Derma Sciences Reports Second Quarter Financial Results

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 [phone] and international listeners should dial [phone]. 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 [phone] from within the U.S. or [phone] 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,
	2014			2013
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