has accepted the 10-year data, the 5-year data, and that's no longer a question that they have in regard to the Toric ICL.

And just a question for the physicians on the panel, if they are still there, if the negative 6 diopter is the cut-off for getting an ICL, what proportion of your patients fall into that category?

So I think, Dr. Mertens, you said that's typically where you had 4c before the minus 6 and above was PRK or LASIK -- I'm sorry, above minus 6 was ICL, below, you gave them options. So what percent, is the question, of your patients which would be minus 6 and above?

Well, first of all, when implanted the 4c for 3 months, my range of ICLs implanted with the 4C was between minus 1 and minus 8.75. The mean was minus 5., so I'm coming down with my mean of myopia. And minus 6 and above will be 20% of our cases. As I told you, minus 6 is my cut-off point for my laser surgery, and below that I offer ICL and LASIK to the patient above minus 6, there's only 1 option as the ICL.

For those 20% of patients, basically the only option they get are the ICLs. So for the rest of the patients, then, for that other 80%, how do they generally make their selections when given the choice between LASIK and the ICL?

When a patient typically comes in, my first question to the patient is, why did you come to me? What is your motivation? What do you want to achieve? What do you expect from me? And I always send them my information brochure before they come to the pre-op consultation. And there is already mentioned that ICL is a possibility and laser is a possibility below minus 6. So my patients already come in pre-educated, which helps a lot. When I'm talking to them, I say, okay, we're going to run some tests, we're going to look at dry eyes, we're going to look at your cornea. And we're going to decide what will be the best and what will be the second best procedure, or will it be equal. When I see dry eyes, I already tell my patients, okay, when we do a LASIK or a PRK, your dry eye will become worse for sure. So the best option will be ICL. Second is when I see any suspicion in the cornea, an abnormal corneal topography or a thin cornea, then the option is only the ICL. As I told you, more than 50% of my cases last 3 months were ICL in respect to LASIK surgery. So the business we're doing with the phakic lenses is growing rapidly.

Dr. Zaldivar, anything else you'd like to add to that?

Basically, what we are doing now is emphasizing high quality. That's very easy for us to explain to the patient because of high-definition TV. Basically, what we're working now in lower power is compare the quality of laser in the minus 4, minus 3, and compare with the quality of the vision of the ICL. In all the objective methods that we measure, always ICL is better quality then LASIK. If the patient is obsessive in quality, usually they choose all the time ICL because this is something that we do not emphasize so much before, and now we are understanding because we have a lot of machines that we can measure really quality. It's very easy to explain to the patient, you know normal TV or high-definition, and really this is the difference.

Raymond Myers, Benchmark Capital.

First, I want to ask you about the exchange rate. I just want to be clear about what effect exchange rate might have for us in the future. If exchange rates do not change from current levels roughly today, what impact should we expect in the fourth quarter and going forward?

I'm going to let Deborah answer that, Ray.

Ray, basically, to the extent that the dollar is strong, we'll see exchange losses, or continued strength in the dollar, we'll see foreign exchange losses. And if the euro and Swiss francs gain strength against the dollar, we'll see gains again in our P&L.

So as we stand today, would we expect there to be any positive or negative impact on foreign exchange in the fourth quarter? Or are we neutral right now?

The last time I checked. And I have to admit, I haven't looked at it in a few days. But last time I checked, the euro and the Swiss franc were a little stronger than what they were at the end of the quarter. So I would expect to see gains.

And I believe, Ray, if you go back the prior 4 or 5 quarters, we have seen gains from exchange. So this is the first quarter in about a year-and-a-half where we've had a negative impact because of exchange.

Ray, just to say also, our objective overall is to keep it pretty much even. We like to see the gains, we prefer the gains. But if we manage it so we're break-even, then that's a good result for us.

Yes, that's right. And what we care about is the actual results of the business not these FX things. Hopefully, the earnings become large enough that these little slight tweaks will no longer be material. Let me ask about something that is under your control. What visibility do we have to Q4 and 2012 tax rates and manufacturing consolidation expenses. Barry, you've said for some time that you expect $100 million of savings through 2020 through those initiatives. Can you give us a little better -- walk us through where do the expenses hit? And when do we enjoy the benefits?

First of all, the benefit comes in the periods of 2014 to 2020. And that's over $100 million benefit over that period of time for both labor and tax. If you look at our tax rate third quarter, I don't think anybody would be out there protesting this Company isn't paying taxes, because we had a 74%% tax rate of our operating income that we had to pay. That's too high. I think though realistically, if our operating income, and we don't have these negative impacts that take away from operating income that gets down before the tax line, we should be looking at this year and next year about a 30% tax rate. And then we'll see a favorable impact starting to hit us in 2014. And we believe from the period 2014 to 2020 that our tax rate will be about the 10% level.

