Derma Sciences' net sales increase 3% to $20.7 million in fourth quarter 2013

Derma Sciences, Inc. (the "Company") (Nasdaq:DSCI), a tissue regeneration and burn care company focused on advanced wound care, today reported financial and operating results for the three months and year ended December 31, 2013. Highlights of the fourth quarter of 2013 and recent weeks include:

• Expanded the Advanced Wound Care (AWC) product line and entered the $500 million skin substitute market by licensing the AMNIO family of placental-derived tissue products
• Decision made to increase sales and marketing resources in the first quarter of 2014 to support AWC sales growth
• Received net proceeds of $80.7 million from an underwritten equity offering
• Met with Biomedical Advanced Research and Development Authority (BARDA) to discuss next steps for the grant program providing funding towards the development of DSC127 as a treatment for ionizing radiation exposure
• All sites in South Africa have been selected for the Phase 3 clinical trial with DSC127 for diabetic foot ulcer healing, with initial patient screening to begin in the first quarter of 2014
• AWC product sales were up 22.5% over the fourth quarter of 2012
• AWC products represented 45.6% of net sales, up from 38.3% of net sales in the fourth quarter of 2012
• Traditional Wound Care (TWC) product sales were $11.3 million, compared with $12.4 million in the prior-year fourth quarter
• Net sales were $20.7 million, up 3% over the prior-year fourth quarter
• Gross margin was 38.6%, up 3 percentage points from the fourth quarter of 2012
• Net loss was $5.4 million, or $0.31 per share, compared with a net loss of $3.7 million, or $0.27 per share, in the prior-year fourth quarter
• Record net sales for the year were $79.7 million, up 9.7% over 2012

Management Commentary

"I am very proud of our many achievements during 2013 in pursuit of our goal of becoming a leading advanced wound care company in the U.S., with a particular focus on the treatment of chronic wounds," said Edward J. Quilty, chairman and chief executive officer of Derma Sciences. "We have meaningfully added to our proprietary, high-margin product portfolio while expanding our sales and marketing infrastructure and increasing our customer base. We have a proven ability to grow sales of these products, and I note that in the fourth quarter sales of MEDIHONEY® products were up more than 29% over the prior year fourth quarter, while sales of TCC-EZ® products, which we acquired in April of 2012, increased nearly 36%. Our expanding sales and marketing organization is energized and excited to begin selling our expanded line of products.

"We accelerated the commercialization process for our two new placental-derived products AMNIOMATRIX® and AMNIOEXCEL®, and have begun to introduce them to customers. We recently hired a director of reimbursement and have begun the process of securing Medicare coverage through the nation's eight Medicare Administrative Contractors, or MACs. Our products will be covered by Novitas Solutions, which is responsible for 11 states and the District of Columbia. Additionally, Palmetto GBA does not have a separate coverage policy for skin substitutes, so we will also introduce the products into the four states managed by this contractor. Relative to the geographic distribution of our TCC-EZ business, these 15 states and Washington, D.C. account for around 40%. This is key, as we see great synergy between these parts of our business. We believe this will allow us to have a rapid start in capturing a share of the $500 million skin substitute market. The AMNIO products have higher gross margins, and we expect a positive return on our investment next year," Mr. Quilty added.

Barry Wolfenson, the Company's group president, advanced wound care and pharmaceutical development commented, "We continue to enroll patients and qualify sites in our Phase 3 clinical trials with DSC127 for diabetic foot ulcers. We have initiated all sites in South Africa and most of the sites will begin screening patients next week. In addition, we have begun a direct-to-consumer media campaign to support enrollment here in the U.S. We expect trial enrollment to be completed in mid-2015 with top-line data readout early in 2016. We are continuing preclinical work with DSC127 on scar reduction, while working with BARDA to begin further studies with DSC127 to prevent/treat dermal burns resulting from exposure to radiation in the event of a nuclear attack. Pending further analysis of the work done thus far, we will also consider a program directly focused on the prevention/treatment of radiation dermatitis. DSC127 represents a platform technology with a potential market of well over $1 billion, with the U.S. diabetic foot ulcer market alone exceeding $300 million," Mr. Wolfenson concluded.

Mr. Quilty continued, "While TWC sales were down in the fourth quarter in line with expectations, the segment continues to provide positive cash flow. The sales decline was attributable to the previously mentioned lost business in Canada and lower U.S. sales due principally to timing and new customer delivery delays," Mr. Quilty added.

Financial Guidance

Derma Sciences affirms guidance for 2014 revenues to be approximately $92 million and organic sales growth of AWC products to be in excess of 30%. TWC revenues are expected to grow 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 (NDA) with the U.S. Food and Drug Administration (FDA) will be approximately $55 million to $60 million.

"We are expecting first quarter revenues to be largely consistent with fourth quarter revenues due primarily to two factors," commented Mr. Quilty. "First, the inclement weather in much of the country negatively impacted sales as patient visits to wound care clinics were down. In addition, realigning sales territories as we continue to add sales representatives is temporarily impacting growth. We welcomed 14 new U.S. salespeople since the end of the fourth quarter, and we are in the process of adding more as we take advantage of the current disruption in the skin substitute market. We now have 84 people in our sales organization domestically and 10 in our international organization, including Canada. We also plan to add more specialists to support our AMNIO products as we roll them out. Importantly, our current cash and equivalents and investments are approximately $100 million, which is more than adequate to fund our planned development and growth initiatives," Mr. Quilty concluded.

Financial Results

Net sales for the fourth quarter of 2013 were $20.7 million, up 3% from $20.1 million for the fourth quarter of 2012. This included AWC product sales of $9.4 million, up 22.5% from $7.7 million in the prior-year quarter, and TWC product sales of $11.3 million, down 9.3% from $12.4 million in the prior year. TWC results were negatively impacted by lower sales in the U.S. due to timing and a delay in delivery to new private label customers and Canada due to lost sales.

Gross profit for the fourth quarter of 2013 was $8.0 million, or 38.6% of net sales, compared with gross profit for the fourth quarter of 2012 of $7.2 million, or 35.6% of net sales. Gross margin expansion reflects increased sales of higher-margin AWC products, which accounted for 45.6% of net sales in the 2013 quarter compared with 38.3% of net sales in the 2012 quarter.

Selling, general and administrative expense for the fourth quarter of 2013 was $10.6 million, compared with $8.8 million for the fourth quarter of 2012. The increase was principally due to higher expenditures associated with AWC growth initiatives including the hiring of additional personnel.

Research and development expense for the fourth quarter of 2013 was $2.4 million, compared with $2.6 million in the fourth quarter of 2012. Research and development expenses for both years are associated with conducting the DSC127 Phase 3 program.

The net loss for the fourth quarter of 2013 was $5.4 million, or $0.31 per share, compared with a net loss for the fourth quarter of 2012 of $3.7 million, or $0.27 per share. The increase in net loss was principally due to higher growth related selling, general and administrative expenses including higher stock-based compensation and legal expenses and taxes.

For the year ended December 31, 2013, net sales were $79.7 million, up 9.7% over $72.6 million in net sales for the year ended December 31, 2012. The Company reported a net loss for 2013 of $24.0 million, or $1.40 per share, compared with a net loss for 2012 of $12.1 million, or $0.97 per share.

As of December 31, 2013, Derma Sciences had cash, cash equivalents and investments of $23.0 million (excluding a $6.9 million investment in Comvita common stock held as a long-term investment), compared with $45.8 million as of December 31, 2012. Subsequent to the close of the quarter the Company raised approximately $80.7 million in net proceeds from an underwritten offering of 7.5 million shares of common stock.