Derma Sciences first quarter net sales increase 6% to $15.3 million

May 15 2012

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 months ended March 31, 2012. Highlights of the first quarter of 2012 and recent weeks include:    

Net sales were $15.3 million, up 6% over the prior-year first quarter

• Advanced wound care product sales were $4.5 million, up 25% over the prior-year quarter
• Advanced wound care products accounted for 29% of net sales, up from 25% of net sales a year ago, led by 38% growth in MEDIHONEY sales
• Traditional wound care product sales were $10.8 million, in line with the prior-year quarter
• Gross margin was 32%, up approximately 100 basis points from the first quarter of 2011
• Net loss was $2.5 million or $0.24 per share, compared with $0.5 million or $0.08 per share in the prior-year quarter, reflecting higher sales and marketing costs associated with advanced wound care growth initiatives, acquisition costs and higher research and development expense
• Completed expansion of U.S. advanced wound care sales force during the quarter; the U.S. sales organization now stands at 50
• Held a successful meeting with the U.S. Food and Drug Administration (FDA) regarding further development of DSC127; made continued progress towards initiation of Phase 3 clinical trials with DSC127 during 2012
• Hired Vice President, Clinical and Product Development to guide DSC127 development program
• Closed on the acquisition of MedEfficiency, further strengthening the Company's proprietary advanced wound care product line
• Raised net proceeds of $17.8 million at market via an equity offering to fund the advanced wound care and pharmaceutical products growth strategy

Management Commentary

"The past few months have been a period of rapid growth in our infrastructure as we built out and expanded our sales resources, added support staff and completed a significant acquisition," said Edward J. Quilty, chief executive officer of Derma Sciences. "Year-over-year growth in advanced and traditional wound care products was in line with our stated growth objectives and growth compared with the fourth quarter of 2011 was consistent with our expectations. We expect to meet our overall sales growth objectives for the full year."

Mr. Quilty added, "Our traditional wound care products performed as expected during the first quarter. Although gross margins in this segment of our business are lower than those of the advanced wound care business, these products provide positive cash flow that we use to support our advanced wound care growth initiatives. Our objective with this business segment is to maintain it and grow it modestly as circumstances dictate."

"We completed our acquisition of MedEfficiency last month and are in the midst of the integration process. The TCC-EZ product is an important component of our strategy to be the leading supplier of products for the treatment of chronic wounds in general and diabetic foot ulcers in particular. To date, we have integrated the former head of the MedEfficiency sales team and four of its direct sales representatives into our U.S. advanced wound care sales team. All members of the Derma Sciences sales team have been trained on the MedEfficiency product line and are actively selling the products. Work on integrating the former MedEfficiency supply chain and administrative support resources into Derma Sciences is underway. We believe this acquisition represents a significant growth opportunity for Derma Sciences and that it will serve to accelerate the timeline to profitability of our business, excluding our Phase 3 R&D spending.

"As previously reported, we had a very constructive meeting with the FDA in February concerning our progress to date with DSC127. Our toxicology and Chemistry, Manufacturing and Control work started in the third quarter of 2011 and led by a number of seasoned consultants, continues on plan with significant progress being made on both fronts. During the first quarter we evaluated a number of firms and selected a Clinical Research Organization ("CRO") to oversee and conduct the Phase 3 clinical trials, along with a firm that will be responsible for the trials' data management and statistical evaluation of its results. We are presently finalizing contracts with these firms. Additionally, we are pleased to announce that George Omburo, Ph.D. has joined Derma Sciences as Vice President - Clinical and Product Development, a new position, to oversee and manage our DSC127 development program. Dr. Omburo has more than 13 years of clinical drug development experience with several large multi-national pharmaceutical companies. Hiring Dr. Omburo marks a significant step forward in the development of DSC127," he continued.

"Our next steps are to complete and submit packages to the FDA for our planned pharmacokinetic study, request and hold an End-of-Phase 2 meeting with the FDA and commence the Phase 3 trials by year end."

Financial Results

Net sales for the first quarter of 2012 were $15,277,366, compared with $14,371,271 for the first quarter of 2011, an increase of 6.3%. This reflects 25.4% growth in sales of advanced wound care products to $4,497,054 from $3,585,172 in the first quarter of 2011, and a 0.1% decline in sales of traditional wound care products to $10,780,312 from $10,786,099 in the same period last year. For the full year 2012, the Company expects advanced wound care product sales growth to be between 30% and 40%, and traditional wound care product sales growth to be approximately 2% to 4%.

Gross profit for the first quarter of 2012 increased 10.1% to $4,876,160, or 31.9% of net sales, from $4,428,382, or 30.8% of net sales, for the first quarter of 2011. The increase in gross margin reflects increased sales of higher-margin advanced wound care products, which accounted for 29.4% of net sales, compared with 25.0% of net sales in the same period last year, and flat lower-margined traditional wound care sales, partially offset by higher product costs.

Selling, general and administrative expense for the first quarter of 2012 was $6,359,090, compared with $4,738,019 for the first quarter of 2011. The increase was principally due to higher sales and marketing expenditures associated with advanced wound care growth initiatives.

Research and development expense for the first quarter of 2012 was $1,114,698, compared with $143,827 in the first quarter of 2011, reflecting higher expenses associated with the ramp-up of the DSC127 Phase 3 program. The Company expects research and development expense to be approximately $8.0 million to $10.0 million for the full year 2012.

The net loss for the first quarter of 2012 was $2,538,901 or $0.24 per share, compared with a net loss for the first quarter of 2011 of $547,032 or $0.08 per share. Incremental marketing and sales growth-related expenses, and higher compensation expense and research and development expenses were principally responsible for the larger net loss.

As of March 31, 2012, the Company had cash and cash equivalents of $15,680,749 and investments of $4,976,000, compared with cash and cash equivalents of $17,110,350 and investments of $5,474,000 as of December 31, 2011. Subsequent to the close of the quarter the Company raised net proceeds of $17,800,000 in an equity offering and acquired MedEfficiency, Inc. for $14,500,000 in cash. The Company expects transaction and transition costs associated with the acquisition to be approximately $1,775,000, of which $113,675 was recorded in the first quarter.