Derma Sciences Reports First Quarter 2015 Financial Results

Advanced Wound Care product sales increase 17% over the prior year led by TCC-EZ®
AMNIOEXCEL® receives additional MAC coverage
Company affirms 2015 financial guidance

Conference call begins at 11:00 a.m. Eastern time today

PRINCETON, N.J.--(BUSINESS WIRE)-- Derma Sciences, Inc. (Nasdaq: DSCI), a tissue regeneration company focused on advanced wound and burn care, today reported financial and operating results for the three months ended March 31, 2015.

Highlights of the first quarter of 2015 and recent weeks include (unless otherwise stated, all comparisons are with the first quarter of 2014):

• Advanced Wound Care (AWC) net product sales increased 17.0% to $9.8 million, with growth led by sales of TCC-EZ®, AMNIOEXCEL® and AMNIOMATRIX® amniotic allografts and MEDIHONEY® products
• Traditional Wound Care (TWC) product sales declined 14.9% to $9.7 million, reflecting the loss of two distributor relationships, as previously announced, and a distributor inventory reduction strategy in Canada
• Total net sales declined 1.5% to $19.5 million
• Gross margin was 38.6% compared with 34.9%
• Novitas Solutions, Inc., the largest Medicare Administrative Contractor (MAC), published a favorable local coverage determination for bioengineered skin substitutes including AMNIOEXCEL® effective April 9, 2015
• Over 500 patients have been enrolled in the aclerastide (DSC127) Phase 3 program to date, and additional clinical trial sites outside the U.S. are being evaluated

Management Commentary

“Our commercial business is off to a strong start this year. We continue to believe in our strategy of investment in sales and marketing of our key AWC brands, leveraging our sales force investment through organic growth as well as introducing new products at the same point of call, and improving mix and gross profit. This will provide the best return for our shareholders and I am pleased that first quarter execution aligns with that strategy,” said Edward J. Quilty, Derma Sciences’ chairman and chief executive officer.

“In addition, despite a sharp year-over-year decline in TWC sales, we are confident that as we ramp up shipments to our new retail customers beginning in the second quarter, we will begin to offset private-label business lost as a result of industry consolidation. Our TWC strategy continues to be an appropriate level of sales and marketing investment to maintain a fairly predictable level of sales and cash flow from these businesses. We remain confident in our full-year guidance of $44.3 million for our TWC business in 2015.

“An increase in Centers for Medicare and Medicaid Services (CMS) reimbursement for TCC-EZ® went into effect on January 1st, and last December offloading consensus guidelines were published in the Journal of the American Podiatric Medical Association recommending total contact casting as the preferred method for off-loading diabetic plantar foot ulcers. Together these two developments helped fuel a 32% increase in TCC-EZ® sales in the quarter, as clinicians make total contact casting a first-line therapy for diabetic foot ulcers. We’re optimistic this trend will continue throughout the year.

“The ramp up of our AMNIOEXCEL® and AMNIOMATRIX® products is meeting our expectations. Novitas Solutions recently published a local coverage determination (LCD) that included coverage for our AMNIOEXCEL® amniotic allograft for treatment of chronic wounds of the lower extremity as of April 9th. Novitas is the largest of the country’s eight MACs, with responsibility for processing claims covering approximately 11.3 million Medicare beneficiaries. It is also responsible for issuing LCDs that specify which healthcare products and services are reimbursable through the Medicare Fee-for-Service program in its region, which includes 11 states and the District of Columbia. We now have LCD determinations from three of the eight MACs and more than 50% of our sales territories are operating under favorable LCD determinations.

“We are encouraged by the presentation at the Spring Symposium on Advanced Wound Care that highlighted excellent outcomes in the healing of diabetic foot ulcers with AMNIOEXCEL® used along with TCC-EZ®. TCC-EZ® is the leading total contact casting system and is proven to overcome many of the traditional hurdles to casting, making this a viable first-line therapy option for the up to 1.5 million patients in the U.S. with diabetic foot ulcers.

“We continue to be encouraged by the level of support from patients, clinicians, wound care advocacy groups and members of Congress in our request to CMS for consideration following the January 30th coding decision that changes the MEDIHONEY® line of products to non-covered codes. CMS has assured us of a response by the end of May,” Mr. Quilty added.

