Executive Summary / Key Takeaways

• STAAR Surgical, a specialist in ophthalmic implantable lenses, faces significant near-term challenges driven primarily by a dramatic decline in China sales due to distributor inventory drawdown, resulting in a substantial net loss and negative Adjusted EBITDA in Q1 2025.
• Despite China's weakness, STAAR continues to demonstrate solid growth in markets outside of China (9% ex-China sales growth in Q1 2025), leveraging its unique Collamer lens technology and targeted commercial strategies like the U.S. Highway 93 initiative.
• The company is implementing aggressive cost reduction measures, including a Q1 2025 restructuring charge of $22.7 million, targeting an SG&A run rate of approximately $225 million exiting 2025 to improve future profitability and cash generation.
• Strategic initiatives to mitigate risks and position for future growth include accelerating the ramp-up of Switzerland manufacturing capacity (expected full approval summer 2025) for tariff optionality and negotiating consignment agreements in China to manage inventory and tariff exposure.
• While prior guidance has been withdrawn due to ongoing uncertainty, management anticipates minimal China sales in H1 2025, an expected rebound in H2 2025 contingent on market sell-through, and a return to overall profitability and cash generation exiting the year, though the Vision 2026 targets are no longer expected to be achieved.

A Specialist's Stand: STAAR Surgical's Place in the Ophthalmic Arena

STAAR Surgical Company, with over four decades dedicated solely to ophthalmic surgery, has carved out a specialized niche as a leading developer, manufacturer, and seller of implantable lenses. Its core product, the Implantable Collamer® Lens (ICL), particularly the EVO family, represents a distinct approach to vision correction compared to traditional methods like laser refractive surgery (LASIK, PRK, SMILE) or even conventional intraocular lenses (IOLs) used in cataract surgery. Unlike corneal-based procedures that permanently reshape the eye's surface, EVO ICLs are phakic lenses, implanted in front of the natural crystalline lens, offering a reversible solution that preserves corneal integrity.

This technological differentiation is foundational to STAAR's strategy and competitive positioning. The proprietary Collamer material, a collagen copolymer, is highlighted for its biocompatibility and ability to provide high-quality vision. While precise, directly comparable quantitative metrics across all competitor products are not always publicly detailed, STAAR emphasizes benefits such as superior optical precision in treating myopia and astigmatism, potentially leading to better visual outcomes and patient satisfaction. The company's R&D efforts, including the upcoming EVO+ (V5) lens for China with a larger optical zone and investments in AI-based measurement tools, aim to enhance clinical confidence, expand the addressable market by moving down the diopter curve (average diopter implanted globally was -8.2 in H1 2024, down 0.5 from FY 2023), and maintain a technological edge. A U.S.-based head-to-head study versus laser vision correction is also underway to further demonstrate EVO's advantages.

In the broader ophthalmic device market, STAAR operates alongside diversified healthcare giants and specialized eye care companies. Key publicly traded competitors include Cooper Companies (COO), Johnson & Johnson (JNJ), Alcon (ALC), and Bausch + Lomb (via Bausch Health (BHC)). These players offer a range of products from contact lenses and IOLs to surgical equipment. STAAR's niche focus on ICLs gives it a specialized value proposition, particularly for refractive surgery patients seeking alternatives to laser procedures. However, its smaller scale compared to diversified players like JNJ (with 2023 revenue around $85 billion) or ALC (2023 revenue ~$9 billion) presents operational and financial challenges. While STAAR's technology may offer performance advantages (e.g., potentially lower revision rates compared to some alternatives), larger competitors often benefit from economies of scale, broader distribution networks, and more extensive R&D budgets in absolute terms, even if STAAR invests a higher percentage of its revenue in R&D. STAAR's competitive standing is moderate; it excels in its specific niche but faces challenges scaling against the financial and operational might of larger, more diversified rivals. Indirect competition from laser vision correction providers also remains a significant factor, potentially impacting demand for surgical implants.

