(STAAR Surgical story updated for comments from plaintiff's lawyer and company)

MONROVIA, Calif. ( TheStreet) -- With performance among LASIK refractive eye surgery stocks weaker than ever in 2009, is it time for investors to look beyond LASIK with their investing lens?

Staar Surgical ( STAA) was up close to 11% on Tuesday, after Japan approved its Visian Implantable Collamer Lens (ICL) for the surgical treatment of myopia.

An ICL is like a contact lens that is surgically implanted through a small incision into the eye. ICLs replace glasses -- like LASIK does, only ICL is reversible.

Eyes may pop at the one-day return in Staar Surgical, but Staar is the kind of volatile small-cap stock that can easily move in the double-digits up or down on a one-day news event. There is also a legal overhang from an ongoing court case about breach of contract with a former Staar distributor that investors will need to monitor.

There is reason to see the Japan news as a positive for Staar Surgical. The rate of myopia is 45% in Japan, as opposed to 23% worldwide. Shares of thinly traded STAAR Surgical traded at more than twice their average daily volume on the Japanese market opening -- with more than 170,000 shares traded on Tuesday versus an average of 73,000 shares.

Asia, more generally, has been a growth area for Staar. In 2009, Staar's revenues in Asia grew by 50%, while its unit sales grew by 70%, according to Barry Caldwell, president and CEO of Staar. In South Korea, Staar has 10%-11% of the market, whereas in the U.S. it only has a 1% market share.

The Japanese market for refractive eye procedures held up well during the market downturn -- surgeries were only down 3% last year, compared with double-digit declines in many markets, and Japan is the third-largest market in the world after the U.S. and China.

Still, investors should not expect the growth in Japan from the ICL approval to come overnight. Caldwell said there are currently 15 surgeons trained in Japan on the procedure, and to the extent that Staar will have to train additional surgeons in the Japanese market, the growth be gradual at the outset of the sales effort. While a positive for Staar, the news won't be a big driver of revenues in the near-term.

Joanne Wuensch, an analyst at BMO Capital Markets, said the Japanese news is definitely a positive, but it is important for investors to remember that Staar only generated $18 million in revenues in the last quarter and has not turned a profit since it went public. Therefore, it is positive news for a company that has lacked positive news, but not a game-changer.

"The history of Staar is not just to get approval and reach for the stars, there is training and education required and getting patients and ophthalmologists in Japan comfortable with the procedure won't occur overnight," the BMO Capital Markets analyst said.

The big ticket item on the Staar Surgical horizon would be approval from the FDA for its toric ICL, which is expected some time early this year -- it is also seeking approval in Japan for the toric ICL, which treats both myopia and astigmatism. While Staar was up big today on the news from Japan, it is the FDA approval that BMO's Wuensch says will be the much more important development.

Staar CEO Caldwell agreed, saying that whereas Japan will be a gradual growth story, there is already pent-up demand in the U.S. for the toric ICL procedure. "When and if the toric ICL is approved there will be a spike in sales in the U.S.," Caldwell said, explaining that U.S. sales could in fact spike in the months immediately after an announcement, before settling at a more stable level.

Does that mean it is time to buy Staar ahead of the FDA approval? Clearly, some investors saw the trigger on Tuesday with the Japan news. However, profitability won't be achieved through that deal alone, and when Staar will reach profitability is something that Staar and the BMO analyst disagree on.

Staar's Caldwell thinks profitability will be achieved in 2010. BMO's Wuensch, on the other hand, thinks Staar will get back to even in 2010, but not reach profitability until 2011.

Caldwell said he would be disappointed if Staar only met the BMO's analysts' path to profitability. He added that while Staar has not been in the habit of giving detailed forward-looking guidance, being profitable for all of 2010 is one of the company's top five goals for the year.

It's a big goal for Staar since it hasn't yet turned a profit as a public company, but investors also need to keep in mind that it will be predicated on FDA approval, as well as a general upbeat response from what has been a poor consumer market in the U.S.

A key factor in the Staar procedure is that, like LASIK surgeries, it is an out-of-pocket expense, and that fact has really hurt the refractive procedure market in 2009. TLC Vision Systems ( TLCVQ), most notably, filed for bankruptcy late in 2009, while LCA-Vision's ( LCAV) procedures have dropped precipitously.

