STAAR Surgical Co (STAA) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the STAAR Surgical third-quarter 2012 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, October 31, 2012. I would now like to turn the conference over to Doug Sherk. Please go ahead.

Thank you, operator, and 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, which ended on September 28, 2012. The news release announcing our third-quarter results crossed the wire about a half an hour ago, and is available at the STAAR website at www.STAAR.com. Today's call is also being broadcast live via webcast.

In addition, a slide presentation will accompany remarks by management. To access both the webcast and the presentation slides, go to the Investor Relations section of STAAR's website at www.STAAR.com. If you are listening via telephone to today's call, and would like to review the slides that accompany management's remarks, please navigate to the live webcast, as I have just reviewed, and choose the No Audio, Slides Only option. In addition, an archived replay and slides will be available on 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 [of] revenue, sales, profit margins, expenses, cash, or other financial statements; any statements about plans, strategies, or objectives of management for future operations, or prospects for achieving such plans, [can be] statements concerning proposed new products, including expectations for success of the ICL, KS-SP IOL, nanoFLEX Toric IOL, or other products in the US or international markets; governmental approval of new products or developments, or other future actions of the FDA or other regulators; the outcome of product research and development, or any clinical study; any statements regarding future economic conditions or performance; the size of market opportunities; statements of belief and any statements of assumptions underlying any of the foregoing.

These statements are based on expectations and assumptions as of date of this conference call, and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks are described in the Safe Harbor Statement in today's press release, and in the Risk Factor section of our annual report on form 10-K. Investors and potential investors should read these risks. STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes, and does not intend to do so.

In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and diluted net income per share information that excludes manufacturing consolidation expenses, gains or losses on foreign currency, fair market value adjustments for warrants, and stock-based compensation expense. We believe these non-GAAP numbers provide meaningful supplemental information, and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in our financial release, which is available on our website and in our slide presentation.

Now, let's turn the call over to Barry Caldwell, President and Chief Executive Officer of STAAR Surgical.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us today for a review of STAAR Surgical progress during the third-quarter 2012. With me today on the call is Deborah Andrews, our CFO. Deborah joins me and the entire STAAR organization in offering our thoughts and prayers to all of you on the call today who have been impacted by Sandy. We know that watching the storm on television doesn't come close to understanding the devastation and loss that has occurred in the northeast corridor, and we wish everyone as rapid a recovery as is possible.

I'll start our call this afternoon with an overview of the quarter, and also a review of our 2012 key metrics in light of the third-quarter results. Deborah will provide a detailed look at our third-quarter financial results, and discuss progress with our manufacturing consolidation project, which we call Project Common. Before we take your questions, I will provide some additional operational updates.

Now, let's look at our overall revenue growth in the quarter, which came in at 4%, which drove our sales to $15.9 million in the quarter. On the upside, the Visian ICL revenue grew 15% to establish a new quarterly revenue record for the product line. ICL sales were 57.4% of total sales, which was also a new all-time level. On the IOL side of our business, sales were down 8%, which netted our increase in total core revenues to 5% for the quarter. As we had planned, the de-focused Other product category continued to decline at a rate of 11% during the quarter.

While our revenue growth was less than we would have liked, we did execute very well in several areas during the quarter. These include continued expansion of our gross margin level, generating cash from the business while making key investments for our future, ending the quarter with nearly $20 million in cash, good progress on our manufacturing consolidation plans, as well as enhancing our management organization.

Now let's drill down on the revenue results. First, on the ICL side, this slide illustrates the quarterly growth for the ICL since mid-2005. The third-quarter sales of $9.1 million represents a new record quarter for the Visian ICL products. The growth in sales was in double digits in all three of our regions. Our European region grew ICL sales by 17.5% during the quarter, Asia-Pacific region grew 15.5%, and our North American region grew 11%.

Our overall ICL growth for the quarter was 15%, which was less than we had anticipated. Sales in Korea, which I'll show in a minute, declined by 15% during the quarter, and we'll get to more detail on those factors behind those developments in just a moment. However, excluding Korea, Visian ICL sales increased by 26% during the quarter, and this would have been in line with our Visian ICL metric for the second half.

Now, let's move to the top-11 targeted markets on which we focus, and look at the top-performing markets during the quarter. This slide depicts ICL revenue in each market during the third quarter of the past three years. Overall, ICL sales grew 17% in these 11 focused markets.

First, in Spain. The move to a direct sales model led to a 72% increase in revenue from that market. ICL unit growth was basically flat during the quarter, but the move to a direct model resulted in our ability to generate revenue at the customer level, and thus, the large increase. The mix of toric ICLs to basic ICLs in this market declined during the quarter, which held down the growth rate somewhat in revenues. During the last week of September, we attended the Annual Spanish Opthalmic Meeting as STAAR; that's the first time in our history we've done that. We had hired a new direct sales rep, and plan to hire another during this quarter, as we're confident we can return this market to a unit-growth market with additional focus and our new products.

Next, in Japan. Revenues grew 56% during the quarter, while units more than doubled. This reflects increases from the two large refractive centers in Japan. Those centers began using the Visian ICL with CentraFLOW technology during the quarter.

