KeraVision 4Q 1999 Conference Call 2/10/2000 Tom Loarie (CHMN CEO) John Galantic (PRES COO) Mark Fischer-Colbrie (VP CFO) TL: During the 4Q we began a transition from being a training company to a procedures company. Record procedure volume results are a good indication that our programs are beginning to work. Announced 2000 procedures in first 9 months of commercialization in the US; reached 2300 by the end of the year. We believe that the recent acceleration in procedures is a result of our fast-track surgeons program, which focuses on a select group of practices where we believe we can have the fastest impact at establishing Intacs as the procedure of choice, where we are implementing our practice integration model on a priority basis. MFC: During 4Q KeraVision focused on activities to build procedure volume. Significant investments made in establishing practice integration models and beginning the work of generating consumer demand, including cooperative advertising. Also made investments in proctoring (company representatives observing doctors' initial Intacs cases). Revenues in 4Q $1.9 million, consisting largely of sales of surgical instrument sets/start-up inventories of Intacs (4Q 1998: $334,000 3Q 1999: $4.2 million). Change in revenue reflects change from training company to procedures company. Going forward, expect quarterly revenue to reflect that transition. Expenses: significant investments in sales and marketing. More specifically: increased spending on market research at consumer and professional levels, added staff to support proctoring, conducted professional advertising, awareness-building activities around the AAO meeting, and kicked off programs to support core practices. Expect to make continued investments in sales and marketing programs, focus on practice support programs and consumer demand programs that John will talk about in a minute. Results: net loss of $0.52/share, $9.5 million (vs. net loss of $0.59, $7.2 million in 4Q 1998). Cash balance at end of December quarter of just under $50 million. Revenues for year of $10.5 million (vs. $835,000 in 1998). Net loss $27.3 million vs. $24 million in 1998. EPS 1999 loss of $1.88/share vs. 1998 loss of $2.16/share. JG: 4Q procedure results: Pleased with growth in procedure volume, December was a record month in spite of holidays. Focus on core practices. Other positive initial indications: rising number of procedures per active surgeon, and many Intacs patients at fast-track practices are consumers who would not have chosen a laser procedure, therefore would not have been a refractive consumer had it not been for Intacs. Believe Intacs are in the initial stages of proving they are a market expander, and as a vehicle for growing the individual practices. Changing marketplace: Overcapacity in laser-based procedures with continuing influx of new entrants to the market. Stemming from that is significant discounting of LASIK in pockets all over America. Increase in segmentation of market, which is creating an opportunity for Intacs. Laser-based doctors are finding it difficult to differentiate themselves on anything but price. Leading to creation of market segment on surgeon side of very high volume "assembly line" practices built around one technology. Also seeing emergence of the "comprehensive" refractive surgeon offering a range of options. Having greatest success with this group. Examples include Drs. Neatrour in Virginia, Schanzlin in San Diego, Sutton in Nebraska; all offering LASIK and Intacs, with Intacs as procedure of choice for mild myopes. Procedure growth for laser surgery slowing. Doubled from '98 to '99; in 2000 expected to grow only 30% to 40%. Why? From surveys: half of people eligible for laser surgery would refuse it even if it were offered for free. Estimate that of this group about 40% of myopes above -.5d have already had the procedure. Only way for practices to maintain soaring procedure volume increases is to reach out to mild myopes; the "low-hanging fruit" has been picked. Mild myopes: considerably more risk-averse, feel the have a lot more to lose from a potential procedure gone wrong. That's why many of them, according to our research, find the Intacs concept so appealing. According to our research, about 80% of people in Intacs range who are discontented with contact lenses and glasses are apprehensive about laser surgery, due to fear of a permanent procedure, desire to keep options open for future advances. Because of escalating pricing competitions and decreasing surgeon margins, optometrists are finding themselves increasingly cut out of the picture as surgeons are trying to maintain profitability by going it alone, so it's not surprising that a number of Intacs surgeons are beginning to see a rise in referrals from optometrists, who see a greater role for themselves with Intacs (pre- as well as post- care). 2000 Marketing plan (5 areas of focus): 1) Channel of distribution - creation of integrated practices, focusing on a model group of 30 fast-track practices. 2) Consumer insight - using market research to understand the mildly-nearsighted consumer and how best to reach them. 3) Consumer pull - advertising to create demand. 4) Web-based strategy - helping to inform consumers about a highly-considered and researched purchasing decision (6 - 10 months from consideration to procedure). 5) Professional influence - includes major meetings, publications for both M.D.s and O.D.s. What is the Fast-Track Program? What is Practice Integration? Developing a practice model through a systematic process of building commitment in a surgeons practice, top to bottom, to establish Intacs as the procedure of choice for consumers with mild myopia. Goal for these practices: majority of mild myopes treated with Intacs. To gauge our results, we are analyzing a variety of metrics of Fast-Track Practices: procedure volume; share of mild myopes within their total volume; share of Intacs with their mild myopes; overall growth of new patients in the practice within the Intacs range of correction. Ultimately will grow total volume of procedures with addition of mild myopes, bringing success to KeraVision and the surgeon. Seeing early indications that look very promising. We will establish that Intacs are a revenue driver for the practice as well as for the marketplace as a whole. Believe our results indicate that the fast-track practices are adding new business by appealing to new consumers who would otherwise not have had refractive procedures. Not simply cannibalizing existing LASIK customers, but reaching into this broader segment of mild myopes who consitute most of the available vision correction, but who have taken a wait-and-see attitude towards other