Recent Performance: China Headwinds Overshadowing Ex-China Strength

STAAR's recent financial performance has been significantly impacted by external macroeconomic factors, particularly in China, its largest market. For the first quarter ended March 28, 2025, the company reported net sales of $42.6 million, a substantial 45% decrease compared to $77.4 million in the prior-year quarter. This sharp decline was primarily driven by a near-total collapse in reported China sales, which plummeted from $38.5 million in Q1 2024 to just $0.4 million in Q1 2025.

This dramatic drop in China revenue stems from elevated inventory levels held by STAAR's distributors in the country. Following lower-than-expected procedural volumes in the second half of 2024, distributors had sufficient stock to meet demand in early 2025 without placing significant new orders. This situation was exacerbated by a $27.5 million order shipped in December 2024 that was not recognized as revenue in Q4 2024 due to extended payment terms requested by a distributor in January 2025. Management indicated that while reported sales were minimal, in-market ICL procedures in China during Q1 2025 were believed to be similar to or potentially better than Q1 2024, suggesting underlying demand may be stabilizing or improving despite the inventory overhang impacting STAAR's direct sales into the channel.

In stark contrast to the China situation, STAAR demonstrated resilience and growth in markets outside of China. Net sales excluding China were $42.2 million in Q1 2025, representing a solid 9% growth over the prior-year quarter. This growth was broad-based, with the Americas region seeing a 9% increase (driven by the U.S. and Latin America), EMEA growing 10%, and APAC excluding China increasing 8% (with contributions from Japan, Korea, and India). This performance outside of China underscores the continued global adoption of EVO ICL technology and the effectiveness of STAAR's commercial strategies in these regions, even amidst a challenging global macroeconomic backdrop and declining trends in the overall laser vision correction market in some areas like the U.S.

The significant drop in sales, coupled with strategic investments and operational adjustments, heavily impacted profitability. Gross profit fell to $28.0 million in Q1 2025 from $61.0 million in Q1 2024, resulting in a gross margin of 65.8%, down sharply from 78.9%. This margin contraction was attributed primarily to higher manufacturing costs per unit resulting from lower production volumes in the U.S., increased excess and obsolete inventory reserves, and period costs associated with the ramp-up of the new Switzerland manufacturing facility.

Operating expenses also saw a significant increase, totaling $85.4 million in Q1 2025 compared to $63.3 million in the prior year. This included $22.7 million in restructuring, impairment, and related charges. These charges were associated with leadership realignment, workforce reductions, consulting expenses ($9.45 million cash expense), and non-cash impairment of fixed assets, operating lease right-of-use assets, and internally developed software ($13.3 million). Excluding these charges, operating expenses decreased slightly, reflecting initial cost control efforts. The combined impact of lower sales, reduced gross margin, and restructuring charges resulted in a substantial operating loss of $57.4 million and a net loss of $54.2 million in Q1 2025, compared to operating and net losses of $2.3 million and $3.3 million, respectively, in Q1 2024. Adjusted EBITDA for Q1 2025 was a loss of $26.4 million, a significant decrease from earnings of $5.3 million in the prior year.

Despite the near-term financial strain, STAAR maintains a solid liquidity position. As of March 28, 2025, cash, cash equivalents, and investments available for sale totaled $222.8 million. Management expects cash balances to dip temporarily in Q2 and Q3 2025 but anticipates staying above $140 million, with a return to cash generation expected as the company exits 2025. The company has no debt.

Strategic Response and Outlook

In response to the challenging environment, particularly in China, and to position the company for future sustainable growth, STAAR has undertaken several strategic initiatives under its new leadership team. These actions are aimed at addressing near-term operational and financial pressures while reinforcing the long-term investment thesis centered on the growing global myopia market and the differentiated EVO ICL technology.

A key focus has been on managing the China inventory situation and mitigating potential tariff impacts. The company has worked with distributors to manage existing stock levels, expecting minimal sales into China in the first half of 2025 as distributors consume inventory. A return to more normalized sales levels in China is anticipated beginning in the third quarter of 2025, contingent on in-market sell-through. To proactively address potential tariffs on U.S.-origin goods, STAAR negotiated consignment agreements and shipped inventory to China in April 2025. This consigned inventory remains owned by STAAR but is positioned in-country to reduce near-term tariff risk.

