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, 2011. Highlights of the first quarter of 2011 and recent weeks include:
  • Net cash generated from operations was $1.1 million
  • Working capital increased $663,127 to $10,607,056 as of March 31, 2011 from $9,943,929 as of December 31, 2010
  • Advanced wound care product net sales for the quarter of $3.6 million increased 57% from the prior year first quarter with MEDIHONEY® net sales up 104%
  • Advanced wound care sales accounted for 25% of total sales, compared with 18% of total sales a year ago
  • Core product sales for the quarter of $10.8 million rose 2% from the first quarter of 2010
  • Total sales were $14.4 million, up 12% over the prior year’s first quarter
  • Completed the DSC127 Phase 2 trial and began to analyze the 24-week data set for treating diabetic foot ulcers following excellent top-line 12-week healing results
  • Initiated conversations with potential out-licensing partners for DSC127

Management Commentary

“Our strong first quarter financial results reflect investment in our strategy to become a significant provider of higher-margined advanced wound care products,” commented Edward J. Quilty, chairman and chief executive officer of Derma Sciences. “Our United States (U.S.) based sales force of 20 representatives is twice the number we had a year ago, and they, along with our expanding global efforts, have done an exceptional job in more than doubling our sales of the MEDIHONEY® line while achieving rapid growth in our XTRASORB® and BIOGUARD® lines. Sales of advanced wound care products, which increased 57% in the quarter, now represent 25% of our total net sales, compared with 18% a year ago. The demand for our advanced wound care products is substantial and growing rapidly, and our goal of becoming a key player in the advanced wound care market is beginning to be realized. With regard to the continuation of our growth, we intend to gain market share through new products, line extensions and through additions to our sales organization to provide better coverage.”

Speaking specifically about sales outside the U.S., Mr. Quilty commented, “Our international sales have grown nicely since we began selling overseas in the first quarter of last year. Building upon the United Kingdom office we opened in May 2010, we brought on new distributors in additional countries within the European Union and Middle East, and we are starting to see sales growth related to this expansion. We also recently signed new exclusive distributor agreements providing coverage in South Korea, Australia, and key countries within Latin America. We expect accelerating growth outside the U.S. as we launch ALGICELL Ag® and our XTRASORB line of products in the third quarter of this year.

“Our core wound care business remains a solid source of cash flow, with a 2% increase in sales for the quarter over the prior year. Although gross margins were down slightly due to product mix and higher product costs, we have mitigated the impact through improved inventory management and manufacturing efficiencies. As a result of this performance, we were able to pay down our line of credit $0.7 million to $2.4 million during the quarter and improve our liquidity.”

“We are looking forward to reporting 24-week top-line results of our Phase 2 clinical trial with DSC127 in diabetic foot ulcer healing within the next 30 days. We reported 12-week data in February, and as we announced then, the topline efficacy results beat our expectations with a 21% improvement in the intent to treat arm and a 27% improvement in the per protocol arm versus control. The 24-week data will examine the durability of the closed wounds and will further measure healing rates between the treated and placebo groups for those patients not completely healed at 12 weeks. We expect to announce the expanded 24-week results from this trial within the next 30 days and to submit our report to the U.S. Food and Drug Administration by the end of the third quarter. Should the spread in healing between the treated and placebo groups continue to widen, we believe that this would further distinguish the strong results of the study and would bode well for the utility of the drug.”

“In addition to planning the design of a Phase 3 pivotal trial, we are reviewing options for trial funding,” continued Mr. Quilty. “We recently filed a Form S-3 Shelf Registration Statement with the Securities and Exchange Commission. This gives us an additional layer of flexibility as we go about exploring other options for funding a trial. For example, we are in active discussions with potential partners for the rights to DSC127 outside the U.S. We are also reviewing the strategic implications of securing a U.S. partner, and looking at monetizing some of our core product lines. Any funding decision we make will be in the best interests of shareholders with a view toward both near and long-term value creation. We believe that given the potential demand for a pharmaceutical product in diabetic foot ulcer healing that could approach $900 million in annual global sales, developing DSC127 is a significant priority not only for Derma Sciences shareholders, but for the growing patient population in dire need of an efficacious treatment,” Mr. Quilty concluded.

Financial Results

Net sales for the first quarter of 2011 were $14,371,271, compared with $12,844,382 in the first quarter of 2010. Gross profit increased 11% to $4,428,382, or 30.8% of sales in the quarter, compared with $3,989,900, or 31.1% of sales in the first quarter of 2010. The lower gross margin percent reflects an increase in sales of lower-margin core products, unfavorable core sales mix towards lower-margin products and higher product costs, partially offset by the benefit of increasing sales of higher-margin advanced wound care products.

