News Column

Derma Sciences Reports Second Quarter Financial Results

August 7, 2014

Conference call begins at 11:00 a.m. Eastern time today

PRINCETON, N.J.--(BUSINESS WIRE)-- Derma Sciences, Inc. (Nasdaq:DSCI), a tissue regeneration company focused on advanced wound and burn care, today reported financial and operating results for the three and six months ended June 30, 2014.

Highlights of the second quarter of 2014 and recent weeks include (all comparisons are with the second quarter of 2013):

  • Total net sales increased 15.3% to $20.9 million
  • Advanced Wound Care (AWC) product sales increased 11.4% to $8.8 million
  • Traditional Wound Care (TWC) product sales increased 18.2% to $12.1 million
  • Gross margin was 37.5%, up 70 basis points from 36.8%
  • Received approval from the Veterans Administration (VA) for inclusion of AMNIOEXCEL® in its Federal Supply Schedule

    Management Commentary

    “Our AWC business faced headwinds during the second quarter that were specific to the U.S. and were temporary in nature, including reimbursement and competitive pressures. While AWC sales results were below expectations, our franchise continued to grow and I am pleased with how effectively the Derma Sciences team addressed those challenges and how well we are positioned for the future,” said Edward J. Quilty, chairman and chief executive officer.

    “Of note, TCC-EZ® sales grew 19.0% and MEDIHONEY® sales grew 16.2% over last year. We expect sales of our innovative MEDIHONEY dressings to near $20 million this year. The brand was the subject of a negative advertising campaign resulting in some misconceptions in the market, which impacted sales. We have since enhanced our sales and marketing efforts to reinforce the robust clinical data-driven evidence supporting the use of MEDIHONEY in wound healing. Our efforts are working as MEDIHONEY sales are back on a solid growth trajectory, with particular emphasis on large facilities converting to MEDIHONEY as their first-line product for when removal of necrotic tissue is required.”

    “Demand for TCC-EZ was adversely impacted by Medicare Outpatient Prospective Payment System (OPPS) reimbursement rates announced at the end of last year, which took effect as of January 2014. These final rates were vastly different from the original proposed rates, which is unusual. We have invested considerable effort with the Centers for Medicare and Medicaid Services to correct this situation and are encouraged with the 2015 OPPS proposed payment rates. We continue to work with the Authorities to ensure these proposed rates are finalized and take effect as of January 2015. The final 2015 OPPS schedule is due to be published in the October/November 2014 timeframe.”

    Also boding well for TCC-EZ is a groundbreaking study on Total Contact Casting that was published in the July edition of the journal Advances in Skin & Wound Care, entitled Diabetic Foot Ulcer Off-loading: The Gap Between Evidence and Practice. Data from the US Wound Registry by Caroline E. Fife, M.D. et. al. Among the many conclusions that were positive for total contact casting was that this study showed, for the first time ever, that TCC-EZ heals as well as, if not better, than traditional casts.

    “Our newly acquired AMNIOEXCEL® placental tissue product is now being sold into VA centers. While much work remains with the VA centers, we have already started working on the foundational groundwork for the broader market. We look forward to capturing a meaningful share of this $500 million opportunity as we advance our work on initial clinical development, key opinion leader development, and reimbursement through commercial payors as well as the Medicare Administrative Contractors. Our AMNIO product line is expected to be an important contributor to the growth of our AWC business on both the strength of its efficacy and its cost competitiveness.”

    “Our TWC business posted strong growth during the quarter, albeit off a soft prior-year due in part to our exclusive Canadian distributor rebalancing its inventory. We are developing additional private-label wound care products for the retail marketplace, which we expect to support this business segment with higher margins following the expected loss later this year of some low-margin private-label distributor sales,” noted Mr. Quilty.

    Commenting on the DSC127 Phase 3 program, Barry Wolfenson, Group President, Advanced Wound Care and Pharmaceutical Development, said, “We continue to strengthen the enrollment of patients into our Phase 3 trials with DSC127 for the treatment of diabetic foot ulcers. Earlier this year we tested a direct-to-patient media campaign to help drive additional prospective patients to clinical trial sites. We believe this is a winning approach and we have additional programs beginning in September including direct-to-patient initiatives designed to continue to accelerate enrollment. Enrollment has maintained its strength even through the summer months, which traditionally exhibit some decline, so we expect the pace of enrollment in the fall to accelerate even further.”

    Financial Results

    Net sales for the second quarter of 2014 were $20.9 million, up 15.3% from $18.1 million for the second quarter of 2013. This included AWC product sales of $8.8 million, up 11.4% over $7.9 million in the prior-year quarter, and TWC product sales of $12.1 million, up 18.2% over $10.2 million in the prior year. Growth in AWC product sales was led by MEDIHONEY and TCC-EZ. TWC results reflect improved Canadian and U.S. first-aid product sales.

    Gross profit for the second quarter of 2014 was $7.8 million, or 37.5% of net sales, compared with gross profit for the second quarter of 2013 of $6.7 million, or 36.8% of net sales. The higher gross margin percentage principally reflects a favorable sales mix.