Simultaneously, STAAR is accelerating the ramp-up of its manufacturing capabilities in Switzerland. This facility is expected to be fully validated and approved by summer 2025, providing optionality to manufacture products for China and other markets from Switzerland, further mitigating long-term tariff exposure. While this ramp-up is strategically important, it is contributing to higher manufacturing costs and temporarily impacting gross margins due to lower production volume absorption and initial inefficiencies. Management is targeting a return to gross margins in the 75-80% range longer term as the Swiss facility reaches higher output levels, but expects margins to remain temporarily depressed (targeting 70% in H2 2025) through the current ramp phase.

Cost optimization is another critical component of the strategic response. The Q1 2025 restructuring and impairment charges reflect steps taken to streamline the organization, particularly addressing inefficiencies in U.S. operations and underutilized facilities and assets. Management believes these actions will position the company to exit 2025 with an SG&A run rate of approximately $225 million, a significant reduction aimed at improving future profitability and cash flow generation as revenue rebounds.

Given the dynamic macroeconomic conditions, particularly the uncertainty surrounding the pace of recovery in China and evolving government policies and tariffs, STAAR withdrew its previously provided fiscal year 2025 outlook. While formal guidance is not in place, management provided color on their expectations: minimal China sales in H1 2025, an expected rebound in China sales in H2 2025 (though the magnitude depends on market sell-through), continued growth in ex-China markets (though potentially not at the high end of prior expectations), gross margins improving but remaining temporarily below historical levels, and a return to overall profitability and cash generation expected as the company exits 2025. Notably, the company stated that it no longer expects to achieve its Vision 2026 target sales and operating model.

Key risks to this outlook include a prolonged slowdown or disruption in China, the actual impact and duration of tariffs, potential competition (including from new entrants like Eyebright in China and ongoing price compression in laser vision correction), and the successful execution of the Switzerland manufacturing ramp-up and cost reduction initiatives. The company's reliance on distributors, particularly in China, also presents risks related to inventory management and payment terms.

Despite the near-term challenges and revised outlook, STAAR remains confident in the long-term opportunity. The global prevalence of myopia continues to grow, representing a vast addressable market. The company believes its EVO ICL technology offers a differentiated, premium solution that is increasingly preferred by patients and surgeons seeking visual freedom while preserving corneal integrity. Strategic investments in surgeon education, practice development, and product innovation (like EVO+ and AI tools) are intended to drive continued adoption and market share gains globally.

Conclusion

STAAR Surgical is currently navigating a period of significant turbulence, primarily stemming from the sharp contraction in its crucial China market due to inventory dynamics and macroeconomic headwinds. The resulting financial performance in Q1 2025, marked by substantial losses and a depressed gross margin, underscores the severity of these near-term challenges. However, beneath the surface of these difficulties, the core investment thesis remains centered on STAAR's unique and differentiated EVO ICL technology and the vast, growing global market for myopia correction.

The company is not standing still; it is actively implementing strategic measures, including aggressive cost reductions, proactive inventory management in China through consignment, and accelerating the build-out of its Switzerland manufacturing capacity to enhance supply chain flexibility and mitigate tariff risks. While these actions may incur temporary costs or impact near-term revenue recognition, they are designed to right-size the business and position it for a potential rebound. The continued growth demonstrated in markets outside of China provides evidence of the underlying strength of the EVO ICL product and the effectiveness of STAAR's commercial efforts when not facing the specific inventory dynamics seen in China.

The path forward is not without risk, particularly regarding the timing and strength of a China recovery and the unpredictable nature of global trade policies. The withdrawal of guidance signals the current uncertainty, and investors should temper near-term expectations, acknowledging that the Vision 2026 targets are no longer the expected outcome. However, for investors with a longer-term perspective, STAAR's focus on leveraging its technological moat, expanding its addressable market, and improving operational efficiency through cost controls could pave the way for a return to profitability and cash generation, potentially beginning in the latter half of 2025. The success of the Switzerland manufacturing ramp and the ability to normalize the China channel will be critical indicators to monitor as STAAR seeks to translate its specialized market position and technological leadership into sustainable financial performance.