Derma Sciences fourth quarter total sales increase 12% to record $15.3 million

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 12 months ended December 31, 2010. Highlights of the fourth quarter of 2010 and recent weeks include:

“We significantly bolstered our position in the high-margin advanced wound care market segment during the year”

• Reported positive top-line results from its Phase 2 trial with DSC127 for treating diabetic foot ulcers, including meeting the trial's primary endpoint of complete healing by 12 weeks and all secondary endpoints measured at the time
• The last patient completed the durability portion of the Phase 2 study; full 24-week healing and durability data expected to be announced in June
• Received 510(k) clearance for MEDIHONEY® Gel
• Advanced wound care product sales for the quarter of $3.6 million increased 59% from the prior year fourth quarter and increased 17% from the third quarter of 2010
• Core product sales for the quarter of $11.7 million rose 3% from the fourth quarter of 2009
• Total sales were a record $15.3 million, up 12% over the prior year's fourth quarter

Management Commentary

"We significantly bolstered our position in the high-margin advanced wound care market segment during the year," commented Edward J. Quilty, chairman and chief executive officer of the company. "We licensed full global rights to MEDIHONEY and worked to develop and market line extensions such as MEDIHONEY Gel, along with the new products in our XTRASORB® and BIOGUARD® lines. New products and line extensions, aided by the investment of several million dollars during the past year in our 20-person U.S.-based sales force, in addition to the investment in our U.K.-based operations, and in ongoing marketing and clinical support, contributed to a 59% increase in sales of advanced wound care products over the prior year fourth quarter. Sales of advanced wound care products are now 24% of total company sales, up from 17% in the fourth quarter of 2009."

Mr. Quilty continued, "Our basic wound care business remains solid, with a 3% increase in sales for the quarter over the prior year. However, our gross margin continued to be impacted by record-high cotton prices and other cost of goods, including transportation and obsolescence. We have responded by passing along some of these higher costs to our customers, while remaining price competitive in the market. In addition, sales of our first aid products during the quarter reflect the typical seasonal slowdown during the winter months."

Commenting on international sales, which began in 2010, Mr. Quilty said, "Our international sales were $546,000 in the fourth quarter, up approximately 61% from the preceding quarter. Sales are increasing due to initial sales into the Middle East and continued growth in key European markets. We have been adding to our distributor coverage with new countries in the EU and the Middle East, and we are making our first inroads into Asia and certain larger South American countries. Our XTRASORB products received CE Marks in February of this year, and we look to have an expanded line of products including XTRASORB and ALGICELL®Ag in the EU in the third quarter of this year.

"Our activities throughout the year and in recent weeks have been transformative for Derma Sciences, highlighted by highly favorable results from the DSC127 Phase 2 trial in diabetic foot ulcer healing. In the intent-to-treat population, by 12 weeks 54% of wounds treated with the 0.03% dose of DSC127 achieved 100% closure, compared with 33% of wounds treated with placebo. In the per-protocol population, results were even more impressive with 65% of wounds treated with the 0.03% dose achieving 100% closure in 12 weeks or less, compared with 38% of wounds treated with placebo.

"The last patients completed a further 12 weeks of follow up just this week, which examines healing rates within the full 24-week time frame along with the durability of the healed wounds. We expect to report the complete 24-week dataset from this trial in June and to submit our report to the U.S. Food and Drug Administration by the end of the third quarter. Developing next steps to advance this drug into a Phase 3 registration trial is a key priority for Derma Sciences. We look forward to multiple value-creating events with DSC127 in the months ahead," Mr. Quilty concluded.

Financial Results

Net sales for the fourth quarter of 2010 were $15,303,435, compared with $13,648,500 in the fourth quarter of 2009. Gross profit increased 2% to $4,307,124 or 28.1% of sales in the quarter, compared with $4,232,044 or 31.0% of sales in the prior year quarter. Gross profit was adversely impacted by higher product, obsolescence and transportation costs. Total operating expenses were $4,442,478 compared with $4,002,106 in the fourth quarter of 2009 due to increased investment in sales and marketing, partially offset by receipt of a $245,479 research and development grant. The net loss for the fourth quarter of 2010 was $347,198 compared with net income of $843 last year.

Net sales for 2010 were $56,474,056, up 16% compared with net sales for 2009 of $48,526,158. Gross profit was $16,527,332 or 29.3% of sales in 2010, compared with gross profit of $15,057,718 or 31.0% of sales in 2009. The net loss for 2010 was $2,448,864 or $0.39 per share, compared with a net loss for 2009 of $1,282,725 or $0.25 per share.

As of December 31, 2010, working capital was $9,943,929, and cash and cash equivalents were $404,216. Line of credit borrowing was $3,075,555 at year end with approximately $800,000 of additional availability at that time.