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Derma Sciences Reports Fourth Quarter and Year Ended Financial Results

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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 and year ended December 31, 2014.

Highlights of the fourth quarter of 2014 and recent weeks include (unless otherwise stated, all comparisons are with the fourth quarter of 2013):

  • Advanced Wound Care (AWC) product sales increased 21.6% to $11.5 million and increased 21.1% versus the third quarter of 2014, with growth continuing to be led by MEDIHONEY(R) and TCC-EZ(R)
  • Traditional Wound Care (TWC) product sales increased 1.3% to $11.4 million and increased 6.6% versus the third quarter of 2014
  • Total net sales increased 10.5% to $22.9 million
  • Gross margin was 39.3%, compared with 38.6%
  • AMNIOEXCEL(R) and AMNIOMATRIX(R) products were added to Premier, Inc.’s portfolio of suppliers
  • Appointed John Caminis, M.D. as chief medical officer and under his direction began assessing additional DSC127 clinical trial sites outside the U.S.
  • Publication of consensus guidelines recommending off-loading for treatment of diabetic foot ulcers published in the Journal of the American Podiatric Medical Association
  • Reported 438 patients enrolled in the DSC127 Phase 3 program to date, with a continued focus on accelerating enrollment and exploring additional sites outside the U.S.

Management Commentary

“Our team worked hard and smart during 2014 to overcome a number of unexpected events early in the year. I am very pleased with the momentum we established as the year progressed, in particular with our AWC business,” commented Edward J. Quilty. “MEDIHONEY performed well and regained its sales momentum, posting 26.5% growth over the 2013 fourth quarter, while sales of TCC-EZ(R), another anchor product, grew 25% over the 2013 fourth quarter. In December, 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. The newly published guidelines on off-loading state as one of the core consensus statements that ‘total contact casting is the preferred method for off-loading diabetic plantar foot ulcers, as it has most consistently demonstrated the best healing outcomes and is a cost-effective treatment.’ Derma Sciences’ TCC-EZ is the leading Total Contact Casting system on the market and has been proven to overcome many of the traditional hurdles to casting, making this treatment accessible in any clinical setting.

“Looking forward this year, a significant 61% increase in reimbursement by CMS for TCC-EZ went into effect as of January 1st and our sales team is reinvigorated now that they are able to offer the gold standard casting system with attractive practitioner economics. The consensus document provides further evidence to support our salesforce as they call on our approximately 1,200 wound care clinics.

“We are optimistic about the prospects for our new amniotic allografts for wound healing, and expect that by the end of April sales representatives in more than half of our territories will be selling AMNIO products into regions with the potential for Medicare reimbursement coverage,” he added. “Our first randomized controlled study in diabetic foot ulcers on AMNIOEXCEL will be fully enrolled in the coming weeks, and is one of several we are conducting to support reimbursement determinations from the four Medicare Administrative Contractors (MACs) that require such data. The results of this study will also support reimbursement efforts with commercial payors. The recent addition of AMNIOEXCEL and AMNIOMATRIX to the Premier purchasing group contract was an important event and expands access to our products. We are confident that our amniotic allograft products will show excellent efficacy and that we have a very competitive offering in the marketplace.

“The TWC business continues to provide Derma Sciences with positive cash flow, yet industry consolidation has impacted sales. We are working to replace affected sales with new private-label products and are optimistic that over the course of the year we will we be able to secure significant new retail over the counter business,” Mr. Quilty added.

Commenting on the DSC127 Phase 3 program, Barry Wolfenson, Group President, Advanced Wound Care and Pharmaceutical Development, said, “We continue to explore all avenues to enroll patients into this trial and are pleased the pace accelerated in 2014 following sluggish enrollment in the early days of the trial to a more robust level. The addition of Dr. John Caminis to the team is already having a favorable impact on our program, given his experience with contract research organizations in geographies outside the U.S. He is also examining our protocol for ways to make enrollment easier for the investigators without compromising our rigorous trial design.