So about a 30% tax rate through 2013 and then go down to a 10% rate.

I think that would be a fair way to look at it.

What about the expenses of the manufacturing consolidation? You've bucketed $6 million that you expect to spend on this. When to those hit and how to we account for that.

Right, so about $600,000 to $650,000 of those expenses have hit already this year through the first 9 months. And we have shown them in our P&L, not separately. So the smallest portion of this year, we're expecting about another $150,000 to hit us during the fourth quarter. Beginning next year, we're going to put a separate line on our P&L which will show you specifically what the costs are related to consolidation so that you can take that out of your model to get a better sense of what the true business is doing versus the expenses of consolidation.

And next I'm going to move on to some regulatory questions. If you've addressed 2 out of the 3 FDA studies that were prescribed, that begs the question, what's the third study and what are the remaining milestones to getting US FDA approval?

First of all, none of the studies are milestones related to the Toric ICL. They are not related at all. The reason why I pointed it out is the endothelial between the FDA a year ago. They've now accepted the data from the post market approval study. That number is huge. I think we completed about 1500 and this is a requirement -- not a requirement -- but it has to come from patients. Physicians have been helping us in asking patients to sign up for on the website this questionnaire and continue to follow this for a period of a few years. So you can understand that patients have a reluctancy to deal with this even though we do pay them for doing it. And we are hoping and we will have started some and we'll have additional discussion with the FDA to try to lower the number to a more reasonable number.

Is that directly related to the Toric approval? If that's a post marketing study for the standard ICL, then that should not delay a Toric approval, should isn't it.

No. They're not tied at all. The only reason I pointed it out, it was a heavy part of the agenda. A supplement to that PMA the approval for the ICL.

and naturally because that is a safety related issue it does relate to a Toric application. So what else relates to the Toric application? What is the next layer of questions to you.

the last questions we had were in regards to. We've not had follow-up or response from the FDA since that point in time.

Remind us what in the window means.

So let's say the requirement is to follow up on a patient at 12 months. Well, odds are the fission is not going to see the patient at 12 months. There's a window allowed. Eleven months to 13 months. That data is acceptable from that patient. If you get beyond that 13 months, you're called of window. It's not a bad thing because you've actually exposed the patient to the same risk over a longer period of time. I can understand why if you're on the short end of the window, the FDA would have an issue of that because you might have seen the patient at the 10-month mark and haven't gotten close enough to the 12-month mark. So that's basically an example of how it works.

So how many patients were on the short end of the window?

A very small amount.

That's good. Those were the last questions they gave. I suppose they can come up with questions indefinitely if they want to.

I believe it's their right. Okay. We're glad that you're making progress in what they're asking. Hopefully, it's not a protracted -- continue to be a protracted procedure. I think in the next few weeks as we get Toric approved in Japan, then we'll only have 1 more market in the world to get approval in, and that will be the US.

Follow-up, Chris Cooley, Stephens Inc.

Just 2 quick follow-ups, Barry. One, if I may, just to be clear. When I think about the non-operating items that impacted the 3Q results. I apologize, there was a little bit of static here when Deborah was running through those. Can you guys provide that one more time just so I can get to what was a baseline for the quarter. What earnings would have been ex those operating one-time items, as well as the gain. And then secondly could we just touch base. I know, having recently been at the experts meeting in the CRS, great enthusiasm on the V4c. Give us your maybe assessment of domestic surgeons' views of the V4c. With Innovation Summit kicking off Thursday and the Academy now having ran for 3 days. Just your thought on how domestic surgeons are seeing the opportunity with the V4c or will be the V5 once it comes to the states?

Chris, up in the non-operating items that hit our P&L, our total other income was actually an expense of about $450,000, versus last year during the third quarter, it was income, not an expense. It was about $390,000. So the year-over-year comparison was a negative impact to us of a total of $835,000. Now when you look at the 2 items in the line that had the greatest impact, exchange was about $270,000, $280,000 of that number. And then there was about $150,000 related to the adjustment of the warrants that we have outstanding because of the increase in the STAAR stock price.

So now on the domestic surgeons side. Good question. You must have been listening in last night. We had a dinner last night with about 15 US surgeons, and Dr. Mertens actually was there and presented his data on the V4c. And every question they wanted to ask was related to the FDA and when they think they can get it. And I'm going to let Dr. Mertens add anything he might want to add, since he presented and he interacted a lot with those US domestic surgeons. But my take away was they are very enthused about the technology and they think it will make the procedure much simpler and easier for them and their patients.

