Derma Sciences net sales for third quarter 2010 increase 17% to $15,096,134

Nov 12 2010

Derma Sciences, Inc. (Nasdaq: DSCI), a medical device and pharmaceutical company focused on advanced wound care, today reported financial and operating results for the three and nine months ended September 30, 2010. Highlights of the third quarter of 2010 and recent weeks include:

“We are successfully leveraging our investments in sales, marketing and clinical support, as evidenced by the growth in our novel key brands”

• Net sales increased 17% to $15.1 million from $12.9 million in the third quarter of 2009
• Advanced wound care product sales increased 38% to $3.1 million from $2.3 million in the prior year third quarter and increased 19% from $2.6 million in the second quarter of 2010
• Core product sales (all other sales) increased 13% to $12.0 million from $10.6 million in the third quarter of 2009
• Gross margin declined to 29.3% in the third quarter of 2010 from 31.4% in the third quarter of 2009, due principally to higher manufacturing costs
• These cost issues, combined with incremental investment in sales, marketing and clinical support resulted in a net loss of $502,552, compared with net income of $139,603 in the prior year third quarter
• Patient enrollment was completed in the Phase II trial with DSC127 in diabetic wound healing
• Received a research and development grant of $244,479 from the U.S. government under HR: 3590 - Patient Protection and Affordable Care Act

Management Commentary

"We are successfully leveraging our investments in sales, marketing and clinical support, as evidenced by the growth in our novel key brands," said Edward J. Quilty, Chairman and Chief Executive Officer of Derma Sciences. "We had the first commercial sales of new product offerings in our XTRASORB line during the quarter. We made progress with our two 510(k) submissions to the U.S. Food and Drug Administration for new MEDIHONEY line extensions and are looking forward to bringing those products to market in the near future.

"We remain focused on cost containment in order to improve gross margins going forward. We have been challenged by a well publicized significant increase in the price of cotton to all time record levels. In addition, our margin continues to be adversely impacted by efficiency issues associated with the startup of manufacturing in Mexico. We expect these issues to be resolved by the end of the year. We have taken and will continue to take, steps to manage this and other cost measures impacting our business.

"We are making important inroads into our international sales growth initiative, following the opening of an office in the U.K. earlier this year. Our team is in place and is responsible for growing direct sales in the U.K. and managing the network of distributors throughout Europe and the Middle East. Our expectation is for international sales to become a significant part of our business in the coming years.

"We were very pleased to complete patient enrollment at the end of September in our Phase II trial with DSC127 in diabetic wound healing. We anticipate reporting top-line efficacy data between late December and mid January. Should the trial be successful, we are evaluating several options, including bringing on a partner. The recent award of $244,479 from the U.S. government under the Patient Protection and Affordable Care Act related to the development of DSC127, was welcome validation of our work," concluded Mr. Quilty.

Financial Results

Net sales for the third quarter of 2010 increased 17% to $15,096,134, compared with $12,882,425 in the third quarter of 2009. Gross profit increased 9.5% to $4,429,930 in the third quarter of 2010, compared with the same period in 2009. Selling, general and administrative expense was $4,690,054 in the third quarter of 2010, compared with $3,677,182 in the prior year quarter. The year-over-year increase was mainly attributable to the incremental selling expense associated with the planned expansion of the U.S. sales force and incremental international expenses. Higher G&A expense comprised of incremental amortization, legal and investor relations costs, also contributed. The net loss for the third quarter of 2010 was $502,552 or $0.08 per share, compared with net income of $139,603 or $0.03 per share in the third quarter of 2009.

Net sales for the nine months ended September 30, 2010 were $41,170,621, up 18% compared with net sales of $34,877,658 for the same period in 2009. Gross profit was $12,483,233 or 30.3% of sales, compared with gross profit of $10,825,674 or 31.0% of sales in the nine months ended September 30, 2009. The net loss in the first nine months of 2010 was $1,970,310 or $0.31 per share, compared with a net loss of $1,178,978 or $0.23 per share in the first nine months of 2009.

As of September 30, 2010, working capital was $9,587,806, and cash and cash equivalents were $409,505. Line of credit borrowing was $3,658,625 at quarter end with approximately $1,200,000 of additional availability.