Derma Sciences (DSCI) Prelim. Q4, FY15 Sale Miss Views

Derma Sciences, Inc. (Nasdaq: DSCI), a tissue regeneration company focused on advanced wound and burn care, provides preliminary net sales for the year ended December 31, 2015, announces various actions to reduce operating expenses and introduces financial guidance for the year ending December 31, 2016.

For the year ended December 31, 2015:

• Preliminary fourth quarter 2015 net sales are $20.2 million, including $10.3 million in net sales of advanced wound care (AWC) products, a decline of 10.1% on a year-over-year basis, and $9.9 million in net sales of traditional wound care (TWC) products, a decline of 12.8% on a year-over-year basis. The decrease in AWC net sales was impacted by the reduction and realignment of the Company’s U.S. direct field sales force implemented during the quarter. The decrease in TWC net sales reflects the loss of a significant customer earlier in the year due to industry consolidation and unfavorable foreign currency exchange, partially offset by new retail business.
• Preliminary 2015 net sales are $84.5 million, up 1% compared with 2014 net sales of $83.7 million. Preliminary 2015 AWC net sales are $41.7 million, an increase of 9.5% compared with 2014, and preliminary 2015 TWC net sales are $42.7 million, a decline of 6.3% compared with 2014. The increase in AWC sales reflects strong growth from the TCC-EZ® and AMNIOEXCEL® products, partially offset by sales declines in the fourth quarter and lower MEDIHONEY® sales due principally to Medicare Part B reimbursement modifications. The decrease in TWC net sales reflects the same factors described above.

*** The Street sees Q4 sales of $23.8 million and FY15 sales of $88.1 million.

Actions resulting in reduced operating expenses:

• In December 2015 Derma Sciences began implementing various cost-savings initiatives and targeted expense cuts including a reorganization resulting in a 16% overall headcount reduction. These actions should result in total operating expenses excluding R&D expenses being approximately $10.0 million less in 2016 compared with 2015. This consists of reductions to G&A expenses of $4.0 million, to sales expenses of $3.5 million and to marketing expenses of $2.5 million.
• Primarily reflecting the termination of the aclerastide Phase 3 clinical program in the fourth quarter of 2015, Derma Sciences expects R&D expenses to be less than $0.1 million in 2016, compared with approximately $17.6 million in 2015.
• Estimated severance and separation charges of $1.2 million related to the workforce reduction will be recorded in the quarter ended December 31, 2015. In addition, estimated severance and separation charges of $1.5 million related to the departure of Derma Sciences’ chief executive officer in December 2015 will be recorded in the quarter ended December 31, 2015.

For the year ending December 31, 2016:

• Derma Sciences expects 2016 net sales to be approximately $89.1 million, representing growth of 5.4% compared with preliminary 2015 net sales of $84.5 million. Net sales of AWC products are expected to be $47.2 million in 2016, representing growth of 13% compared with preliminary 2015 AWC net sales of $41.7 million. Net sales of TWC products are expected to be $41.9 million in 2016, representing a decline of 2% compared with preliminary 2015 TWC net sales of $42.7 million.
• Net sales are expected to increase as the year progresses, but quarterly sales will be impacted by ordering patterns and by delivery dates, particularly in the TWC business.
• Cash burn for the first half of 2016 is expected to be approximately $7.5 million; the Company expects positive cash flow for the second half of 2016 of approximately $1.0 million.
• Financial guidance will be updated throughout the year, as warranted.

“The 2016 operations projection matches expenses to achievable sales growth, and reflects the Board’s and senior management’s previously announced commitment to sustainable, profitable growth and to reaching positive operating cash flow in the second half of the year,” said Stephen T. Wills, Interim Executive Chairman and Principal Executive Officer of Derma Sciences. “We exited 2015 with approximately $40 million in cash and approximately $16 million in marketable securities, thus putting us in a position to take advantage of non-organic growth opportunities that would allow us to leverage our sales and distribution infrastructure. The search for a successor CEO with the vision to build upon Derma Sciences’ strategy and take us forward into the next phase of development and growth is underway.”

“We reduced the size of our U.S. direct field sales force from 50 to 38 representatives, and while this reduction and realignment impacted fourth quarter results we are in a position to deliver on the projected 13% growth in our AWC business for 2016. We expect that this growth will again be led by double-digit gains in our core TCC-EZ®, AMNIOEXCEL® and MEDIHONEY® brands,” said Barry Wolfenson, Group President AWC. “Notably, in 2015 TCC-EZ® product sales grew by a robust 30% while sales of AMNIOEXCEL® increased more than six-fold, albeit off a small prior-year base. With regard to MEDIHONEY®, sales in 2015 were impacted by changes to Medicare Part B reimbursement, and we look forward to these products returning to double-digit growth in 2016.”

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