In China, while the impact of the negative press coverage on LASIK still lingers in the market, we did start to see a rebound in ICL growth in that important market. Let's look at the China growth rates in a little more detail for a moment. This chart shows the excellent quarterly growth rate that we have experienced in China over the past 2.5 years. Now, you can see the dip last quarter due to the negative LASIK media coverage. Yes, the second-quarter growth rate is reflected on this chart, as it was flat.

According to our research, this coverage resulted in a significant slowdown in all refractive procedures in the market during the second quarter. As we said on our last call, we believed it would take a while for growth to recover in China. While the third-quarter ICL growth was 52%, it's not back to our average quarterly growth rate. The weekend before last, we sponsored an advanced ICL users meeting in China, and the feedback from surgeons there almost unanimously was that the majority of patients coming into the office are still asking serious questions about LASIK complications. These questions should help drive the ICL return to our past growth rates more quickly than LASIK.

Now, let's return to the target market growth rates. Another upside highlight for the quarter was US. Our ICL sales increased in the US by 11.5% due to increased promotional activities, including initial benefits from our social media promotional programs. Sales to private-sector accounts increased by 20%, which is impressive compared to the reported results of other refractive technologies during the quarter. For example, LCA-Vision reported yesterday, their refractive revenues declined 9% during the quarter.

Now, on the military side of ICLs, there was still a slight decline from prior year. It was 12% despite having a return of some of the military personnel to the US. During the third quarter of last year, there was a large year-end order by the military providing us with somewhat of a higher comparable. Military ICL sales did increase by 92% as compared to the second quarter of this year. We do expect to see continued improvement in military ICL sales in the fourth quarter due to surgeons returning from overseas duty and the expansion of surgeons using the Visian ICL.

ICL sales in India continue to grow nicely, reflected by the 24% increase. And though smaller markets today, you can see good growth rates in Italy at 64% and the UK at 17%.

Now, let's look at Europe proper, if you would. ICL revenues in Europe grew by 29% during the quarter. Approximately 82% of ICLs shipped to Europe were the CentraFLOW technology, as compared to 56% of shipments during the second quarter. We have now successfully implanted well over 7,000 ICLs with the CentraFLOW technology. There were over 100 presentations on the ICL during the week of the European Society Cataract and Refractive Surgery Meeting during September in Milan. Many of these were on the benefits of this new technology, and all were quite positive.

As you know, we invoice a 10% premium on the CentraFLOW technology. Since the introduction of the CentraFLOW, however, the euro has declined by 12%, and since we sell ICLs in Europe in euros, we have yet to see the pricing premium reflected in our overall results. The negative impact from the euro was the highest during the third quarter thus far.

Now, let's turn to Korea. Sales in Korea came in lower than expected for the second quarter in a row. The third quarter was the first time that we have seen the actual demand from end customers to our distributors decrease on a year-over-year basis. To get our growth reunited, we are in the process of hiring a direct employee in Korea to work with our distributor day to day to get ICL growth there back on track. Additionally, I am headed to Korea tomorrow with our President of Asia-Pacific to participate in a strategic session with our distributor over the weekend to review plans to grow the ICL in Korea.

While we have been very successful in Korea in the past, our market share is still only 13% of all refractive procedures in the market. Along with our distributor, our mutual goal is to achieve 25% in this key market. We should have the Visian ICL with CentraFLOW technology available in Korea in the next several months. With additional focus and support from STAAR, and the new technology, we believe with our distributor we can capture the opportunity we see in the market.

Now, let's talk about the IOL business. Third-quarter IOL sales decreased 8%, with IOLs down in all three regions. The chart at the bottom of the slide shows that decline in three of our four top IOL markets. Our major IOL competitors have reported their third-quarter results, and they seem to indicate that overall global cataract procedures declined during the third quarter as compared to prior year. Novartis Alcon reported their surgical sales declined 2%, citing weakness in procedures. Additionally, Abbott AMO reported their surgical sales declined 4.3% during the quarter. Neither company reports their specific IOL results any longer.

While the decline in revenues on IOLs was $0.5 million, the decline in gross margin was 50% of that, as we increased our gross margin again during the quarter to 60% from 59% a year ago. Our average selling price of IOLs had a slight decline globally during the quarter, but there was a continued increase in the US selling price.

Our sales in Japan were lower than expected, partially due to the continued lack of the KS-SP pre-loaded Single Piece Acrylic IOL, which was launched late in the quarter. We have seen a very strong response to the KS-SP initial limited launch in Europe, and European distributors have significantly increased their forecast for the remainder of this year, and 2013. Our supply will still be tight, so we don't anticipate being able to meet their increased demand in the fourth quarter, but anticipate being able to do so during the first half of next year. Another factor impacting our IOL sales is the nanoFLEX Toric IOL, as we are still in the limited launch stage awaiting initial clinical marketing results, which we now expect to have completed during the fourth quarter.

Here's an update on our progress against our second-half key metrics. The red arrows reflect where we believe we fell short, the green where we believe we achieved, and the yellow is the toss up. The first metric was to achieve double-digit revenue growth. With 4% growth in the quarter, this was obviously not achieved. Although our current expectation is to exceed our third-quarter revenue growth rate during the fourth quarter, exceed the third-quarter rate, our current estimate is that the growth in the second half will be short of this double-digit objective.

The second metric was to achieve 25% growth in Visian ICL revenues. Well, with 15% growth in ICLs during the third quarter, this was not achieved during the quarter. Again, we expect strong ICL revenue growth during the fourth quarter. Our current expectation for the second-half Visian ICL revenue growth is less than the 25% metric.

The third metric is continuous expansion of gross margins to achieve 71% for the full year. Our gross margin in the third quarter was 70.4%, which was a 190-basis-point improvement over prior year. We believe we're still on track to achieve our annual target of 71%, or bump right up against it.

Our fourth metric is to achieve profitability in Q3 and Q4. While we were profitable on a non-GAAP basis, we were break-even during the third quarter on a GAAP basis, which included over $700,000 of manufacturing consolidation expenses. Those expenses are higher than we had previously anticipated by about $200,000, as we moved forward some non-cash expenses that were originally planned in 2013. If not for that forward movement, we would have been profitable on a GAAP basis. That's why we've marked this with an arrow neither up or down, a toss up. We believe that our fourth-quarter earnings will result in profitability for the second half and the full year on a GAAP basis, including all expenses.

The fifth metric is to implement our manufacturing consolidation with no disruption to customer and product quality or supply requirements. This metric continues to be achieved, and we believe we will continue our progress on this objective during the fourth quarter, as well.

Deborah will discuss key financials and manufacturing consolidation in more detail. Following her review of our financial details, we will return to discuss our key operational progress. Now, I'd like to turn the call over to Deborah for a more thorough review of third-quarter highlights. Deborah?

Thanks, Barry, and good afternoon, everyone. Since Barry has already discussed revenue highlights, I'll be focusing my comments on operating expenses, our gross margin expansion, GAAP net loss and adjusted net income, and cash. I'll close with an update on our manufacturing consolidation project.

First, let's review our operating expenses. Our total operating expenses, including manufacturing consolidation expenses, increased 16% to $11.3 million. Manufacturing consolidation expenses were over $700,000, an increase of $600,000 over the prior year. Our operating expenses before manufacturing consolidation expenses were $10.5 million, up 10%. This increase was primarily due to our investment in global marketing and selling expenses, including the addition of 14 new employees, and $400,000 related to the change of distribution in Spain to a direct model. We estimate the annualized cost of the headcount additions will be approximately $2 million, and the expense associated with the transition in Spain will continue through February 2013, at which time the normal logistics cost of being directed a market will begin. Total operating expenses also nearly increased $300,000, due to non-cash increase in our stock-based compensation.

Our GAAP net loss was break-even on a per-share basis, which was the same result as in the third quarter of last year. Through the nine-month period, GAAP net loss was $0.01 per share, as compared to net -- GAAP net income of $0.04 per share in the prior year.

Moving on to our gross margin results, our gross profit margin was a record 70.4%, up 190 basis points over Q3 2011. This improvement in gross profit margin is primarily due to improved ICL mix, but also due to improved ICL and IOL manufacturing costs, and higher ICL average selling prices. ICL revenue represented 57% of our total sales, compared with 52% in the third quarter of last year. We continue to expand our IOL gross margin, as well. Overall, IOL gross margins were 60%, which was a 100-basis-point improvement over the 59% in Q3 of 2011. Overall, gross profit margin of 70.4% was also a sequential improvement over the 69.8% we reported in Q2.

Moving on to our non-GAAP measures. To provide investors with a better basis on which to compare results and understand our business, we also report net income on an adjusted basis, which excludes manufacturing consolidation expense, gain or loss on foreign currency transactions, fair value adjustment of warrants, and non-cash stock-based compensation expense. If we exclude these items, our adjusted net income for the quarter was $1.3 million, or $0.04 per share, compared to an adjusted net income of $1.2 million, or $0.03 per share in Q3 2011. Our adjusted net income for the first nine months of the year was $3.7 million, or $0.10 per share, as compared to adjusted net income of $2.8 million, or $0.08 per share in 2011.

We ended the third quarter with $19.8 million in cash and cash equivalents on the balance sheet. This compares to $17.5 million of cash at the end of Q2 2012, and $16.6 million at the end of Q4 2011. We generated $2.5 million in cash from operating activities in the third quarter despite the increased investments associated with the manufacturing consolidation, including investments in inventory, and our sales and marketing expansion.

Moving on to our manufacturing consolidation project, which is progressing on schedule. Our expenses during the quarter were about $700,000; we now expect to spend about $2.5 million in total during the year, up from our previous estimate of $2.3 million. This is due to moving forward severance accruals, a non-cash item in 2012, originally budgeted in our plans for 2013. We began manufacturing non-sterile silicone IOLs in the US for Japan during the quarter, and expect to be shipping all non-sterile silicone IOLs for Japan from the US during the fourth quarter. We remain on schedule to start shipping the first Visian ICLs from the US during the first quarter of 2013.

