STAAR Surgical Buy or Sell?

STAAR Surgical Company [NASDAQ: STAA] designs, develops, manufactures and sells ophthalmic products for use in refractive, cataract, and glaucoma surgery.

Operating in the ophthalmic surgical market segment, STAAR makes implantable lenses for minimally invasive ophthalmic surgical procedures.

The company offers the EVO Visian implantable Collamer lenses (ICLs) to treat visual disorders, such as myopia, hyperopia, astigmatism, and far-sightedness. 

STAAR also makes foldable intraocular lenses (IOLs) to replace natural lenses removed in cataract surgery.

All of these lenses are foldable, which permits the surgeon to insert them through a small incision. 

The Bull Case for STAAR Surgical

STAAR Surgical, founded in 1982 and headquartered in Monrovia, California, sells its products in about 75 countries.

A company that makes visual implants to improve a patient’s quality of vision does not look like a candidate fit for investors’ immediate attention. Most investors will hardly consider eye lenses to be a red-hot stock capable of generating high returns. However, STAAR Surgical, which makes implantable lenses for vision correction, has been quietly defying expectations with its solid growth over the years. 

There is no denying the fact that there’s no sure thing in a stock market, but STAAR’s past and present performance inspires a lot of confidence in its long-term growth prospects. Let’s look at the factors which generate a lot of optimism about this visual implants manufacturer.

Ophthalmic Products: Evergreen Source of Revenue

It is said that eyes are the window to the soul. But like any other organ of the body, they are prone to injury, illness and damage. Over 60 percent of the adult population in the United States today wears eyeglasses, which date back more than 1,000 years. And, for lenses, the first FDA-approved soft contact lenses in the United States were launched in 1971.

STAAR’s main product is EVO Visian ICL family of lenses which witnessed growth of 46% year-over-year in the first quarter of 2021 in the US.  Also, strong ICL unit growth drove company net sales growth of 44% year-over-year to $50.8 million in the first quarter of 2021.

ICL is a pricier option in comparison to eyeglasses, lenses or LASIK but, in the long run, ICL is more convenient as the patient does not have to bear any additional cost by way of maintenance. Patients with implanted lenses don’t need to purchase consumables like saline for their contact lenses, or keep investing in purchasing new contact lenses.

The same goes for eyeglasses which also require maintenance and careful handling. Moreover, there’s always the possibility of breaking, damaging or losing your eyeglasses. You cannot lose or damage implanted lenses as the patient never needs to handle them in the first place.

The company is also rolling out its EVO Viva Presbyopia lenses in Europe in a controlled manner. The lenses are designed for early presbyo patients, ages 45 to 55, seeking visual freedom at near, intermediate, and far distances. Pending FDA approval, the company is looking forward to introduce its EVO lenses in the US market in the fourth quarter of this year.

The company is profitable and growing its quarterly revenue in double digits year over year.

The long-term prospects for the company look even brighter with more than 50% of the world population expected to suffer from myopia by 2050. That’s twice as many of the 25% people suffering from myopia today.

Researchers believe that lack of outdoor activities and looking at electronic devices for extended periods of time could be the reason for this upward trend. A lens-based future of refractive vision correction is definitely going to accelerate STAAR’s revenue and profitability.

STAAR’s track record as the fastest-growing, publicly traded ophthalmology company in the US also continues, and so does its direct-to-consumer multi-faceted communications designed to build awareness of its EVO Visian ICL family of lenses. China is its largest market and next on the agenda is winning larger refractive vision correction market share in the European and South Korean markets, respectively.

The pandemic diminished the sales of several of the company’s competitors in the surgical tools industry, but STAAR (STAA) still managed to hit its sales target, which speaks volumes about the quality, relevance and resiliency of its products.

With demonstrated resilience like that, absence of any major threat, and lucrative growth prospects, STARR is a long-hold play. The stock, no doubt, is pricey but investors can afford to pay a premium to buy the stock for the long-term upside.

The Bear Case for STAAR Surgical

STAAR Surgical (STAA), which manufactures and sells implantable Collamer lenses (ICLs) for patients suffering from myopia or presbyopia, currently looks on a solid footing.

It has a large addressable market, and there is high probability that its next-generation EVO Visian ICL devices will win FDA approval sometime in 2021. A more significant footprint in the US will open up a massive market opportunity for the company, suggesting there are profitable days ahead for STAAR.