“Our goal remains the submission of a New Drug Application for a product that will enjoy significant commercial success with clearly established safety and efficacy. The market for a topical pharmaceutical treatment for diabetic foot ulcers could exceed $300 million annually in the U.S.,” Mr. Wolfenson added. “In addition, DSC127 represents a platform technology with a potential market in excess of $1 billion should we move forward with scar mitigation and radiation dermatitis indications.”

Financial Results

Net sales for the fourth quarter of 2014 were $22.9 million, compared with $20.7 million for the fourth quarter of 2013, an increase of 10.5%. This included AWC product sales of $11.5 million, up 21.6% from $9.4 million in the prior-year quarter. Growth in AWC product sales was led by MEDIHONEY and TCC-EZ.

TWC product sales were $11.4 million, up 1.3% over $11.3 million in the prior year fourth quarter, led by traditional and first-aid products, offsetting a decline in Canada sales due to foreign exchange and inventory rebalancing by our exclusive distributor.

Gross profit for the fourth quarter of 2014 was $9.0 million, or 39.3% of net sales, compared with gross profit for the fourth quarter of 2013 of $8.0 million, or 38.6% of net sales. The higher gross margin principally reflects product mix favoring higher-margin AWC products.

Selling, general and administrative expense for the fourth quarter of 2014 was $12.3 million, compared with $10.6 million for the fourth quarter of 2013. The increase was principally due to higher personnel and operating expenses primarily associated with AWC growth initiatives.

Research and development expense for the fourth quarter of 2014 was $6.3 million, compared with $2.4 million in the fourth quarter of 2013. The increase was principally attributable to activity surrounding patient enrollment and recruitment for the DSC127 Phase 3 clinical trials, along with incremental preclinical work with DSC127 for scar prevention and AMNIO post-marketing clinical studies.

The net loss for the fourth quarter of 2014 was $9.6 million, or $0.37 per share, compared with a net loss for the fourth quarter of 2013 of $5.4 million, or $0.31 per share. The increase in net loss was principally due to higher R&D expenses.

Net sales for 2014 were $83.7 million, up 5.1% from $79.7 million for 2013. AWC product sales were $38.1 million, up 12.3% compared with $33.9 million in 2013. TWC product sales were $45.6 million, down slightly from $45.8 million in 2013. The Company reported a net loss for 2014 of $39.8 million, or $1.62 per share, compared with a net loss for 2013 of $24.0 million, or $1.40 per share.

As of December 31, 2014, Derma Sciences had cash, cash equivalents and short term investments of $75.4 million compared with $23.0 million as of December 31, 2013. In addition it held a long term investment in Comvita common stock of $8.4 million as of December 31, 2014.

Financial and DSC127 Guidance

Derma Sciences affirms the financial guidance provided in January for 2015 net sales to be approximately $88.1 million, representing growth of 5.3% compared with 2014 net sales. Sales of AWC products are expected to be $43.8 million, up 15.0% over 2014. TWC products are expected to decline 2.9% 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 DSC127 Phase 3 program up to the filing of a New Drug Application with the U.S. Food and Drug Administration to be $62.5 million to $67.5 million.