Also, we are very pleased that several employees from Switzerland and Japan are willing to take on special assignments in the US for periods of one month to a year to further assist in the transfer activities. We continue to believe that this transition will be a substantial boost to our ability to drive leverage. We expect the manufacturing consolidation to improve our cost of goods, and once fully implemented, combined with our continued improvement in product mix and selling price, we expect to expand our gross margins to nearly 80%. We believe that it will improve our tax rate from 50% to 10% beginning in 2014, and we estimate the consolidation project, including the impact of our tax strategies, will result in anticipated savings exceeding $100 million for the aggregate period of 2014 to 2021.

This now concludes my comments, and I'll turn the call back over to Barry.

Thank you, Deborah. Now let's review some additional key operational updates, which should help drive our results. First, on the product development area. We continue to make progress on key projects, which will help drive both the ICL and IOL growth in 2013, as well as 2014. These include -- good progress has been made on the Visian for ICL version 5, which will be pre-loaded and include an Aspheric optics. This project is on track to commercialization by mid-2013.

Secondly, our engineering team has developed some new concepts on the Visian ICL V6, or version 6. These concepts are designed to make the ICL more forgiving, which would allow for better sizing accuracy. These concepts could lead to some new patentable positions. The V6 technology is also designed to incorporate a multifocal or presbyopic optic. We are working on this technology internally, as well with several external companies, and we can see some very good possibilities.

Our nanoFLEX Toric IOL for Europe has taken longer to roll out than we had planned. This has mainly been due to surgery schedules during the past quarter. We expect to have those marking and evaluations completed during the fourth quarter, and have good expectations for this product next year.

Finally, we have had a setback on the nanoFLEX II IOL for the US. The FDA did not agree with our position that this was an annual reportable change. We plan to do a more thorough detail on our approach in an official reply to the FDA shortly. This could, however, turn out to be an O-US, or only outside-the-US product, at least initially.

Now let's talk about some of the highlights at the recent ESCRS, European Society Cataract and Refractive Surgery Meeting, which was held in Europe. As we noted before, there were many presentations on phakic IOLs, including over 100 on the Visian ICL during the week. There were a lot of key learnings from the surgeons' experience with the technology. The overall highlight was the new ICL with the CentraFLOW technology. The feedback from their clinical experiences include things like better vaulting of the lens, lower complication rates, better overall visual results, and of course, happier patients.

There was discussion and concern regarding the updated Novartis Alcon Phakic IOL DFU. Surgeons are now recommended to examine endothelial cells for each patient with a Cachet lens three times in year one, and twice per year thereafter. There was also no display of the product in their booth at the meeting. Also, an interesting question was raised during these sessions. If one believes that the cornea is a potential location for a presbyopic lens, then why would someone have LASIK performed today? Overall, these sessions were very positive for the Visian ICL technology.

Now, some organizational updates. We also made progress during the quarter on enhancing our Organization to help drive enhanced top and bottom line growth. As Deborah mentioned, we have added 14 new sales and marketing personnel, and they are quite talented. Their talent will become evident as you see their results.

We also added a new position in the Company, that of Vice President of Business Development. This position is the focus on external opportunities to grow our business within our area of strategic focus. We were fortunate to have an experienced and talented individual, Craig Felberg, already within our Organization to assume this new role.

Craig's transition to this new role allowed us to appoint a new Vice President of Research and Development, and Regulatory. Again, we were very fortunate to have an individual in our Organization with a very strong technical background, Robin Hughes. Robin is already making a difference in both the R&D and Regulatory organizations, and cooperation and working together.

This allowed us to bring in a new talent to the position of Vice President, Global Marketing. We were fortunate to recruit a very talented and experienced marketing executive in Jim Francese. Jim began making an impact on day one.

Additionally, we added Charlie Slacik, former Senior VP and CFO of Beckman Coulter, to our Board. He brings 35 years of financial experience to our Board.

STAAR had a solid third quarter. Though our revenue growth was below our expectations, we did see progress with good ICL growth across all regions. We do face some challenges in some of our key markets, as we discussed, but we do continue to gain market share in most, if not all, of our targeted 11 markets. We've been in a competitive disadvantage in IOLs, but we expect our new products will help change that. We expect to see our revenue trends here to improve during the fourth quarter and during next year.

The third quarter and this year show the ability of this business to generate significant cash. Despite major investments in our future, we are generating good cash, and have the largest cash balance in our history. Those investments and additional talented sales and marketing personnel will help produce increased revenues in 2013. Our investment in the manufacturing consolidation will generate a continued expansion of our gross margin and significant tax benefits beginning in 2014. We look forward to providing updates on that growth progress along the way.

On a final note, we will be presenting at an investor and analyst breakfast meeting during the American Academy of Ophthalmology in Chicago on Saturday, November 11. We will also be at the Stephens Fall Conference on November 14 in New York City, and the Piper Jaffray Healthcare Conference on November 27, which is also in New York City.

And with that, we're ready to take your questions. Operator, and please open up the line for that. Operator?

Excuse me, sir.

(Operator Instructions)

Our first question is from the line of Matthew O'Brien with William Blair. Please go ahead.