Commenting on the aclerastide (DSC127) Phase 3 program, John Caminis, M.D., chief medical officer, said, “We have been keenly focused on advancing these trials and made good progress during the past few months, with patient enrollment now nearing the 50% mark. We are working with a second contract research organization to initiate a number of sites in Eastern Europe, Germany and Israel, and plan to commence screening patients by the end of the summer. We expect to have the results of our carcinogenicity study in the third quarter, and we continue to advance chemistry, manufacturing and controls and the other activities to be ready prior to submitting a New Drug Application (NDA) with the U.S. Food and Drug Administration.”

Financial Results

Net sales for the first quarter of 2015 were $19.5 million, compared with $19.8 million for the first quarter of 2014, a decrease of 1.5% (an increase of 0.7%, excluding foreign exchange impact). This included AWC product sales of $9.8 million, up 17.0% from $8.4 million in the prior-year quarter. Growth in AWC product sales was led by TCC-EZ®, MEDIHONEY® and our AMNIO products.

TWC product sales were $9.7 million, down 14.9% from $11.4 million in the prior-year first quarter. The decline was due principally to lower sales of private-label products owing to the loss of two customers due to industry consolidation, a distributor, inventory reduction strategy in Canada, and unfavorable foreign exchange.

Gross profit for the first quarter of 2015 was $7.5 million, or 38.6% of net sales, compared with gross profit for the first quarter of 2014 of $6.9 million, or 34.9% of net sales. The higher gross margin percentage principally reflected lower other manufacturing costs.

Selling, general and administrative expenses for the first quarter of 2015 were $13.3 million, compared with $13.0 million for the first quarter of 2014. This increase reflects normal inflationary cost increases.

Research and development expense for the first quarter of 2015 was $4.5 million, compared with $4.2 million for the first quarter of 2014. The increase was principally attributable to preclinical work with aclerastide for scar prevention and to AMNIOEXCEL® post-marketing clinical studies.

The net loss for the first quarter of 2015 was $10.6 million, or $0.42 per share, compared with a net loss for the first quarter of 2014 of $10.3 million, or $0.46 per share. The increase in net loss was principally due to higher R&D and foreign exchange expenses.

As of March 31, 2015, Derma Sciences had cash, cash equivalents and short-term investments of $66.5 million, compared with $75.4 million as of December 31, 2014. In addition the Company held a long-term investment in Comvita common stock of $8.4 million as of March 31, 2015, unchanged from December 31, 2014.

Financial and Aclerastide Guidance

Derma Sciences affirms the financial guidance provided in March for 2015 net sales to be approximately $88.1 million, representing growth of 5% compared with 2014 net sales. Sales of AWC products are expected to be $43.8 million, up 15% over 2014. TWC products are expected to decline 3% to $44.3 million, reflecting the loss of a significant customer in 2015. Net sales are expected to increase as the year progresses, yet quarterly sales will be impacted by ordering patterns and delivery dates, particularly in the TWC business.

The Company affirms expectations for the total cost of the aclerastide Phase 3 program up to filing of a New Drug Application with the U.S. Food and Drug Administration to be $62.5 million to $67.5 million. As of March 31, 2015, the Company has spent approximately $41.5 million on this program.

Conference Call and Webcast

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

To access the conference call, dial (888) 563-6275 from within the U.S. or (706) 634-7417 from outside the U.S. and provide passcode 37710973. Individuals interested in listening to the live conference call via the Internet may do so at www.dermasciences.com.

Following the conclusion of the call, a replay will be available through May 17, 2015 and can be accessed by dialing (855) 859-2056 from within the U.S. or (404) 537-3406 from outside the U.S. and providing passcode 37710973. The webcast will be available for 30 days.

About Derma Sciences, Inc.