    Selling, general and administrative expense for the second quarter of 2014 was $12.6 million, compared with $10.8 million for the second quarter of 2013. The increase was principally due to a higher headcount and increased expenditures primarily associated with AWC growth initiatives.

    Research and development expense for the second quarter of 2014 was $4.4 million, compared with $3.2 million in the second quarter of 2013. The increase was principally attributable to an increased level of activity surrounding patient enrollment and recruitment for the DSC127 Phase 3 clinical trial, along with preclinical work with DSC127 for scar prevention and other AWC clinical studies.

    The net loss for the second quarter of 2014 was $8.7 million, or $0.34 per share, compared with a net loss for the second quarter of 2013 of $7.3 million, or $0.43 per share. The increase in net loss was principally due to higher operating expenses.

    Net sales for the six months ended June 30, 2014 were $40.7 million, up 10.2% from $36.9 million for the six months ended June 30, 2013. AWC product sales were $17.2 million, up 11.5% compared with $15.4 million in the prior-year period. TWC product sales were $23.5 million, up 9.3% compared with $21.5 million in the prior-year period. The Company reported a net loss for the first half of 2014 of $19.0 million, or $0.79 per share, compared with a net loss for the first half of 2013 of $13.6 million, or $0.81 per share.

    As of June 30, 2014, Derma Sciences had cash, cash equivalents and investments of $88.6 million (excluding a $7.6 million investment in Comvita common stock held as a long-term investment), compared with $23.0 million as of December 31, 2013.

    Financial and DSC127 Guidance

    Derma Sciences now expects 2014 net sales will be approximately $86.0 million and organic sales growth of AWC products, not including AMNIO products, will be approximately 15%. Including sales of AMNIO products, Derma Sciences expects total AWC sales growth will be approximately 20%. This compares with previous guidance for net sales of approximately $92.0 million and organic sales growth of AWC products to be in excess of 30%. The Company affirms guidance for TWC 2014 revenue growth of between 2% and 5%.

    The Company also affirms expectations for the total cost of the DSC127 Phase 3 program up to the filing of a New Drug Application with the U.S. Food and Drug Administration to be approximately $55.0 million to $60.0 million. Derma Sciences continues to expect trial enrollment will be completed in mid-2015 with top-line data readout early in 2016. The Company expects enrollment to reach the halfway point in late 2014 or early 2015.

    Conference Call and Webcast

    Derma Sciences management will host a conference call at 11:00 a.m. Eastern time today to discuss second quarter financial results and answer questions. In addition, management will provide a business update and discuss recent and upcoming milestones.

    To access the conference call, U.S.-based listeners should dial (888) 563-6275 and international listeners should dial (706) 634-7417. All listeners should provide the following passcode: 82860672. Individuals interested in listening to the live conference call via the Internet may do so by logging on to the Company’s website at www.dermasciences.com.

    Following the conclusion of the conference call, a replay will be available through August 13, 2014 and can be accessed by dialing (855) 859-2056 from within the U.S. or (404) 537-3406 from outside the U.S. All listeners should provide passcode 82860672. The webcast will be available for 30 days.

    About Derma Sciences, Inc.

    Derma Sciences is a tissue regeneration company focused on advanced wound and burn care. It offers a line of products with patented technologies to help better manage chronic and hard-to-heal wounds, many of which result from diabetes and poor vascular functioning. The company recently entered the $500 million market for skin substitute products with its licensing of AMNIOEXCEL® and AMNIOMATRIX® in the first quarter of 2014. AMNIOEXCEL® has been launched to customers and the Veterans Administration recently has included the product in its Federal Supply Schedule V797P-2000D. Derma Sciences’ MEDIHONEY® product is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown in clinical studies to be effective in a variety of indications. TCC-EZ® is its gold-standard total contact casting system for diabetic foot ulcers. Other novel products introduced into the $14 billion global wound care market include XTRASORB® for better management of wound exudate, and BIOGUARD® for barrier protection against microbes and other contaminants. Its pharmaceutical wound care products include DSC127, which is currently in Phase 3 clinical trials for the healing of diabetic foot ulcers. The drug candidate is also part of a BARDA grant program for the healing/prevention of tissue damage due to ionizing radiation exposure. The patented API peptide used in DSC127 is also in preclinical testing for scar prevention/reduction. The company also offers a full product line of traditional dressings.

    For more information please visit www.dermasciences.com.

    Forward-Looking Statements

    Statements contained in this news release that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" are intended to identify forward-looking statements. Readers are cautioned that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements that may be made in this news release or that are otherwise made by or on behalf of the Company. Factors that may affect the Company's results include, but are not limited to development and commercialization of DSC127, product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, the success or failure of negotiations and trade, legal, social and economic risks. Additional factors that could cause or contribute to differences between the Company's actual results and forward-looking statements include but are not limited to, those discussed in the Company's filings with the U.S. Securities and Exchange Commission.