Good afternoon. Thanks for taking the questions.

Hi, Matt.

Hey, Barry. Just was hoping for a little more color on Korea. The commentary about end market softness is something that we haven't heard before and is a little bit concerning. Is there something more there as far as follow up from patients from a couple years ago that is causing hesitancy among surgeons at this point? And then when you talk about it getting up to 25%, from 13% penetration today, what gives you the confidence? I understand 4c is a very eloquent product, but is there something that you are hearing, specifically, from your distributor and from the surgeons that gives you that confidence?

That's a good question. And it is the first time that we've seen end market demand being less in a quarter than the prior year. Certainly, since I have been here, but I think that's true in the history of our sales there in Korea. We are not hearing anything negative about ICL or results from the ICL. It's actually just the opposite. But there is some belief here and, again, as I said, I'm heading to Korea tomorrow and we'll be meeting with our distributor for a couple of days going through exactly where they are. So I'll gain more knowledge then, and should have more knowledge to share in the breakfast meeting in Chicago, that's on Saturday, November 10. I think it's at 11, as I was speaking.

But our distributor in Korea, Woo Jeon, they have done an excellent job for us and for the ICL technology. I have spoken glowingly about them many times. I believe there were some things during this year, earlier in the year and maybe still up until now, that has defocused their organization a bit. I think I mentioned this before; it has been concerning. We've worked with them to come up with a plan to hire a STAAR direct employee to work day-to-day with our distributor. As a matter of fact, we'll be seeing two or three candidates while I'm in Korea. The 25% objective is one that Woo Jeon, our distributor, set for the next couple of years, so I don't believe they are backing off of that objective, and that's one of the things I want to learn while we're working with them over the weekend.

Okay, and just to follow-up on that a little bit more. I know It's -- you're not over there yet at this point, but do you have any sense for how long this may persist? Because if I recall, a couple years ago, you had an ordering issue with them, that snapped back pretty quickly. But this seems like it's a little bit more fundamental in terms of their selling efforts.

Yes, I think that's true, Matt. If you look at the history of Korea sales, there can be big quarterly swings just based upon their inventory levels and where they are based on their demands. Remember, their demands are the highest during the first quarter and the third quarter each year, so they generally buy more in the fourth quarter and the second quarter in preparation for that. But I will be learning more, and this is different, though, than just filling inventory and replacing inventory; it is in the demand side. So I do believe it's something that we can turn around quickly. It may have something to do with the economy in Korea; we have not heard that before. And nor do we have any good insight on total refractive procedures in Korea like we have in China. I mean, it was very evident during mid to late second quarter that the refractive procedures in China were not the same as they had been.

Okay, and then just one more for me, if I may. You saw some nice growth out of the US, China and India this quarter. Can you give us a sense for more of same-store sales from somebody that has been using 6 months to 12 months, what kind of reorder rates you see there versus the growth coming from opening up new accounts?

Well, in all three of these markets, we're really focused on penetrating accounts rather than training new surgeons. I know in the US it would only be a handful of new surgeons that have been trained this year entirely. We do see, though, some very positive signs from our consumer media work. As a matter of fact, in the US right now, we're generating -- and it may not sound a lot, but to us, it's a lot now, at least initially. We are generating 12 to15 patient referrals from our social media work directly to our customers.

And I think that's part of the reason that a 20% increase in our civilian accounts during the third quarter is pretty strong compared to what we think is going on in the market. Same thing is true in China. We aren't training a lot of surgeons, at least at the first level, but we are training them at an advanced level. This is the kind of training we had just a weekend before last in China, and our response there was very positive. We generally see very good increase in usage from those surgeons once they go through the second phase of training.

Okay, great. Thank you.

Thank you.

Thank you. And we ask that you please restrict yourself to one question and then one follow-up, and then re-queue if you have any further questions. Our next question is from the line of Jason Mills with Canaccord Wealth Management. Please go ahead.

Thank you. Barry, can you hear me okay?

Hi, Jason. Yes, we can.

Thank you. So, Barry, a lot of questions that I was going to ask on Korea have been addressed, but moving to Japan, perhaps you could give us a little bit more color about the ICL business in Japan there. What you expect in the fourth quarter, and then what you expect over the next 18 months or so out of Japan. When can that, given the Toric, can that accelerate? What are your thoughts there?

Good question on Japan. We have very high expectations for the Japanese market. And as you know, the demographics there in terms of higher rates of myopia, and also, higher rates of astigmatism play right in the hands with the Visian ICL technology. We have seen a very good growth in the two large refractive centers there, Optical Express and Shinagawa. As our results indicate, the units doubled in the third quarter as compared to a year ago.

Those accounts began using the CentraFLOW technology during the third quarter, and we think overall, that's going to help particularly those accounts a lot more because they are both very much geared towards procedure timing and how quickly they can move patients in and out. And the V4c CentraFLOW technology is one that helps patient flows significantly, so our expectations are quite high. My expectations are higher growth than what we're seeing right now in Japan because of the opportunity. We are just knocking on the ground floor here of the opportunities we have in Japan, and getting to a market share level like we have in Korea, given that we have a direct organization in Japan, is something that should be clearly in our short-term window in terms of objectives.