There were indeed around 15 very important US surgeons implanting the ICL already in their practices, and they were very anxious to hear what my experience was with the 4c. And I told you this afternoon how I feel about this technology and also at the expert meeting in Vienna. And those US surgeons were very anxious to know when this technology can come to the States. But of course, we cannot answer that question. But there were no doubts about the advantages of this new technology.

I have a question from the audience quickly. And then, Operator, if there's 1 final question from the conference line, I think we can take it because we need to wrap up. But an interesting question from the audience for both Dr. Zaldivar and Dr. Mertens. And that is, why don't the majority of your colleagues implant the ICL today?

This is an interesting question, because I think there is 2 reasons. One of the reasons is the discectomy, that is not easy, and the new model avoid it, that is my expectation in grow is going to be very high. Probably the second one is sizing of the lens, that we are improving incredible with a new instrument now like ultrasound. We take out 1 of the problems, that is the discectomy, because we are going to avoid it. The only thing difficult for a standard doctor is going to be sizing that now is a little more easy because it's a lot more formulas to do it.

That's my expectation is surgeries, you are becoming better, it is easier, and it is also reflected in all the meetings that we had the last year. Usually when we talk in France 2 years ago, there was 80 people in the audience, and now the last one is about 600. This is for us the measurement of the expectation of the surgery. And I think the growing is going to be the same. That the doctors come and listen what is going to be the technique. This is probably this is the 2 limitation. One is taken out, probably now we're growing a lot.

I want to ask one more thing, Roberto. There were reports in the literature about cataracts formation, and I must tell you that in my hands, it has not been any issue. So I have a follow-up. In more than [700] ICLs, more than 40 are follow-up, and my incidence of cataract is less than 0.5%, which is as low as, and even lower than other phakic IOLs. And my colleagues must understand that when you do surgery on an eye on a high myop, they can have cataracts just by doing surgery on it. Like when doing surgery for glaucoma for high eye pressure, that eye can get cataract sooner than without surgery.

This is 1 thing that we need to add, and these are many questions are asked by surgeons, this is dangerous for cataracts. Then we need to make sure and we need to tell them, and we do of course, that cataracts are not an issue. Interior cell loss is an issue because when you have to deal with corneal problems and the corneal transplants, you can never get a very good outcome when doing corneal transplants. So the ICL we don't ave any issues with the interior cells, interior chamber phakic do have issues with interior cells.

In talking about just cataracts, I have the experience to use all the model of ICL that was not the same since 1993. And since we start doing the V4, and we precise the sizing of the lens and learning a little bit on how to do it, it was incredible, because almost since 2001, we don't have any case of cataracts, that means 10 years of follow-up, no cases, maybe about 8000 lenses.

Operator, I think there's 1 more question we can take from the lines and then we need to wrap up.

Jack Fraser, Seamark Capital.

I would just like, Barry and Deborah, to explore whether or not you've had a chance to think through looking longer-term out. When you consider your core ICL business growing, it's growing to 30% per year, and your core IOL business, which really is the nanoFLEX, growing at 5% to 10% per year. And assuming that you maintain gross margins of 85% on the ICLs and 55% to 605 on the IOLs, and then considering your expected costs after you manufacturing footprint to Monrovia. Have you thought through what your overall corporate average gross margins would look like at the end of, say, 2 years on a pro forma basis?

Good question, Jack. I think through all of that, you can see through the dynamics of the greater growth in ICLs with a higher gross margin that has a very positive impact on the overall gross margin. Plus what we think we'll get through consolidation. I think we believe we can get very close, or if not to, the 80% gross margin level with this business. And I want to thank all of those on the line and on the webcast for their questions and their interest, all of those in the audience. I especially want to thank Roberto and Erik and Hasan. I think to hear it actually from the surgeon's mouth and also then to hear it from the patients' mouth. It can be said much better than Deborah and I can say it. We had a very good third quarter, though we still have a lot of work to do. And we're about it here, we'll be at it tonight. And we look forward to reporting to you on our success during the fourth quarter.

I will point out to you that we'll be in New York City twice during the month of November, the second week of November for the Stephens conference and the fourth week for the Piper Jaffray conference. So if you're in New York and would like to schedule time with us, please call EVC. And any of the investors or analysts that have additional questions tonight, please feel free to call Deborah or myself on our cell phones, as we're here in Atlanta, and we'll be out to dinner. Thank you very much and have a good evening.

Ladies and gentlemen, that concludes STAAR Surgical third quarter 2011 financial results conference call. If you would like to listen to a replay of today's conference, you can dial 303-590-3030 or 1-800-406-7325 and enter the access code of 447-8575 followed by the pound sign. We thank you for your participation and you may now disconnect.