Original title: The Chinese market has saved a "stand-off stock" of US stocks, and ICL crystal supplier STAA: Come across the ocean to find gold. Fengyunjun has been myopic for many years, and once he leaves his glasses, he becomes "blind": it is difficult to distinguish between

Original title: The Chinese market saved a US stock "Lying flat stock", ICL crystal supplier STAA: Come across the ocean to make gold

Domestic competitors are not in a hurry.

Author | Fusu

Edit | Xiaobai

Edit | Xiaobai

Fengyunjun has been myopic for many years, and once he leaves his glasses, he becomes "blind": it is difficult to distinguish between male and female within five steps, and people and animals are not distinguished from five meters away...

In recent years, many people with myopia have successfully removed their glasses through surgery.

It is understood that there are currently four common methods of myopia surgery, which are: LASIK, full femtosecond, ICL and surface surgery.

(Source: Aier Eye Hospital " Chinese Myopia Surgery White Paper ")

Among them, LASIK, full femtosecond and surface surgery (collectively referred to as "traditional laser surgery") all require the use of laser device to cut corneal tissue.

and ICL (Implantable Collamer Lens) is different from the above three categories. It is an implantable surgery. The surgical principle of

ICL is to place intraocular lens in the patient's eye posterior chamber to correct vision while retaining corneal integrity. It is currently recognized as a high-end myopia surgery method, and the treatment price is much higher than other myopia surgeries.

(Source: Aier Eye Hospital 2021 Annual Report)

Online data shows that the treatment price of ICL surgery is more than 30,000 yuan, while the price of traditional laser surgery is 10,000-20,000 yuan. The He Ophthalmology Prospectus, which is downstream of the ophthalmic medical industry chain, once disclosed that the unit price of its purchase of ICL crystals is above 8,000 yuan.

(Source: He's Ophthalmology Prospectus)

There are only two posterior chamber type intraocular lenses approved for myopia surgery at this stage, and their manufacturers are STAAR Surgical (STAA.US, "Company") and Haohai Biotechnology.

Fengyunjun believes that STAAR's strength is currently far ahead in terms of market share and cost advantages.

After many years of transformation, the performance ushered in an explosive period

(I) Revenue is in a high growth period

STAAR is an American company founded in 1982 and listed in Nasdaq in 1990.

company started its business in the production and sale of intraocular lenses (IOL) for cataract surgery.

However, this business has been calm for a long time, which is also reflected in the company's once "stand-off" stock price trend.

(Source: Google Finance)

The reason is that the global IOL market has been monopolized by a few medical device giants for a long time, leaving the company with almost no place to stand.

According to a 2021 report by Market Scope, the top five manufacturers in the global IOL market share is 67%, including Alcon (ALC.US), Johnson & Johnson (JNJ.US), Hoya (7741.T), Bausch Lomb (BLCO.N) and Zeiss (AFX.DE).

Faced with a highly competitive market, the company decided to find another way out. As early as 1997, the company began to launch intraocular lenses (ICLs) for correcting myopia.

Compared with mature IOL, the surgical principles of ICL are also very similar: both are minimally invasive surgeries, where the doctor performs surface anesthesia of the patient's eyes, and then a minimally invasive mouth is opened on the cornea to implant the intraocular lens.

However, the company's ICL products have always received mediocre responses within 20 years after their launch. Before 2018, the company's revenue growth was slow, with a year-on-year growth rate of only single digits. The situation of the company did not start to turn around until 2018. That year, the company's revenue increased by 37% year-on-year to US$120 million, breaking the $100 million mark for the first time.

From then on, the company's revenue began to enter a high growth period: can achieve double-digit year-on-year growth rate every year due to the impact of global shipments due to the new crown epidemic in 2020.

In 2021, the company's revenue increased by 41% year-on-year to US$230 million; in the first half of 2022, revenue increased by 28% year-on-year to US$140 million.

At the same time, the company is gradually withdrawing from its incompetitive IOL business.

From 2017 to the present, the revenue share of the company's ICL products has continued to increase, reaching 92.4% in 2021; the revenue share of IOL has dropped sharply from 19% in 2017 to 5.4% in 2021.

(II) Nearly half of its revenue comes from China's

company's ICL products have passed major certifications including the US FDA, EU CE, and can be sold in 75 countries and regions around the world, including China, the United States, the European Union.