Derma Sciences is a tissue regeneration company focused on advanced wound and burn care. It offers a line of products with patented technologies to help better manage chronic and hard-to-heal wounds, many of which result from diabetes and poor vascular functioning. The Company sells AMNIOEXCEL® amniotic allograft membrane and AMNIOMATRIX® amniotic allograft suspension into the $500 million market for skin substitute products. Derma Sciences’ MEDIHONEY® product is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown in clinical studies to be effective in a variety of indications. TCC-EZ® is a gold-standard total contact casting system for diabetic foot ulcers. Other novel products introduced into the $14 billion global wound care market include XTRASORB® for better management of wound exudate, and BIOGUARD® for barrier protection against microbes and other contaminants. Its pharmaceutical wound care products include aclerastide, a patented active pharmaceutical ingredient (API), which is currently in Phase 3 clinical trials for the healing of diabetic foot ulcers. Aclerastide is also in preclinical testing for scar prevention/reduction and is part of a BARDA grant program for the healing/prevention of skin tissue damage associated with exposure to ionizing radiation. The Company also offers a full product line of traditional dressings.

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 development and commercialization of DSC127, product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, 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 COMPREHENSIVE LOSS
(UNAUDITED)
			Three Months Ended
			March 31,
				2015				2014
Net Sales			$	19,498,652			$	19,787,034
Cost of sales				11,963,526				12,874,709
Gross Profit				7,535,126				6,912,325
Operating Expenses
Selling, general and administrative				13,296,635				13,049,555
Research and development				4,472,229				4,183,599
Total operating expenses				17,768,864				17,233,154
Operating loss				(10,233,738	)			(10,320,829	)
Other expense (income), net				367,788				(39,251	)
Loss before income taxes				(10,601,526	)			(10,281,578	)
Income tax provision (benefit)				8,051				(11,563	)
Net Loss				(10,609,577	)			(10,270,015	)
Other Comprehensive Loss
Foreign currency translation adjustment				(155,811	)			(202,612	)
Unrealized gain (loss) on equity securities, net of taxes				8,805				(376,675	)
Total other comprehensive loss				(147,006	)			(579,287	)
Comprehensive Loss			$	(10,756,583	)		$	(10,849,302	)
Net loss per common share- basic and diluted			$	(0.42	)		$	(0.46	)
Shares used in computing net loss per common share – basic and diluted				25,552,762				22,564,611

DERMA SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
		March 31,				December 31,
ASSETS		2015				2014
Current Assets
Cash and cash equivalents		$	16,497,725			$	19,396,845
Short-term investments			50,000,000				55,996,000
Accounts receivable, net of allowances of $595,827 and $531,205, respectively			8,209,842				8,758,034
Inventories			15,841,189				13,280,940
Prepaid expenses and other current assets			3,105,842				3,411,934
Total current assets			93,654,598				100,843,753
Long-term investments			8,437,096				8,422,790
Equipment and improvements, net of accumulated depreciation of $7,481,760
and $7,681,864, respectively			3,590,405				3,614,439
Identifiable intangible assets, net of accumulated amortization of $11,377,437
and $10,631,372, respectively			12,069,439				12,815,504
Goodwill			13,457,693				13,457,693
Other assets			140,243				143,733
Total Assets		$	131,349,474			$	139,297,912
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	6,214,252			$	5,058,892
Accrued expenses and other current liabilities			4,769,770				6,452,358
Total current liabilities			10,984,022				11,511,250
Long-term liabilities			488,983				521,358
Deferred tax liability			1,693,853				1,700,640
Total Liabilities			13,166,858				13,733,248
Stockholders’ Equity
Convertible preferred stock, $.01 par value; 1,468,750 shares authorized;
issued and outstanding 73,332 at March 31, 2015 and
December 31, 2014 (liquidation preference of $3,222,368
at March 31, 2015)			733				733
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 25,710,990 at March 31, 2015 and
25,319,203 at December 31, 2014)			257,110				253,192
Additional paid-in capital			231,712,159				228,341,542
Accumulated other comprehensive income			764,557				911,563
Accumulated deficit			(114,551,943	)			(103,942,366	)
Total stockholders’ equity			118,182,616				125,564,664
Total liabilities and stockholders’ equity		$	131,349,474			$	139,297,912

Derma Sciences, Inc.
John Yetter, 609-514-4744
Chief Financial Officer
[email protected]
or
Investors
LHA
Kim Sutton Golodetz, 212-838-3777
[email protected]
or
Bruce Voss, 310-691-7100
[email protected]
or
Media
Spectrum Science Communications
Leticia Diaz, 202-955-6222
[email protected]

Source: Derma Sciences, Inc.

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