Operating expenses were $4,881,846, compared with $4,303,852 in the first quarter of 2010, with the increase due to investment in sales and marketing associated with the expansion of the advanced wound care sales force. The net loss for the first quarter of 2011 was $547,032, or $0.08 per share, compared with a net loss of $578,689, or $0.10 per share in the prior year’s first quarter.

Working capital increased $663,127 to $10,607,056 as of March 31, 2011, from $9,943,929 as of December 31, 2010. This increase reflects positive cash flow from operations together with the funds received from warrant and stock option exercises during the quarter. With cash on hand of $827,253, together with available borrowing under our line of credit of $1,652,848, the Company had $2,480,101 of available liquidity as of March 31, 2011, versus $1,203,417 as of December 31, 2010.

Conference Call and Webcast

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

To access the conference call, from the U.S. please dial (888) 563-6275 and from outside the U.S. please dial (706) 634-7417. All listeners should provide the following passcode: 65322401. Individuals interested in listening to the live conference call via the Internet may do so by logging on to the Company’s website, www.dermasciences.com.

Following the end of the conference call, a telephone replay will be available through May 18, 2011, and can be accessed by dialing (800) 642-1687 from the U.S. or (706) 645-9291 from outside of the U.S. All listeners should provide the following passcode: 65322401. The webcast will be available for 30 days.

About Derma Sciences

Derma Sciences is a medical technology company focused on three segments of the wound care marketplace: pharmaceutical wound care products, advanced wound care dressings and traditional dressings. Derma Sciences has successfully completed the treatment phase of a Phase 2 clinical trial in diabetic foot ulcer healing with DSC127, a novel pharmaceutical drug under development for accelerated wound healing and scar reduction. Its MEDIHONEY product is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown to be effective in a variety of indications, and was the focus of a positive large-scale, randomized controlled trial involving 108 subjects with leg ulcers. Other novel products introduced into the $14 billion global wound care market include XTRASORB for better management of wound exudate, and BIOGUARD for infection prevention.

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, product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, commercialization or technological difficulties, 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 OPERATIONS
 
Three Months Ended

March 31, (unaudited)
      2011     2010
Net Sales $ 14,371,271     $ 12,844,382
Cost of sales       9,942,889       8,854,482
Gross Profit       4,428,382       3,989,900
Operating Expenses    
Selling, general and administrative   4,738,019   4,187,745
Research and development       143,827       116,107
Total operating expenses       4,881,846       4,303,852
Operating loss       (453,464)       (313,952)
Other expense, net:    
Interest expense   93,629   159,892
Loss on debt extinguishment

-
  114,072
Other income, net       (73,429)       (109,506)
Total other expense       20,200       164,458
Loss before income taxes   (473,664)   (478,410)
Income taxes       73,368       100,279
Net Loss     $ (547,032)     $ (578,689)

Net loss per common share - basic and diluted
    $ (0.08)     $ (0.10)

Shares used in computing net loss per common share –

basic and diluted
      6,634,187       5,647,175
   
 

DERMA SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 

 

ASSETS
   

March 31,

2011

(Unaudited)

December 31,

2010

(Unaudited)
Current Assets      
Cash and cash equivalents $ 827,253 $ 404,216
Accounts receivable, net   5,417,200   5,441,511
Inventories   11,052,842   12,498,519
Prepaid expenses and other current assets       2,174,522       609,164
Total current assets   19,471,817   18,953,410
Equipment and improvements, net   3,811,954   3,608,242
Goodwill   7,119,726   7,119,726
Identifiable intangible assets, net   6,523,126   6,971,626
Other assets       292,260       316,859
Total Assets     $ 37,218,883     $ 36,969,863
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Current Liabilities    
Line of credit borrowings   2,374,998   3,075,555
Current maturities of long-term debt   -   5,851
Accounts payable   3,611,570   3,777,454
Accrued expenses and other current liabilities       2,878,193       2,150,621
Total current liabilities   8,864,761   9,009,481
Long-term liabilities   319,586   211,581
Deferred tax liability       1,096,598       1,068,088
Total Liabilities       10,280,945       10,289,150
Shareholders’ Equity    
Convertible preferred stock, $.01 par value; 1,468,750 shares
authorized; issued and outstanding: 284,844 shares
(liquidation preference of $4,201,426 at March 31, 2011)   2,848   2,848
Common stock, $.01 par value; 18,750,000 authorized; issued and
outstanding: 6,724,894 at March 31, 2011; 6,563,076 at
December 31, 2010   67,249   65,631
Additional paid-in capital   49,481,144   48,803,210
Accumulated other comprehensive income –
cumulative translation adjustments   1,729,645   1,604,940
Accumulated deficit       (24,342,948)       (23,795,916)
Total Shareholders’ Equity       26,937,938       26,680,713
Total Liabilities and Shareholders’ Equity     $ 37,218,883     $ 36,969,863

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