As of the first half of 2022, the company has sold more than 2 million ICL products worldwide. The last time the company disclosed sales was in early 2019, when it announced that its cumulative global sales exceeded 1 million.

In just less than 3 years, the company's ICL product sales have achieved an order of millions of magnitude.

(Source: Company News Release)

The key reason why the company's rapid increase in ICL products in recent years lies in the explosion of the Chinese market. What is more worth mentioning is that the company's largest market is not its home country, the United States, but in China.

companies usually adopt a single dealer strategy in each country, that is, only one dealer is authorized, and the latter is responsible for all local sales business.

The company's distributor in mainland China and Hong Kong is Shanghai Lan Bioproduction International Trade Co., Ltd. (" Shanghai Lansheng "). Qichacha shows that Shanghai Lansheng is a company with state-owned background and specializing in the import and distribution of high-end medical devices.

(Source: Qichacha)

In recent years, Shanghai Lansheng has been the company's largest customer, and its revenue contribution has increased year by year from US$24.5 million in 2017 to US$110 million in 2021. During this period, the CAGR was 45%, which was significantly higher than the CAGR of the company's total revenue in the same period 26%.

The percentage of revenue contribution of Shanghai Lansheng has also increased from 27% in 2017 to 47% in 2021.

China has become the company's core market.

The Chinese market is the dominant one

(I) The competition in the US market is fierce

Old men may be curious: Why, as the origin of the company, has failed to develop into its largest market?

The reason is that the company's ICL products ("new generation ICL") that adopted the new generation of technology did not pass the US FDA certification until the first quarter of this year.

The company has been selling ICL products of the previous generation of technology in the United States since 2006. In 2011, the company's ICL product achieved a major technological breakthrough called "CentraFLOW".

In traditional ICL surgery, doctors need to perform laser iridotomy a few days before implanting ICL crystals on the patient. The new generation of ICL eliminates this extra process, slowing down the patient's surgical pain and saving treatment time.

FDA divides medical devices into three categories, and intraocular lenses belong to the class III devices that are considered to be high-risk and most strictly regulated. Therefore, the review process is extremely complicated and takes a long time.

Company did not complete clinical trials of the new generation of ICL in the United States until early 2020, and submitted clinical data to the FDA in early 2021.

In March 2022, the company announced that its new generation of ICL has officially passed the FDA verification and will be sold in the US market from now on.

(Source: Company News Release)

Does this mean that the company's ICL products are expected to increase significantly in the United States? Fengyunjun believes that it is up to be discussed.

Whether in the United States or global markets, implantable myopia surgery represented by ICL is facing fierce competition from traditional laser myopia surgery such as LASIK and full femtosecond.

Even if it is limited to the field of implantable surgery, ICL is not the only choice for myopia patients in the United States.

is different from the "post-room intraocular lens" technology path represented by ICL. " iris clamped anterior intraocular lens" is more widely used in the United States. Among them, "Artisan" and "artilex" intraocular lenses produced by Ophtec, it has obtained FDA certification earlier than the new generation of ICL.

(II) The domestic first-mover advantage is obvious

For the company, it is very fortunate that in the Chinese implantable myopia surgery market, the room type intraocular lens will be the main one in the future.

At present, there are only two approved post-room intraocular lens products in the domestic market, namely the company's ICL products and the Yijing PRL products of Haohai Biotechnology.

(Source: Haohai Biotechnology 2021 Annual Report)

Haohai Biotechnology is a well-known leader in domestic biomedical materials, and is involved in sub-fields such as ophthalmology, medical beauty , orthopedics.

In the field of ophthalmology, the advantage of Haohai Biotechnology lies in the cataract artificial lens. According to the 2021 financial report, the annual sales of its cataract intraocular lenses account for about 30% of the Chinese market usage.

And in the field of myopia intraocular lenses, Haohai Biotechnology is just a "new player".

In April 2020, Haohai Biotech acquired 55% of the equity of Hangzhou Aijinglun Technology Co., Ltd. ("Hangzhou Aijinglun") for a consideration of 74 million yuan, thus obtaining the latter's independently developed Yijing PRL business.

Haohai Biotech confirmed goodwill of 53.35 million yuan for this acquisition transaction and received an inquiry letter from the Shanghai Stock Exchange.