Conference Call and Webcast

Derma Sciences management will host a conference call at 11:00 a.m. Eastern time today to discuss fourth 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 93972264. 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 March 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 93972264. 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 recently entered the $500 million market for skin substitute products with its licensing of AMNIOEXCEL(R) and AMNIOMATRIX(R) in the first quarter of 2014. Both products were launched in 2014, and both are included within the Veterans Administration Federal Supply Schedule. AMNIOEXCEL is currently the focus of a randomized clinical trial on the management of diabetic foot ulcers. Derma Sciences’ MEDIHONEY(R) 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(R) 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(R) for better management of wound exudate, and BIOGUARD(R) for barrier protection against microbes and other contaminants. Its pharmaceutical wound care products include DSC127, a patented active pharmaceutical ingredient (API) which is currently in Phase 3 clinical trials for the healing of diabetic foot ulcers. DSC127 is also in preclinical testing for scar prevention/reduction and is part of a BARDA grant program for the healing/prevention of tissue damage due to ionizing radiation exposure. 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
Three Months Ended
December 31, (unaudited)
2014 2013
Net Sales $ 22,873,292 $ 20,692,739
Cost of sales 13,879,756 12,714,665
Gross Profit 8,993,536 7,978,074
Operating Expenses
Selling, general and administrative 12,267,357 10,624,540
Research and development 6,259,825 2,422,368
Total operating expenses 18,527,182 13,046,908
Operating loss (9,533,646 ) (5,068,834 )
Other income, net (73,932 ) (97,077 )
Loss before income taxes (9,459,714 ) (4,971,757 )
Income tax provision 107,276 454,080
Net Loss (9,566,990 ) (5,425,837 )
Other Comprehensive Loss
Foreign currency translation adjustment (30,850 ) (180,841 )
Unrealized gain (loss) on investment 153,676 (717,571 )
Total other comprehensive gain (loss) 122,826 (898,412 )
Comprehensive Loss $ (9,444,164 ) $ (6,324,249 )
Net loss per common share- basic and diluted $ (0.37 ) $ (0.31 )
Shares used in computing net loss per common share – basic and diluted 25,287,094 17,291,385
Year Ended
December 31,
(Derived from audited financial statements)
2014 2013
Net Sales $ 83,745,680 $ 79,710,980
Cost of sales 53,635,745 50,320,506
Gross Profit 30,109,935 29,390,474
Operating Expenses
Selling, general and administrative 50,961,022 42,044,484
Research and development 19,253,059 11,335,672
Total operating expenses 70,214,081 53,380,156
Operating loss (40,104,146 ) (23,989,682 )
Other income, net: (181,543 ) (185,740 )
Loss before income taxes (39,922,603 ) (23,803,942 )
Income tax (benefit) provision (151,048 ) 160,111
Net Loss (39,771,555 ) (23,964,053 )
Other Comprehensive Loss
Foreign currency translation adjustment (216,710 ) (370,880 )
Unrealized gain (loss) on equity securities 48,125 (137,860 )
Total other comprehensive loss (168,585 ) (508,740 )
Comprehensive Loss $ (39,940,140 ) $ (24,472,793 )
Net loss per common share – basic and diluted $ (1.62 ) $ (1.40 )
Shares used in computing net loss per common share – basic and diluted 24,584,071 17,056,632
DERMA SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Derived from audited financial statements)
December 31, December 31,
ASSETS 2014 2013
Current Assets
Cash and cash equivalents $ 19,396,845 $ 6,501,586
Short-term investments 55,996,000 15,478,000
Accounts receivable, net 8,758,034 7,332,756
Inventories 13,280,940 16,472,640
Prepaid expenses and other current assets 3,411,934 3,746,753
Total current assets 100,843,753 49,531,735
Long-term investments 8,422,790 7,858,140
Equipment and improvements, net 3,614,439 2,953,469
Identifiable intangible assets, net 12,815,504 14,635,998
Goodwill 13,457,693 13,457,693
Other assets 143,733 139,318
Total Assets

$

139,297,912

$ 88,576,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable $ 5,058,892 $ 4,522,508
Accrued expenses and other current liabilities 6,452,358 4,969,225
Total current liabilities 11,511,250 9,491,733
Long-term liabilities 521,358 242,325
Deferred tax liability 1,700,640 1,694,147
Total Liabilities 13,733,248 11,428,205
Stockholders’ Equity
Convertible preferred stock, $.01 par value; 1,468,750 shares authorized;
issued and outstanding 73,332 at December 31, 2014 and
December 31, 2013 (liquidation preference of $3,222,368
at December 31, 2014) 733 733
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 25,319,203 at December 31, 2014 and
17,347,071 at December 31, 2013) 253,192 173,471
Additional paid-in capital 228,341,542 140,064,607
Accumulated other comprehensive income 911,563 1,080,148
Accumulated deficit (103,942,366 ) (64,170,811 )
Total Stockholders’ Equity 125,564,664 77,148,148
Total Liabilities and Stockholders’ Equity

$

139,297,912

$ 88,576,353

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