Caldwell said the U.S. refractive market has been devastated more so than any other since 2007, and LCA-Vision in particular has seen its procedures fall by 40% in the past two years.

Staar, on the other hand, says while it is relatively small in the U.S. market, it has held its 1% market share in the U.S. as opposed to the woes of the LASIK-focused companies.

The efforts to increase market share in Japan and the U.S. will come at a cost, due to the requirements in training of surgeons. However, Staar says the company won't have a significant increase in expenses as a result of approval of these products.

"Staar has improved its cash management, they've really focused on that, but while these new products are high-margin products, there are expenses that come with launching them," BMO's Wuensch said, though she added that the gross margins available on these products at full tilt will be meaningfully more to the Staar financial outlook.

That is an important factor for the BMO analyst. Since Staar has such a small cash balance -- $13 million - one of the bright spots for BMO's Wuensch has been Staar's cost-cutting initiative. STAAR has moved gross margin up as a percentage of revenues as it has cut expenses -- though one-time charges led to a reduction of gross margins in the third quarter to the level of 54%.

Caldwell believes that Staar can get gross margin levels back to 60% in 2010, and that costs associated with launching in Japan and the U.S. won't create a negative impact. He added that without the one-time charges in the last quarter, gross margins would have been closer to 56% to 57%.

BMO is keeping a rating of market perform on STAAR. "Our view is that good things are happening and the company is watching cash, and having the Japanese approval and expecting the toric ICL approval in the U.S. are all positives, but it is still a difficult consumer market, Staar is still not making money, and they have the overhang from an unresolved legal dispute," the BMO analyst said.

Staar is currently moving to mediation in a lawsuit filed by a former distribution company that charged breach of contract when Staar decided to sell directly in the U.S. The legal liability remains a serious issue for a company like Staar that only has $13 million in cash.

Staar's Caldwell said the companies have agreed to mediate at the end of March and Staar hopes it can come to some kind of settlement, but from a cost perspective, Staar's legal expenses in 2010 should be considerably less as an appeals process, if it comes to that, will cost less than the trial process it has already been through. "From a P&L perspective, we don't see the legal overhang as hampering efforts to reach profitability," Caldwell said.

Mark Adams, a Jeffer, Mangels, Butler & Marmaro lawyer representing the plaintiff Scott Moody in his case against Staar, said mediation should not change the fact that Staar faces $12.3 million in damages.

Adams said recent attempts by Staar to have the $6.5 million judgment thrown out have failed. An earlier judgment against Staar is at $5.5 million. Together the Parallax and Moody judgments stand at $12.3 million, excluding interest that can run up to as much as $1 million per year.

Adams said if Staar does not settle for the $12.3 million, it will have to post an additional bond of approximately $10 million by April 30.

Caldwell said Staar has three options: If mediation fails, Staar can file another bond of $10 million, which Caldwell says Staar can raise. "We could have it next week if we wanted it," he said.

The second option is to pay the plaintiff Moody $6.5 million, or pay off both plaintiffs including Parallax the total amount of $11.4 million, excluding interest. Caldwell noted that Staar already has $7.3 million in court and could pay off the additional $4 million. However, that is not the most likely outcome, as paying off the plaintiffs ahead of an appeal decision would not make sense as far as ever being able to recoup costs on a successful appeal. The appeals process is also less costly from a P&L perspective than the completed trial process.

Staar did attempt to show the court during the punitive stage of the trial that payment of $4 million above the amount already held in court would make it difficult from the company to continue as a going concern, but Caldwell said that is no longer the case.

"I think it is frustrating attorneys that the most popular story about Staar is no longer the legal case," Caldwell said.

For investors who were part of the 11% surge in Staar shares on Tuesday, let's hope Caldwell's view of the immediate Staar Surgical future is not myopic. For the rest of the investors looking for an entry point, the FDA approval STAAR's toric ICL will continue to be the game-changer, and that day may be coming soon.

At a time when the LASIK players are weak, it is "really about penetrating the U.S. market for Staar," the BMO analyst said.

-- Reported by Eric Rosenbaum in New York.

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