Okay, and a little bit of a tougher question. I am going to take a shot at myself a little bit here, too. The performance over the last couple of quarters, there has been some highlights for sure, and then some emerging disappointments. Every time we see something that was disappointing one quarter, it bounces back in the next quarter a bit, and then we have an emerging disappointment in that quarter. I certainly got the stock wrong, personally, throughout most of this year, and so what can you tell us that gives you the confidence that we don't see any additional emerging disappointments? While you may have a bounce back in an area that this quarter that was weak for you, we don't have something else that pops up. Because it seems like it's that give and take that's resulted in a couple quarters here, where it's been a similar sort of discussion on this conference call, where we have some highlights, but overall, there's a missed expectation. What's more realistic way to look at growth here for the near term?

Really good question. You know, particularly on the revenue side, I totally agree with the disappointment; we're disappointed here. This is not what we expected for the year. We seem to be doing real well until you picked us up, but I know we haven't done a good job for you since you initiated. But we also know -- and what -- kind of what's happened, I think, the last two quarters is something, and it's in a major market, has raised its ugly head. Last quarter, it was China, and to some degree, Korea.

This quarter, we have returned to some decent growth in China, but not -- it should be twice that rate if we were back on our normal pace. And Korea raised its head, certainly, unexpected in terms of consumer demand for the product. And what it's going to take, when you go back and think about those 11 key markets on which we're focused, we're dependent on three or four key markets overall. And if something goes wrong in one of those three or four key markets on the ICL side, it brings everything down. As I pointed out, if the Korea results would have just been flat, we would have met our metric of 25% ICL growth and we would have been happy. No one here expected the demand was going to be less during the third quarter.

I do know, too, Jason, that the fundamental things we are doing with the business are very solid, and very similar to the position we have gotten financially with this company. Because two or three years ago, STAAR could -- would have had a tough time with two consecutive quarters like this in terms of only 4% revenue growth or something like that. But as you can see, we have built a solid financial foundation. And even in quarters like this, we are generating good cash from the business and our cash position is growing quite nicely, which gives us a lot more flexibility than we have had.

I also know that 14 people that we've hired, these have been good hires. They are already showing some results. We were late in hiring some of these folks during the year, and I think I even indicated that as early as the first quarter call. I would have liked to have gotten these folks on board sooner so they could have produced results. Finally, I'd say that the manufacturing consolidation is going to really make that a much stronger foundation. We are expecting 2013 is going to look much better for the company, and 2014 is going to take another major leap forward.

Okay, thanks for the detail. One last question, and I'll get back in queue. Any update on the ICL in the US? The Toric. The Toric in the US, sorry.

You mean with the FDA?

Yes.

Okay, so let me give you a quick update with the FDA on two fronts. First, with the CentraFLOW technology. We did make a submission to the FDA on October 9. It's a 180-day supplement, which means they've got 118 days -- 180 days, I'm sorry, to reply to us. And this was a submission to get approval of the CentraFLOW, or the PORT, the Aqua-PORT right in the center of the lens on our current ICL that we have today in the market. Then secondly, we are knee deep into a -- I'd call a major -- and I have to use the word re-submission to the FDA on the Toric ICL. What we're doing is, we're putting together a very complete -- every question, every data point in regards to the Toric ICL. We are working with outside consultants, as I had mentioned earlier, and this will be submitted on November 16.

Now, as a result of that submission, there are three things that could happen. They could accept our submission and approve it, they could say the submission is complete and pass it onto the panel or they could disapprove it. Now, if they were to do the last thing, if they were to disapprove it, we could -- we have three options. We could redo the study, we could walk away from the US market, not likely we would do that, or we could appeal their ruling. And there are some technical reasons that could support an appeal. So while there is no really concrete movement in terms of Toric with the FDA, we have made significant progress going forward with our submissions and our discussions with them.

Thank you. And our next question is from the line of Chris Cooley with Stephens. Please go ahead.

Thanks for taking my questions.

Hi, Chris.

Most of my questions on the ICL have been addressed. If we could maybe just touch base in kind of a similar vein on the cataract business. It's been a little bit of a bane to the existence here over the last 18 months. Off the lower base and with the premium pricing as you get some of these newer products in, one would have thought you would have at least kept pace with prevailing market rates of growth. What can you talk to us about here tonight from an execution standpoint that gives -- should give us added confidence that that can at least return to a market rate of growth sustainably going forward? And then I have a quick follow-up. Thank you.

Well, I'm not sure today we can tell you what market rate growth is for IOLs. I did cite the two major competitors in the IOL market, though they don't specifically call out their IOLs, it's pretty clear in Novartis Alcon's result, that they are citing their decline in sales overall to procedure decline in cataracts and also, pricing in the European market. That's two of the things they referred to. So I'm not sure what that rate is. But I am sure, though I've said it quite a bit, that we're going to get to a 5% to 10% growth rate in the IOLs through the strategy we have in place. Now, we have not been strong on getting two recent IOL products to market after we have gotten approval.

First is the KS-SP, that's the Single Piece Preloaded Acrylic IOL, which is important in Europe and in Japan. We started shipping this product in limited fashion toward the end of the quarter, and the results from surgeons, the feedback, has been excellent. As we indicated in our comments, in Europe and three basic markets, Germany, Italy and France, the distributors have all doubled their forecast for next year. We are still in a limited product availability of that during the 4th quarter, so we are not going to meet their demand during the fourth quarter. But during the first half of next year, we should be able to meet their demand. So that product is being accepted at a higher rate than we anticipated, so we'll clearly see growth there. Now, we also know that in Japan and Europe, we've lost some IOL sales from our three piece customers who have been waiting for that single piece product, and they moved to another single piece option, and now we've got to work to get them back.

The second product is the NanoFLEX Toric IOL, which is a single piece collamer lens for Europe. We want to do a pre-market launch first, and we had surgery set up during the third quarter. And as it turned out, surgery schedules didn't cooperate with the surgeons with whom we were working, and most of those did not get completed during the quarter. We believe they will be completed during this quarter. Now, that's a product that we can get a good price on, a good margin and our distributors can, as well. So we believe that's a product that will allow us to expand in Europe into some additional counties in which we are not today because of the cost of goods on the more generic-type IOLs.

Okay, and then just maybe for clarification, I want to make sure that I get expectations right here for the fourth quarter. When I think about your ICL growth, you've stated you don't expect to see second half growth rates reaching that 25% level. Prior guidance for the full year had been near 20% in that category. And I think you mentioned you expected to see a sequential increase. I just want to be clear, is that an acceleration sequentially in the reported rate of growth for the ICL, or is that an increase just in terms of dollars that you are expecting in the 4Q? And what's driving that increase sequentially in the category? Thanks so much.

Yes, I think overall, we're talking about the growth rate of fourth quarter will be higher for Visian ICL than the third quarter growth rate, which was a 15% growth rate. That would mean that sales in the fourth quarter would exceed the $9.1 million that we had during the third quarter, and thus, we would establish another high watermark in terms of Visian ICLs on a quarterly basis. A lot for fourth quarter is going to depend on Korea. Typically, fourth quarter is a good ordering quarter for them because they anticipate their procedures that are going to take place the first part of the year and they are a very conscientious distributor and they want the inventory there for their doctors ready to go. A lot will depend on that market.

A lot will depend on if we see a full rebound in China. As I previously said, didn't expect that until next year. But I would say the rate of growth, the third quarter in China, at 52% was a bit higher than I expected to see in the third quarter. So if it continues to grow, we continue to get some good news from surgeons there. I think the idea that patients in China are asking questions about LASIK complications are good for the ICL long term, and maybe even shorter term to get back to our growth rates quicker than LASIK might get back to the growth rates they're at.

Thank you. Our next question is from the line of Bruce Jackson with Northland Capital Markets. Please go ahead.

Good afternoon.

Hi, Bruce.

So if we could just talk a little bit more about the FDA Toric application. Is it -- are you using the same data that you went to them with before? And is the discussion centering on the same issues that you have been going back and forth with previously, or is there anything new that they're looking for?

Okay, well, good question. Part of what our outside observations have been with all the communications back and forth with the FDA is that it's very confusing, and it's frustrating. I think it's confusing and frustrating for STAAR and also for the FDA. So our decision was that we were going to repackage everything together in a way that's more manageable, more easy to understand, and remember, there are two data sets. There was the original data set that was submitted, and then there was the audited data set that was audited by a third-party group, and it appears there may have been some confusion back and forth in regards to which data set. So we have put both data sets in this submission. We put all of their questions with the answers, resubmitted. Remember at some point during the last couple of years, we were getting repeat questions, so we have put it in format, we think, which will be easier for them to understand and follow. And also, a format in which it's easier for us, from which to appeal, if needed.

Okay, and then just a follow-up question on the IOLs in Japan. So the -- you launched the KS-SP, you talked about the demand in Europe and the fact that you are going in be in limited launches. Is that also the case in Japan? It's going to be a limited launch for Japan for the fourth quarter?

Yes, Bruce, it is. The KS-SP inventory, in total, is being allocated between Japan and Europe. Right now, we don't think we will be able to meet the fourth quarter demand, but we are working on that. It's the same kind of reception we have experienced in Japan as we experienced in Europe, though we started in Europe with the initial launch.

Okay, great. Thank you.

Thank you, Bruce.

All right, thank you. Our next question is from the line of Raymond Myers with Benchmark. Please go ahead.

Thank you. Barry, you touched on this a couple of times, but I was hoping you could specify some dollar amounts of the contribution from the KS-SP launch in the fourth quarter and next year.

My guess is going to be in the neighborhood of $0.5 million in revenue.

Incremental million dollars of revenue?

Yes, assuming we can meet that demand. That's the demand we put in or asked for in terms of the product needs. That's the first -- I'm sorry. That's the first number, it's not the increase number. Just so I get it straight.

So it's an incremental $1 million in the fourth quarter?

No, $0.5 million.

Oh, $0.5 million.

