The Curious Case of Staar Surgical

The stock is a potential multi-bagger

Author's Avatar
Jan 30, 2019
Article's Main Image

Summary

Staar Surgical Co. (STAA, Financial) has a proprietary product that is newer and arguably better than Lasik in the growing refractive procedure market.

In addition, the company could be at the start of the growth S-curve and, if it is able to replicate the success of Align Technology Inc. (ALGN, Financial), the stock could be a multi-bagger.Ă‚

In short, Staar Surgical looks like a rare, low-risk growth case.

Background

Staar Surgical makes implantable collamer lenses (ICL). Collamer is a proprietary material used exclusively by the company. The material consists of collagen, which naturally occurs in your body.

Implantable collamer lenses are an alternative way to permanently correct your vision. Unlike Lasik, they do not reshape the cornea. In a 30-minute procedure, the doctor creates a small opening at the base of your cornea to insert the lens. The lens is folded to a quarter of its full size before insertion but expands to its full size after. The doctor then makes adjustments. Your eyes take just a few days to heal and recover.

Implantable collamer lenses evolved from the intraocular lens, or IOL. Staar Surgical developed, patented and licensed the first foldable intraocular lens for cataract surgery in 1991. The first versions of the lens were made of silicone. The foldable lens became the standard of care for cataract surgery throughout the world.

In 1996, Staar began selling the Visian implantable collamer lenses made from its proprietary biocompatible collamer lens material outside the U.S. In 1997, the lens received a CE Marking, permitting sale in European countries. In 2005, it received the Food and Drug Administration's approval for the treatment of high myopia, or nearsightedness, in the U.S. Currently, Staar sells implantable collamer lenses in more than 75 countries. The lenses have been implanted in more than 900,000 eyes worldwide.

In September, the FDA approved implantable collamer lenses for the correction of mid-myopia with spherical equivalent between -3.0 dioptres and -20.0 dioptres. It can be used on patients between 21 and 45 years of age. Prior to this, the lenses could only be used on patients with high myopia of above -10 dioptres.

Why buy the stock?

Staar is a long-term growth story for several reasons.Ă‚

Growing market share

Many people have myopia, or nearsightedness. The most popular way to correct myopia is by wearing glasses or contact lenses. Each method has its own nuisances of discomfort and inconvenience. Some brave souls venture out to permanent solutions, or refractive procedures. Currently, 90% of refractive procedures are Lasik.

Implantable collamer lenses have a significant advantage over Lasik. For instance, the lenses do not cause permanent alternations to patients' eyes. The lens can be removed and replaced if needed. For doctors, the lens does not require significant capital outlay. For instance, Lasik machines cost $200,000 to $500,000. In addition, the expense consumables used by those machines and service contracts run a total of over $100,000.

A disadvantage of these lenses is price. Currently the implantable collamer lenses cost roughly $3,500 an eye, while Lasik is about $2,500. As more doctors begin performing the procedure and Staar reaches bigger scale, the costs will likely come down.

Currently, Lasik accounts for 90% of the 4 million refractive procedures globally. Implantable collamer lenses have a long way to go to take market share from Lasik, and potentially from glasses and contacts.

In the most recent quarter, Staar's management shared what the company aspires to become. It projects 720,000 procedures per year globally based on its 20% share in the 3.6 million market size for permanent corrections. Note, the procedure only recently reached a cumulative of almost 1 million patients.

These estimates may be a bit conservative. If these lenses are indeed a better alternative to Lasik, why stop at 20% market share? Up to this date, I have not found a good non-financial reason why patients would choose Lasik over implantable collamer lenses.

Treating presbyopia

Presbyopia, or farsightedness, has a market potential even larger than myopia. The company's management estimates presbyopia has a patient population of 55 million (versus 35 million in myopia) and could need 1.5 million lenses a year for correction. In the most recent presentation, Staar said that in the near to medium term, it is "targeting 2.22 million eyes annually, which would represent an annual revenue opportunity greater than $1 billion.” Of this 2.2m eyes, 1.5m comes from presbyopia.

Secular growth in myopia population

It should not be surprising that myopia is a growing problem in the world. In 1971, only 25% of the U.S. population was nearsighted. The number is now over 40%. The Academy of Ophthalmology projected that almost 50% of the world population will be nearsighted in 2050, up from one-third currently. That means the number of cases of myopia will rise from 2.5 billion to 4.9 billion.Ă‚ In other words, while the world population is expected to grow less than 1%, the number of cases of myopia is expected to grow over 2% for the next 30 years. This provides a strong backdrop for long-term growth.

Low-risk growth

The implantable collamer lens has low technological risk. It has been in existence since 1997 and has been used in a million procedures in Europe and Asia. More importantly, eye doctors have been trained to insert intraocular lens, which requires the same techniques as ICL, on cataract patients since 1991.

Staar has a deep moat. The lens has patent protections and requires significant know-how to manufacture. In addition, since eyes are such important yet delicate organs, it takes a very long time for eye treatments to be approved. For instance, eight years after Europe approved the procedure, the FDA approved the lens in 2005 for high myopia. Similarly, Lasik technology was invented in the 1980s and the FDA finally approved it in 1996. The cautious regulatory procedure protects the existing players in the market.

Financially, Staar has no debt and is now profitable with a 75% gross margin.

The company could be at the beginning of the growth S-curve

Staar’s growth looks like it just took off in 2018.

990685644.jpg

The unit growth of implantable collamer lenses for the last four quarters is incredible across all key markets. The U.S. is still a blank spot, but will likely become one of the company's top markets in the years to come.

566125147.jpg

How fast can Staar grow and what is in the price?

Using Align Technology, the maker of Invisalign braces, as an example, Staar could be a $10 billion-plus company in a decade. The following chart shows Align’s journey since 1999. The company went public in January 2001 and reached $100 million in revenue in 2003. Over the next 14 years, it grew its number of patients and revenue by more than 10 times and became a $20 billion market cap company.Â

994345695.jpg

In comparison, Staar is projected to have $100 million in implantable collamer lens revenue in 2018. The company is already more profitable than the young Align was in 2003. Its market cap is only $1.6 billion. At a price-sales ratio of over 10, Staar does not appear ro be “cheap”. But compared to its low risk secular growth, the stock can still give a very enviable return to investors.

Depending on when revenue reaches maturity, Staar could see 10-40% compound annual growth, as illustrated in the following table, with relatively low risk.

1342264129.jpg

Two major risks to the story

Staar needs good execution as it has had operating problems before. The FDA issued warnings to its manufacturing facilities, which caused the stock price to be in limbo for a few years. The old management team was booted and the warnings were lifted last year. Future execution issues could cause the stock to underperform, but we suspect issues of this kind would be temporary.

Second, there could be a new technology better than implantable collamer lenses in the future. But it takes years for eye treatment technology to be developed and then years to be approved by both consumers and regulatory authorities. The immediate threat looks remote.

Disclosure: Do not own shares currently, but traded before and look to re-enter.

Read more here: