Staar shines on sign that FDA will approve implantable lens.

STAAR Surgical Co. has taken investors on a wild ride as it struggles to win regulatory approval for its permanent implantable contact lens.

The developer of ophthalmic devices for cataract and other eye patients has seen its stock rise or drop by a quarter or more three times in the past year as the Mourovia company tries to overcome quality control problems.

Now, Staar may have to decide whether it can satisfy U.S. Food and Drug Administration concerns any time soon, or consider alternatives to launching the Visian ICL on its own in the U.S.--something the company and its investors have banked on as a big growth driver.

"We believe Staar remains a company in transition, caught in the tide with its FDA-related issues," Harris Nesbitt analyst Joanne Wuensch told clients last month. Wuensch has a "neutral" rating on the stock.

Shares of Staar closed at $4.87 on Aug. 4, about a 55 percent jump from July 22 when the FDA announced that it was likely to approve the Visian ICL for sale in the U.S.--subject to a satisfactory U.S. inspection of its manufacturing facilities.

A few weeks earlier, shares had plunged almost 31 percent after the company released the latest FDA warning letter concerning efforts to correct regulatory compliance problems, mostly at the Monrovia plant.

While officials characterized the letter as part of an ongoing conversation with regulators, the investment community was skeptical. "We view the tone and the language of the FDA communication as surprising, and it is difficult for us to understand what is transpiring between Staar and the FDA," Wuensch said in a July 11 investor's note.

Foreign markets

The Visian ICL--approved for sale in 41 countries and representing nearly 12 percent of product sales in the second quarter--is manufactured at a Swiss facility. But regulators can block a company's launch of a new product in the U.S. if they have concerns about any of its facilities.

The Vision ICL is implanted in the eye by surgeons who make a slit in the cornea and position the lens behind the iris. The lens corrects nearsightedness.

An FDA advisory panel recommended approval of the device in 2003, and Santa Ana-based Advanced Medical Optics Inc. has since begun selling a competing Dutch-developed lens that received FDA approval last September.

But during a routine inspection in preparation for the final stages of the lens's approval in 2003, the FDA had concerns regarding the manufacturing process, quality control and whether the proper procedures were followed in reporting adverse events and other problems. In one case, inspectors determined Staar had begun a clinical trial of the lens before getting agency approval.

Now, almost two years into its regulatory problems, investors have grown impatient as the FDA dispute diverts resources and attention, especially since Staar has posted annual losses since 2000.

BDO Seidman, LLP, Staar's auditor, raised doubts in a filing in March about the company's financial ability to continue as a going concern because of the losses.

Among the most vocal critics has been New York-based Broadwood Capital Inc., Staar's second largest institutional investor, which has called for management, strategy and board governance reforms.

"We believe that recent events have caused a large portion of Staar's investors to lose confidence in the company's current management and board," Broadwood President Neal Bradsher wrote in an April 8 letter to the board that was filed with the Securities and Exchange Commission.

The company has since made several changes, adding two outside directors. And at the end of April, the company separated the posts of chief executive and chairman, as Bradsher had recommended. Brought in as chairman was Don M. Bailey, non-executive chairman and former CEO of Comarco Inc., a wireless technology company.

Chief Financial Officer John Bily also resigned in April, and Deborah Andrews, formerly the company's global controller, was named his successor on August 2.

Staar said in March that it had retained Morgan Stanley to review "alternatives," but would not say whether a sale of any assets was under consideration. The next month, the company was able to raise $14.35 million in a private placement that alleviated some of the immediate cash flow problems cited by BDO Seidman.

"We have refocused the entire organization on the need for us to reach full compliance with FDA rules and regulations, and conform to both the letter and spirit of the regulations," Don Bailey said during a July 11 conference call.

Staar Surgical Co.

YEAR (Dec. 31)                       2004     2003

Revenue (millions)                  $51.7     $50.5
Total Expenses (millions)            61.8      56.9
Operating Loss (millions)           (10.2)    (6.5)
Net Loss (millions)                 (11.3)    (8.4)
Loss Per Share                     ($0.58)   (0.46)

SUMMARY

Business: Ophthalmic Devices
Headquarters: Monrovia
CEO: David Bailey
Market Cap: $120 million Dividend Yield: None
Total Liabilities: $13.5 million P/E Ratio: N/A *
Long-Term Debt: $0

* Company is not profitable.