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Increasing COVID Numbers in China Creates Uncertainty

Article-Increasing COVID Numbers in China Creates Uncertainty

Image credit: Kevin Frayer / Stringer via Getty Images Women wear masks and face shields in an area that was recently locked down due to COVID-19 cases but now reopened, on December 9, 2022 in Beijing, China.
Just when it looked like the market in China was normalizing, reports of increasing COVID numbers in China has created uncertainty for companies like Staar Surgical.

Staar Surgical CEO Tom Frinzi's emphatic declaration earlier this month that "China indeed is back" might have been a bit premature. The company's stock took a nosedive earlier this week after Bloomberg reported rising COVID infection rates in China, which is where about 52% of Staar's 2022 revenue came from.

Frinzi's optimism during Staar Surgical's first quarter earnings call could be attributed to a restorative quarter for Implantable Collamer Lens (ICL) procedures, which were up 20% in the quarter.

"China indeed is back. And as a result, ICL procedures in China are certainly back," Frinzi said.

Frinzi became CEO of Staar in January, replacing Caren Mason who retired at the end of 2022 after seven years leading the company.

Medtech analysts covering Staar also expressed optimism that the market in China was normalizing in time for the summer months, which tend to be seasonally strong months for the Staar's ICL procedure volume.

But, according to a recent Bloomberg report, COVID infection rates in China have been increasing since late April. The report references a model which estimates weekly infection rates could reach about 40 million by the end of May and could peak at roughly 65 million weekly infection rates in June.

Even so, David Saxon, an analyst at Needham & Co., pointed out in a report Tuesday that 65 million weekly infection rates would be less severe than the COVID wave seen in the fourth quarter 2022 in China, which resulted in a revenue headwind of about $5 million for Staar. The analyst also noted, however, that from 2018 to 2022 (excluding 2020) the second and third quarters have averaged about 31% and 28% of Staar's full year revenue from China.

"Commentary on [Staar Surgical's] 1Q23 call noted the operating environment in China had normalized with management suggesting 2Q23 could be a record for China revenue," Saxon wrote in a report published Tuesday. "If the current COVID wave does have a meaningful impact on ICL procedure volumes, it’s hard to say how much it would impact 2Q23 revenue vs. offset any potential upside from a conservative guide (management only raised 2023 guidance by the 1Q23 beat and guided 2Q23 in line with consensus). That said, we expect this to result in an overhang for the stock until we get more clarity regarding ICL procedure volume trends in China."

Staar Surgical has been deemed one of the 25 Most Attractive Medtech M&A Targets.

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