Derma Sciences third quarter 2013 net sales increase 12% to $22.1 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 nine months ended September 30, 2013. Highlights of the third quarter of 2013 and recent weeks include:

• Advanced wound care (AWC) product sales of $9.1 million, up 33% over the prior-year third quarter
• AWC products represented 41% of total net sales, compared with 35% of total net sales in the third quarter of 2012
• Traditional wound care (TWC) product sales of $13.0 million, up 1% from the prior-year third quarter
• Net sales of $22.1 million, up 12% over the prior-year third quarter
• Gross margin of 36.4%, up 1.2 percentage points from the third quarter of 2012
• Net loss of $4.9 million, or $0.29 per share, compared with a net loss of $3.1 million, or $0.24 per share, in the prior-year third quarter
• Equity investment in Comvita Ltd. of $7.0 million to allow for better control of honey supply, processing and costs
• Shipped $1.0 million initial stocking order for over the counter (OTC) MEDIHONEY® and XTRASORB® products to a large U.S. retail pharmacy chain

Management Commentary

"Our third quarter results reflect our continued success with the strategy we put in place several years ago to focus on the AWC segment of the market by expanding our innovative product offering and building out our sales infrastructure," said Edward J. Quilty, chairman and chief executive officer of Derma Sciences. "Net sales during the quarter were up 12%, with gains in AWC product sales within our stated expectations for 30% to 40% annual organic growth driven by our flagship AWC products MEDIHONEY and TCC-EZ®. Our momentum was also evident on a sequential-quarter basis, with net sales up 22% and AWC sales up 15%."

Mr. Quilty added, "The global demand for medical-grade honey has been increasing rapidly, and during the quarter we made a $7.0 million equity investment in our partner Comvita to assist them with their purchase of additional apiaries and upgrade and expand their Manuka honey processing capabilities. These steps will help serve to improve the reliability of supply and better control the cost of the medical-grade honey we require for our MEDIHONEY line of products.

"During the quarter we shipped a large stocking order of private-label OTC MEDIHONEY and XTRASORB dressings to a leading U.S. retail pharmacy chain, offsetting lower sales in Canada, which contributed to TWC sales growth of 1% over the prior year. TWC sales in Canada, which were soft in recent quarters due in part to our exclusive distributor rebalancing its inventory, were up 56% over the second quarter of this year, which with the stocking order, contributed to a 27% increase over the second quarter of 2013. We continue to expect sales of our TWC products to be flat to up 2% for the full year."

Mr. Quilty continued, "Regarding our Phase 3 trials with DSC127 for the treatment of diabetic foot ulcers, we now have 81 sites activated and screening patients. Management is focused on fully enrolling this trial and is pursuing all available options toward that objective. Adding a firm that specializes in assisting with patient enrollment has been considered for some time and we have decided to implement that program and have selected a vendor. We expect this portion of the program to be fully up and running in January and are confident it will benefit our enrollment rate.

"As we have related in the past, all current sites were planned for the U.S. and Canada. After thorough evaluation of capabilities, including the global expertise of the contract research organization we are working with, we are now planning to open several sites in the Republic of South Africa and possibly other targeted geographies, which we believe will also help enrollment. Due to the results of our pharmacokinetic study we are in the process of submitting waivers to the U.S. Food and Drug Administration (FDA), which we hope will allow us to cut out certain safety studies that would only be relevant if there were systemic exposure to the drug. Our current estimates for cost of the program up to the point of New Drug Application submission are between $45 and $55 million and for data readout to be in the third quarter of 2015. Our intention is to provide an update on patient enrollment when we reach the halfway point in the two trials," Mr. Quilty added.

"DSC127 represents an important drug with peak sales estimates at $900 million globally should the drug be approved we expect it to be one of our key products directed to the diabetic foot ulcer space, which suffers from lack of a first-rate drug to treat this disease. We will not jeopardize the potential approval of our product by focusing on enrollment rates at the expense of not adhering to what we believe are critical aspects of our protocol," Mr. Quilty concluded.

Financial Results

Net sales for the third quarter of 2013 were $22.1 million, up 12% from $19.6 million for the third quarter of 2012. This included AWC product sales of $9.1 million, up 33% from $6.8 million in the prior-year quarter, and TWC product sales of $13.0 million, up 1% from $12.8 million in the prior year. TWC results benefited from substantial increases in sales of private-label and first-aid products, with a large stocking order from a retail pharmacy chain offsetting lower sales in Canada.

Gross profit for the third quarter of 2013 was $8.0 million, or 36.4% of net sales, compared with gross profit for the third quarter of 2012 of $6.9 million, or 35.2% of net sales. Gross margin expansion reflects increased sales of higher-margin AWC products, which accounted for 41% of net sales in the 2013 quarter compared with 35% of net sales in the 2012 quarter.

Selling, general and administrative expense for the third quarter of 2013 was $10.7 million, compared with $8.1 million for the third quarter of 2012. The increase was principally due to higher expenditures associated with AWC growth initiatives, together with higher stock-based compensation expense, TCC-related amortization expense and professional and legal service expenses.

Research and development expense for the third quarter of 2013 was $2.7 million, compared with $1.9 million in the third quarter of 2012, with the increase due to expenses associated with conducting the DSC127 Phase 3 program.

The net loss for the third quarter of 2013 was $4.9 million, or $0.29 per share, compared with a net loss for the third quarter of 2012 of $3.1 million, or $0.24 per share. The increase in net loss was principally due to higher research and development expense, higher stock-based compensation expense, higher legal costs and amortization of intangible assets, principally related to the TCC acquisition.

For the nine months ended September 30, 2013, net sales were $59.0 million, up 12% from $52.5 million in the prior-year period. The Company reported a net loss for the first nine months of 2013 of $18.5 million, or $1.09 per share, compared with a net loss for the first nine months of 2012 of $8.4 million, or $0.69 per share.

As of September 30, 2013, Derma Sciences had cash, cash equivalents and investments of $27.4 million (excluding the $7.9 million investment in Comvita common stock), compared with $45.8 million as of December 31, 2012.