Amidst all the optimism, there’s this looming concern regarding the excessive valuation of STAAR’s shares. It places a lot of excessive pressure on the company to succeed, and while it had a stellar Q1 2021, a disappointing quarter down the line can send the shares on a downward spiral.

China is the company’s largest market, which means continuing US-China trade battle could cause severe economic pain for the lens maker.

It is generally seen that stock with a lot of built-in optimism and enthusiasm for future growth is often volatile. For example, the share price of glucose manufacturing device Dexcom [DXCM] rose from $147 in October 2019 to $440 in August 2020, mostly based on the market’s growth forecasts.

The company registered impressive quarterly sales growth and raised its full year guidance as well, but it wasn’t inspiring enough for investors who dumped the stock. To put it simpler words, investors need to be aware of the fact that STAAR shares are priced at a significant premium to current sales performance and profitability, which means a significant amount of risk is present.

Also, there is a danger of emerging low-cost competitors in future. Similarly, to generics in the drug-development market competitors will, no doubt, try to challenge STAAR’s patents. Additionally, they could also find workaround technologies to keep their R&D costs down which, in turn, could allow them to compete on price.

Plus, companies deriving majority of their revenues from overseas markets (China, in case of STAAR) are often accused of misrepresentation of sales figures. STAAR, too, has been accused of such malpractices, but the company has dismissed them as being without any merit.

It’s never a good idea to blindly follow the market. But then STAAR’s performance suggests that the company is poised to make big strides in the time to come.

STAAR Surgical Stock Price Forecast

One year price forecasts for STAAR Surgical range from a low estimate of $100 to a high of $150.

On average, the stock price is anticipated to reach $106.00 in the next year.

Is STAAR Surgical Stock a Buy?

STAAR Surgical stock has soared close to 250% in the last 12 months and more than 80% this year. This should not come as a surprise as the company has been doing exceptionally well both, on the financial and technological fronts. 

But, given the recent gains, some investors might think that they have missed the boat. Here, we assess if the stock is capable of soaring higher still, and whether investors can still find themselves amidst the action.

Blockbuster Q1 A Sign of the Future

In the first quarter, the company reported revenue of $50.8 million, up 44% year over year, led by strong performance of its implantable Collamer lens (ICL) sales of $46.5 million (up 54% year-over-year).

The maker of implantable lenses also boosted its gross profit margin to 77.1% compared to 70.4% in the same quarter last year. The company has topped consensus revenue estimates three times over the last four quarters.

Coming to the company’s earnings outlook, the management expects full-year earnings of $215 million to $217 million, which would represent a rise of 30% year over year.

STAAR Surgical’s adjusted net income for Q1 of 2021 was $9.6 million or $0.20 per diluted share compared to adjusted income of $1.9 million or $0.04 per diluted share in Q1 2020.

STAAR’s focus on surgeon training and partnership, clinical support, and extraordinary customer outreach continue to be the bedrocks of its excellent results.

STAAR Surgical Vs Lasik

STAAR’s EVO Visian family of implantable Collamer lenses is its most notable product. The company, in its first-quarter, achieved strong and significant ICL unit growth globally of 54% year-over-year.

STAAR’s Collamer lenses are inserted through a small incision directly in the eye, behind the iris but in front of the cornea. The implantable lenses (ICLs) are used to treat visual disorders such as myopia (nearsightedness), hyperopia (farsightedness), astigmatism (blurred vision), and presbyopia (inability to focus on close objects).

More than 1,000,000 of its ICLs have been implanted to date, and it continues to grow in popularity, with a patient satisfaction ratio of 99.4%.

ICL surgical procedures are different from LASIK (laser-assisted in situ keratomileusis surgeries) because they are reversible and less invasive.  For now, ICL procedures are more expensive than LASIK, but the benefits are plenty including, shorter recovery period, more vision clarity, and fewer problems with dry eyes. STAAR (STAA) also makes foldable intraocular lenses (IOLs) to replace natural lenses removed in cataract surgery.

STARR’s main advantage lies in the absence of any notable competitors in the ICL space. That can, of course, change over time, but STARR has a first-to-market advantage that any future competitor will find hard to upend.

An area of concern could be the high cost of ICL surgery (average $3,500 per eye) in comparison to LASIK surgery (average $2,250 per eye), though it is expected that costs of ICL will come down as they become more common and more surgeons start using this procedure.

Also, there is the possibility of ICLs making LASIK obsolete, just as LASIK made radial keratotomy redundant.   ICL grew over 10% in 2020 despite the pandemic, whereas LASIK procedures declined by the same percentage.