Yes.

In the fourth quarter?

Yes.

And is that incremental to the third quarter, or is some of that already in the third quarter?

There's only a little bit of that in the third quarter. I don't know, Deborah, do you have a sense for how much KS-SP --

Very little.

Yes, very little.

Okay, then that's perfect. Then the next question, you mentioned on the call that middle of next year, you expect the Version 5 to be commercialized. What are the milestones to doing that, and can you elaborate on that? That sounds like an important point.

Sure, on the Version 5, there are two key features to that. One is putting it preloaded. As you know, we have been working with an external company on some proprietary technology that would allow us to preload Callamer, not just ICLs, but also IOLs. So once we get the Version 5 in ICL, this is technology that will transfer over to our NanoFLEX and our NanoFLEX Toric IOLs. The second aspect is in aspheric optics, and we have been making progress on that here internally. So we're on track in terms of where we thought we would be with that product, and I would say when you listen to surgeons, particularly those who are using the CentraFLOW technology now, that was their first overall improvement they would have liked to have seen in the technology.

Second, was to get it into a preloaded fashion because it makes it much easier for the surgeon, for the scrub nurse and it also takes a lot -- a significant amount, at least percentage-wise, time out of the procedure while the patient is on the table. So those are the two key features, and we feel very good about where we are overall and being able to get that initial commercialization, of course, would come in the European markets.

Okay, right. Okay, thank you very much.

Thank you, Ray. Happy Halloweeny.

Thanks.

Thank you. Our next question is from the line of Jim Sidoti of Sidoti & Company. Please go ahead.

Good afternoon, can you hear me?

Hi, Jim. Yes, we can. We hope you are well.

It's a little dark here, but other than that, everything is fine. Hoping to get power back soon. A question that I had regarding Korea. It sounds like that -- Korea and the weak IOL markets were primarily responsible for the lower than expected sales in the quarter. Now, you mentioned you were hiring a direct person for Korea. What will the responsibilities for that person be?

Good question. That person will manage the day-to-day activities in Korea. Woo Jeon has done a great job so far and we haven't had to provide any direct support to Woo Jeon in the Korean market. It's just become such an important part, overall, of our business, and we need to work to take it to the next level. They will be working with Woo Jeon on a day-to-day basis targeting key customers. One of the areas of improvement we want to look at in Korea is increasing our rate of Toric sales in Korea. As an overall percent, Korea is one of our lowest markets in terms of Torics versus ICLs. So there's certainly an opportunity for us to work to increase that. So they'll work both from a sales and a clinical perspective, marketing between Woo Jeon and our customer -- and their customers.

And was there any pushback from the distributor to adding this direct representative there? Or were they on board with this?

Absolutely, there was pushback. I think any time that a company that's going through a distributor puts a direct employee in a market, there is always the concern that the company is going to flip the market and go direct. That's absolutely not our intentions, whatsoever. We want to work with Woo Jeon to improve the business. I have already sent my presentation to them a week ago for our meeting this weekend, and it's very, very clear in my presentation to them that we want to work with them and support them. We have no intentions whatsoever to go direct in the market.

Right, and then just a follow-up. On the IOL market, was there any reimbursement change or anything that you could point to, to explain the decline there?

No reimbursement changes during the quarter. I mean, the two key things, I think in my mind, would be not having the KS-SP available sooner in the quarter, and then secondly, what seems to be kind of overall procedure pressure during the quarter.

Right. That's where I'm -- what I'm weaving to, the procedure pressure. Do you have anything you could point to as to why that occurred?

No, and we will get -- shortly get US data for market scope. There is not really any good quarterly data available outside of the US. There is on an annual basis, but not so much on a quarterly basis.

And of those two events, the IOL procedure pressure and the weaker sales in Korea, what do you think had a more significant impact on your quarterly results?

Well, I think it would have to be Korea, given that the gross margin on the ICL is so much higher, that -- I mean, as I said, if Korea -- or taking Korea out of the mix, we had 26% growth rate. Overall, we have been very happy with that. And certainly, that's the kind of growth rate that would be in line, what we would expect from Korea on a quarterly basis. If Korea hadn't been there, I think the top line revenue expectations would have been met and gross margins would have been higher. And we would have been, even though the increased manufacturing costs for the consolidation project, we would have been on a GAAP basis, profitable.

All right, thank you.

Thank you, Jim. Good luck.

Thank you.

(Operator Instructions)

Just a moment. And we have no further questions at this time.

Great, thank you, Operator. Let me reiterate the dates we are going to be out in the markets on Saturday, November 11, there's an investor analyst breakfast in Chicago. I'm sorry, the 10th; I have done that twice. November 10, Saturday. The Stevens Conference, November 14 in New York City. The Piper Jaffray Healthcare Conference, November 27 in New York City. And if you would like to catch up with us in any of those destinations, please feel free to give us a call. We thank you for participating today. We hope you have answered all of your questions, but if you have more, please feel free to give us a call. Have a good evening.

Ladies and gentlemen, this concludes the STAAR Surgical third quarter 2012 financial results conference call. Thank you for your participation. You may now disconnect.