procedures. As Fast-Track practices come onstream, they start out with local advertising, both on their own and with our support. In this early stages we have to appreciate that the doctor him/herself is the "brand." We're leveraging ourselves off of that, co-marketing with the surgeon, using a combination of messages about the practice and about Intacs. We going to continue to limit the number of new primary doctors trained because we believe this core group we've been working with since late last year is our best investment at this stage of the launch. We believe we have a good grasp of our consumer segment, an understanding of who these consumers are. This is allowing us to refine our strategy to develop a number of major new initiatives to pull them into the core practice group that we've established as our clinical platform. Our consumers are high income earners - about 50% higher than consumers of LASIK surgery; tend to be highly educated, with a high concentration of professionals, including medical professionals, and quite high users of the internet. We're going to capitalize on this last attribute to harness the potential of the internet as a vehicle for educating our consumer segment and directing them to our providers. We've learned that Intacs consumers are inclined to use the internet more than other people; we're updating our website with some new information. More importantly we've begun making a major investment in our internet consumer strategy that we'll unveil around mid-year. Finally, all these activities are building towards combining the different marketing elements into test markets later this year, in which we're going to overlay KeraVision direct-to- consumer communication, including internet, on top of the co-op practice advertising and the foundation of our Fast-Track integrated practices. TL: Moved over the last 15 months from an R&D company into a training company into a procedure company. That is our business model - deriving revenues from the procedures. Working our way through the backlog of surgeons awaiting proctoring, but real focus right now is on integrating this core group of practices, helping them grow their procedure volume. Have started with focus on 30 practices. Not going to stay at 30 practices; in 2Q we'll be expanding to a new wave of practices, continuing to replicate the models we've developed. Focus in last five months has been in getting things right in this initial group. Europe: situation is important to us in the last year. Distribuition went from 2 to 10 countries in 1999. Several of these distributors offer Phakic IOL, a new additive modality for treating myopia over -5d. In conjunction with Intacs, these dealers can provide a full product offering of additive technologies. Europe is still not at the advanced stages of market development as is the United States. As European market starts to grow, we can participate successfully. Intacs/Keratoconus: first therapeutic application of Intacs. Beginning clinical studies. Shows Intacs have a lot of promise where other treatments have a limited value. Results of first two years clinical studies is very encouraging. Significant potential market: affects one out of a thousand people, maybe more. More significant: Intacs appears to be useful to treat thinning of the cornea disorders that are not keratoconus in origin. Independent study, unconnected to KeraVision, by Dr. Michael Kritzinger in South Africa, a pioneer in refractive surgery, one of the first in the world to do LASIK procedures, is using Intacs to treat post- LASIK complications that result in thin or thinning corneas. Presented his data for the first time two weeks ago in Portugal at European Society of Cataract and Refractive Surgeons; we're following his studies and his results with great interest. The bottom line is that our technology is both potent and flexible, and has great potential, and we're only in the very early stages. I've been involved in medical technology for 30 years, back to the introduction of IOLs in 1970, angioplasty in the mid-70s; what's exciting to me is that this technology has great potential, just in the early stages of application. We're going to expand the armamentarium of doctors beyond what they currently have with other therapeutic and refractive procedures to treat a whole host of problems and correct many different vision ailments. Hyperopia: Trials continuing in Europe, results continue to be very encouraging. Made a few design changes in our instrumentation. Hope to talk at the end of the year about beginning a study in the US. Phase IIIb trials: Patients in the -.5d to -1d; don't wear contacts, or even their glasses all the time. 24% of the myopes in this range. Higher -3d to-4.5d; with that will be able to provide vision correction to over 90% of the market. Believe that the market now is beginning to accept our technology; see new applications which will continue to expand our market pentration. ++++++++++++++++++++++++++++++++ [Q & A was not available on the replay of the conference call. Some points I understand to have been made are: Intacs sales will overtake training revenue during the first half of 2000. Company is comfortable with a projection of full-year sales of $14-$17 million. Possibly anticipate 18,000 Intacs procedures for 2000. Target: 120 "integrated practices" by the end of 2000. High-volume doctors will be model of success to others: success w/o competition with low-cost laser doctors. KeraVision plans to train between 75 and 85 doctors/quarter. Total at year end 2000 projected to be 920. KeraVision bases procedure count on cards sent in by patients. A December patient may not return their card until April. Current prices charged by surgeons to implant Intacs range from $999 to $3900 per eye. Q: Could you explain the financing available to the doctors for training and kits? A: The doctor pays an extra $197 per Intac for a total cost per Intac of just less than $700.00. Once he completes 200 procedures the $197 fee is dropped. Q: If you get a large demand for training how would you handle it? A: We have to allocate our resources to ensure quality. As sales increase, with the margins we enjoy, we will have more resources to add staff. Q: Would the company consider any type of strategic investment from any players in the optical field? Is this something you're pursuing or considering in the future? A: (Loarie) Yeah, I think we would consider that, we're open to that and if you have any names you can send them to me (laughter). I really feel with the addition of John and his team we have a number of announcements we will make in the next month or so, Steve Henderson from Bausch & Lomb, we are now on the right track. ]