How STAAR Grows Revenues

The sustainability of the company’s earnings depends upon the number of ophthalmic surgeries performed around the world and how successful its products are in providing visual freedom for patients, lessening or eliminating their reliance on glasses or contact lenses.

Currently, 30% of the world’s population suffers from myopia. This figure is expected to climb roughly to 50% by 2050. Also, around 70% of adults ages 45-74 suffer from presbyopia, and this figure is only expected to go up with an aging world population. All these factors spell greater opportunity for STARR’s implantable lenses. 

The company, undoubtedly, offers exciting growth prospects, but there is no denying the fact that a lot of that growth appears to be baked into the company’s stock price, with a forward price-to-earnings ratio of 310.

The company’s stock continues to scale newer heights as it keeps exceeding revenue estimates. However, things can quickly sour for the stock if the company suffers a bad quarter, and spooked investors send the stock on a downward spiral.

Having said that, the company’s long-term prospects, nevertheless, look extremely bright. Its patents, accelerating sales momentum, a unique and large addressable market, along with its direct-to-consumer multi-faceted communications, is expected to help it grow in an expanding market. Investors can wait for some time for correction, before adding the stock to their portfolio.

STAAR Surgical Investment Thesis Conclusion

STAAR has been in the ophthalmic surgery business for more than three decades. STAAR’s bread and butter is its EVO ICL implantable Collamer (blend of collagen and polymer) lens. These lenses are foldable, which means the surgeon can insert them through a small incision in a minimally invasive surgery that lasts 20-30 minutes. Artificial intraocular lens (IOL) used in cataract surgery provides the company with the remainder of its revenues.

There’s a lot to like about STAAR Surgical (STAA). First and foremost, STAAR’s implantable lenses for vision correction is unlikely to run out of demand. Human eyes are prone to wear and tear, especially with age, which means STAAR products are evergreen. STAAR management estimates that its products have a total addressable market (TAM) today of around 35m patients with myopia or high myopia, and approximately 55m patients with presbyopia.

A variety of researches also point towards a very rosy future for the lens maker. Studies show that around $70 billion annually is spent on presbyopic treatments, $48 billion on eyeglasses, $16 billion on contact lenses and $6 billion on refractive surgeries. Also, research suggests that the number of myopes globally will increase to five billion by 2050.

The company foresees very limited competition in the ICL space, given the technological advantage it enjoys, and high barriers to entry in this segment. STAAR, however, views laser eye surgery – and, more specifically, laser-assisted in-situ keratomileusis (“LASIK”) – currently as its biggest competitor.

Also, STAAR sees little or no threat of its customers shifting to competing products. Eyeglasses and lenses can be easily replaced, but implantable lenses can only be removed by a surgeon, which means customers are heavily incentivized to stay put.

On the flip side though, the fact that surgery is required to use its lenses can make obtaining new customers a tad difficult. Also, ICL surgery is not reimbursable via health insurers, and patients have to bear the entire cost, which is around $3,000 – $3,500. STAAR, however, downplays the high cost claiming that the costs of contact lenses or glasses over a lifetime is more than $18,000.

STAAR has a robust balance sheet with plenty of cash and very little debt. Also, it had an excellent estimate-smashing quarter with EPS of $0.20 against the consensus estimate of -$0.02. The implantable lens maker earned $50.75 million during the quarter, compared to the consensus estimate of $43.50 million.

Also, the company is making good progress when it comes to its financial performance, profitability and spending efficiency. Its cost of goods sold (COGS), R&D expenses, and selling, general, and administrative (SG&A) expenses have fallen significantly as a percentage of quarterly revenues over the last five years.

STAAR also works hard to cultivate excellent relations with physicians and its potential customers. The company invests heavily in digital marketing – promoting its products via social media sites such as TikTok and Instagram.

On the downside, STAAR share price is grossly overvalued which, in turn, puts tremendous amount of pressure on the company to succeed. Any lukewarm quarter as such can send the stock price tumbling south.

Will STAAR Surgical Stock Go Up? Conclusion

Overall, STAAR’s valuation suggests the company is poised to make big strides. Its fast-growing presence in Chinese, Indian, European and Middle-eastern markets, and likely introduction of next-generation products in the highly lucrative US market, makes it future extremely promising.

STAAR already is profitable, and it is expected that in a few years the company will further fortify its margin. It has its own manufacturing facilities and a proprietary technology, and its products address a vast and growing market. Overall, it makes sense to wait for another correction to find a cheaper entry point, and then go for it, based on its long-term growth prospects.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.