     
    DERMA SCIENCES, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
    (UNAUDITED)
     
          Three Months Ended
    June 30,
            2014     2013

    Net Sales

    $ 20,916,225     $ 18,148,061
    Cost of sales         13,071,408         11,473,900  
    Gross Profit         7,844,817         6,674,161  
    Operating Expenses
    Selling, general and administrative 12,631,590 10,823,370
    Research and development         4,365,267         3,242,599  
    Total operating expenses         16,996,857         14,065,969  
    Operating loss (9,152,040 ) (7,391,808 )
    Other income, net         (233,050 )       (16,733 )
    Loss before income taxes (8,918,990 ) (7,375,075 )
    Income tax benefit         (232,188 )       (30,402 )

    Net Loss

            (8,686,802 )       (7,344,673 )
    Other Comprehensive Income (Loss)
    Foreign currency translation adjustment 117,750 (169,419 )
    Unrealized gain on equity securities, net of taxes         862,685         -  
    Total other comprehensive income (loss)         980,435         (169,419 )

    Comprehensive Loss

          $ (7,706,367 )     $ (7,514,092 )
    Net loss per common share - basic and diluted       $ (0.34 )     $ (0.43 )
    Shares used in computing net loss per common share – basic and diluted         25,199,805         17,068,854  
     
     
                   
    Six Months Ended
    June 30,
            2014     2013

    Net Sales

    $ 40,703,258 $ 36,937,807
    Cost of sales         25,946,117         23,559,181  
    Gross Profit         14,757,141         13,378,626  

    Operating Expenses

    Selling, general and administrative 25,681,143 20,676,455
    Research and development         8,548,868         6,235,765  
    Total operating expenses         34,230,011         26,912,220  
    Operating loss (19,472,870 ) (13,533,594 )
    Other (income) expense, net         (272,300 )       72,072  
    Loss before income taxes (19,200,570 ) (13,605,666 )
    Income tax benefit         (243,753 )       (16,214 )

    Net Loss

            (18,956,817 )       (13,589,452 )
    Other Comprehensive Income (Loss)
    Foreign currency translation adjustment (84,862 ) (219,100 )
    Unrealized gain on equity securities, net of taxes         486,010         -  
    Total other comprehensive income (loss)         401,148         (219,100 )
    Comprehensive Loss       $ (18,555,669 )     $ (13,808,552 )
    Net loss per common share - basic and diluted       $ (0.79 )     $ (0.81 )
    Shares used in computing net loss per common share – basic and diluted         23,889,487         16,832,578  
     
     
     
    DERMA SCIENCES, INC. AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    (UNAUDITED)
                   
    June 30,December 31,
    20142013

    ASSETS

                 
    Current Assets
    Cash and cash equivalents $ 57,089,886 $ 6,501,586
    Short-term investments 31,493,000 15,478,000
    Accounts receivable, net 7,860,975 7,332,756
    Inventories 17,599,680 16,472,640
    Prepaid expenses and other current assets         3,065,618         3,746,753  
    Total current assets 117,109,159 49,531,735
    Long-term investments 7,565,683 7,858,140
    Equipment and improvements, net 3,231,956 2,953,469
    Identifiable intangible assets, net 14,534,750 14,635,998
    Goodwill 13,457,693 13,457,693
    Other assets         147,310         139,318  

    Total Assets

          $156,046,551       $88,576,353  

    LIABILITIES AND STOCKHOLDERS’ EQUITY

                 
    Current Liabilities
    Accounts payable $ 4,625,433 $ 4,522,508
    Accrued expenses and other current liabilities         4,493,913         4,969,225  
    Total current liabilities 9,119,346 9,491,733
    Long-term liabilities 232,977 242,325
    Deferred tax liability         1,735,859         1,694,147  
    Total Liabilities         11,088,182         11,428,205  
    Stockholders’ Equity
    Convertible preferred stock, $.01 par value; shares authorized 1,468,750;
    issued and outstanding 73,332 at June 30, 2014 and
    December 31, 2013 (liquidation preference of
    $3,222,368 at June 30, 2014) 733 733
    Common stock, $.01 par value; shares authorized 50,000,000;
    issued and outstanding 25,236,582 at June 30, 2014 and
    17,347,071 at December 31, 2013 252,366 173,471
    Additional paid-in capital 226,351,602 140,064,607
    Accumulated other comprehensive income 1,481,296 1,080,148
    Accumulated deficit         (83,127,628 )       (64,170,811 )
    Total Stockholders’ Equity         144,958,369         77,148,148  

    Total Liabilities and Stockholders’ Equity

          $156,046,551       $88,576,353  
     





    Derma Sciences, Inc.

    John Yetter, 609-514-4744

    Chief Financial Officer

    jyetter@dermasciences.com

    or

    Investors

    LHA

    Kim Sutton Golodetz, 212-838-3777

    kgolodetz@lhai.com

    or

    Bruce Voss, 310-691-7100

    bvoss@lhai.com

    or

    Media

    Spectrum Science Communications

    Leticia Diaz, 202-955-6222

    ldiaz@spectrumscience.com


    Source: Derma Sciences Inc.


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