Staar Surgical (STAA): Sounds pretty confident that implantable lenses can replace LASIK surgery
Staar Surgical (STAA), which makes implantable lenses for the eye and which was recently re-added to our Emerging Growth rankings (added May 7 at $8.99), just wrapped up its presentation at the Deutsche Bank Healthcare Conference in Boston. It sounds like its biggest competitor (LASIK surgery) is on the decline and Staar is filling the void. Since Staar is not a well known name in the US (81% of 2012 revenue was from outside the US), we wanted to provide some highlights from the presentation.
In terms of what Staar does, they make implantable lenses for the eye both to correct vision (Visian ICL lens, which is an alternative to LASIK surgery) and to treat cataracts (IOLs). All of its lenses are foldable and can be inserted through a small incision in the eye. It's basically an implantable contact lens. STAA believes its Visian ICL lens is better than LASIK as it has better results, fewer side effects and, unlike LASIK, can be removed if the patient is not satisfied. That's a big selling point to nervous consumers. Management believes its competitive position has improved over the past six months as it appears LASIK procedures are declining in major markets. Also, lenses which are in the anterior segment of the eye all seem to be facing new clinical challenges. The Visian ICL sits behind the iris in the posterior segment. As a result, STAA believes it is taking market share. The stock jumped in early May on a surprisingly strong Q1 report and the favorable comments about its improved competitive positioning.
Probably the most interesting point to come out of today's presentation is STAA being pretty confident that LASIK surgery is on the decline. Basically, they said that there are always evolutions in healthcare. In this space, it was originally glasses then contact lenses etc. "There is clear evidence that LASIK is on the downturn and there is evidence that ICL is taking over. This is the moment for the ICL." LASIK and the related complications have seen a good deal of negative press over the past few years. While this is good for Staar, which has a competing product, unfortunately this tends to weigh down the entire elective eye surgery market as consumers lump all of them together. In particular, there has been a lot of negative press about LASIK in China over the past year. This hurt STAA's results in this important region but they have seen some improvement recently.
In terms of the R&D pipeline, STAA has regularly introduced new products over the past few years. Perhaps most importantly, STAA introduced the ICL V4c with CentraFLOW technology in Europe and other territories in 2011. The CentraFLOW technology optimizes the flow of fluid within the eye, and eliminates the need for the surgeon to perform a YAG peripheral iridotomy procedure days before the ICL implant. By simplifying the procedure to a one-time visit like LASIK, STAA is much better able to compete with LASIK. STAA expects to get approval in India and Korea for the CentraFLOW technology. In the first year after approval in Europe it had a big impact on STAA's results and they expect a similar impact in other countries. Another key launch was the Toric ICL in Japan to treat patients primarily affected by astigmatism.
A big reason STAA is not well known in the US is because its two most advanced lenses are not yet approved in the US. In particular, management concedes that the Toric not being approved in US has been a cloud over the company. STAA has shown it can do well outside of the US but cracking the US market in a bigger way would be a big positive. STAA has filed its application and has had dialogue with the FDA. STAA has been pushing that it would like some sort of decision this year (either approval, go to panel, not approved). Overall, STAA says he has felt a change at the agency that the process seems to finally be moving along.
In terms of other topics, STAA is moving its manufacturing operations from Japan and Switzerland to the US. This manufacturing consolidation should improve gross margins further. The process is wrapping up this year and it's on plan. This is a major project and gross margins should get near 80% after the consolidation. Another topic was STAA's heavy investment in sales/marketing last year. They expect to start to see some benefit this year. They also have some key new product launches and approvals coming up in 2013. Also, Spain has been converted to a direct model (instead of using distributors) which will help margins. Finally, STAA says it wants to crack the US market in a bigger way as it's an attractive opportunity but they do not expect much additional penetration until the Toric ICL gets approved.
Overall, we remain a fan of STAA. They seem confident that LASIK surgery is on the way out and the implantable lens is the next step in corrective vision technology. A huge selling point is that the lens can be removed if the patient is not happy. The unfortunate part about the STAA story is that its latest technology is not yet approved in the US, it's mostly being used in Asia and Europe. But they are working on that and if they get approval, that would be a big boost for them. Another recent development in its favor, we believe, is the recent announced acquisition of lens supplier Bausch & Lomb by Valeant Pharma (VRX). STAA is tiny but has some attractive technology that we think would be attractive to a larger player in this space.
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