(Source: Haohai Biotechnology Inquiry Letter Reply)

Through Haohai Biotechnology Inquiry Letter Reply, Fengyunjun was able to get a glimpse of the situation of the only competitor in the Chinese market of STAAR.

Inquiry letter reply shows that Hangzhou Aijinglun's revenue fell from 3 million yuan in 2018 to 1.45 million yuan in 2019, and its revenue in 2020 even showed a negative digit, reaching -1.04 million yuan.

Haohai Biotech explained that the reason for the negative revenue in 2020 was that the company integrated the dealer channels after the acquisition and agreed to return the dealer's products to the dealer that terminated the cooperation.

(Source: Haohai Biotechnology Inquiry Letter Reply)

However, Hangzhou Aijinglun's revenue has declined year by year also shows that its process of promoting the Mirror PRL in China is quite difficult.

What is more noteworthy is that from 2018 to 2020, Hangzhou Aijinglun never achieved profitability, and the net loss scale expanded from 1.45 million yuan to 110 million yuan.

In summary, for STAAR, there are almost no competitors in the Chinese market, and its leading position will be safe in the short term.

Scale effect is the largest moat

(I) Thanks to the explosion of the Chinese market, it has turned losses into profits

However, does competitors have the possibility of overtaking in the short term?

Fengyunjun believes that the scale effect is the company's existing largest moat. . On the other hand, Hangzhou Aijinglun’s years of losses also indirectly confirms this point.

The company's gross profit margin is relatively high and has continued to increase in recent years. Its gross profit margin increased from 70.9% in 2017 to 77.5% in 2021, and continued to increase to 78.4% in the first half of 2022.

Compared with traditional laser surgery, implantable myopia surgery is still a new treatment method. The company's sales expense rate has been significantly higher than the R&D expense rate for a long time, and also shows that its business model is sales-driven.

In 2021, the company's sales expense ratio and R&D expense ratio were 29.2% and 14.7% respectively.

Thanks to the significant increase in the Chinese market in recent years, the company has turned losses into profits since 2018 and has achieved continuous net profits. Before 2018, the company was in a net loss state for most periods.

In 2021, the company achieved a net profit of US$24.5 million, with a net profit margin of 10.6%; in the first half of 2022, the company's net profit margin was 15.7%, continuing to increase by 3.7 percentage points year-on-year.

Currently, the company has three production facilities around the world, located in the United States, Swiss and Japan.

Among them, the United States is the main production place of ICL products, and the company is also expanding the production capacity of its factories in Switzerland. The Japanese factory produces other products except ICL.

Due to the differences in the patient's myopia degree and eye conditions, the company's ICL product types are as high as hundreds, which also requires it to stock up on a large amount of inventory to meet the fast delivery needs of customers around the world.

Thanks to the expansion of production in the Swiss factory, the company's inventory turnover speed has accelerated, and its inventory turnover days have continued to drop from 169 days in 2018 to 125 days in 2021.

(II)Cash flow has improved, shareholder returns are insufficient

Since the continuous profits were achieved in 2018, the company's cash flow situation has also improved significantly.

In 2021, the company's net cash flow and free cash flow were US$44 million and US$30.3 million, respectively.

The company's growing capital expenditure in recent years is mainly used to expand ICL production capacity at its Swiss factories. In addition, the company has not had any major acquisitions.

As of the end of 2021, the company's cash and cash equivalents on the company's books reached US$200 million, setting a record high.

It is worth criticizing that although the company's "pocket" is becoming increasingly rich, it is quite stingy in giving back to shareholders.

For a long time, companies have not declared cash dividends. The latest stock repurchase occurred in 2018, and the repurchase scale of only US$50,000 was almost insignificant.

Looking back at the growth history of STAAR, it is quite interesting.

Company was originally an inconspicuous medical device manufacturer, struggling in the cataract intraocular lens market, which was monopolized by giants such as Alcon and Johnson & Johnson.

Later, the company took a different approach and transformed into the emerging ophthalmic sub-field of myopia artificial lenses, but it has not improved for many years. Its new generation of technology has long been unrecognized in its US and has not been certified by the FDA until early this year.

However, the company was lucky enough to capture the Chinese market and its performance has continued to explode since 2018. Thanks to its first-mover advantage in China, it currently dominates its position and its only possible competitor, Haohai Bio, has not yet become a climate.

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