DSCI Derma Sciences, Inc.

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 six months ended June 30, 2011. Highlights of the second quarter of 2011 and recent weeks include:

• Net sales were a record $15.9 million, up 20% over the prior year second quarter
• Advanced wound care product sales of $3.8 million increased 47% from the prior year with MEDIHONEY sales up 66%
• Advanced wound care sales accounted for 24% of net sales, up from 20% from the prior year
• Core product sales for the quarter of $12.1 million increased 13% over the prior year
• Quarterly net loss decreased to $551,295 from $976,640 in the prior year
• Reported continued excellent wound healing at 24 weeks with DSC127 in diabetic foot ulcers
• Preparing for end-of-Phase 2 meeting with the U.S. Food and Drug Administration (FDA) and began planning for Phase 3 pivotal trials with DSC127
• Continued licensing dialogues with potential partners for DSC127
• Raised gross proceeds of $29.1 million, $26.4 million net, in an equity offering

Management Commentary

“Derma Sciences today is in the strongest position in the Company’s history, both from a financial and operational perspective. We achieved record sales in the second quarter due to an impressive performance by our advanced wound care sales representatives, who drove both increased sales to existing accounts as well as to new accounts, and to a solid rebound in our core products sales, particularly first-aid products,” said Edward J. Quilty, Derma Sciences chairman and chief executive officer. “Patients in the follow-up portion of our Phase 2 clinical trial with DSC127 showed continued healing of diabetic foot ulcers, with complete healing at 24 weeks following trial enrollment of 73% in the intent-to-treat population and 85% in the per-protocol population, a difference of 27 and 33 percentage points, respectively, compared with patients treated with placebo/standard of care. We raised $26.4 million and these proceeds, coupled with the Company's positive cash flow from operations, will allow us to continue preparations for Phase 3 trials and to immediately expand our advanced wound care sales force. At this time our funds look to be sufficient to complete not only the diabetic ulcer Phase 3 trial, but to cover our anticipated expenses through filing of the NDA.

“The development and marketing of advanced wound care as a high-margin growth opportunity has been an excellent strategy for Derma Sciences,” Mr. Quilty continued. “We continue to develop new line extensions around the MEDIHONEY brand, and recently received 510(k) clearance for MEDIHONEY Hydrogel dressings, which will expand the use of MEDIHONEY from chronic wounds to include burns when we launch the product next year. We are optimistic that MEDIHONEY sales, which increased 66% in the second quarter, will continue on a strong growth trajectory, and note that for the first time the prior-year comparison includes a full quarter of sales in Europe following the licensing of global rights to MEDIHONEY in February 2010.

“Worldwide advanced wound care sales, which include our MEDIHONEY franchise as well as our rapidly growing XTRASORB® and BIOGUARD® lines, among others, increased 47% over the prior year, and this growth was similar in all territories. We are very pleased with our ability to replicate the U.S. sales practices to derive similar results outside the U.S. via our network of direct and distributed sales. We continue to expect accelerating growth outside North America as we plan to launch ALGICELL Ag® and our XTRASORB line of products in the second half of 2011. Our core wound care business grew 13% during the quarter, largely due to an increase in first-aid product sales.”

In commenting on the status of DSC127 for the treatment of diabetic foot ulcers, Mr. Quilty said, “We have been diligently preparing for a meeting with the FDA, which we anticipate will occur in the fourth quarter of this year, to discuss the program's recent positive Phase 2 results and the Company's Phase 3 clinical trial protocol. Subject to FDA approval, we plan to begin the Phase 3 trial by the end of the first half of 2012. Although we have been speaking with potential partners about rights to DSC127, our primary focus has been on our FDA package as we believe that the value of this asset will be maximized upon approval and initiation of the Phase 3 program. We believe DSC127 represents an enormous opportunity for the Company, with a potential annual global market of $900 million for the rapidly growing population of diabetics with debilitating and poorly treated foot ulcers,” Mr. Quilty concluded.

Financial Results

Net sales for the second quarter of 2011 were $15,879,609, compared with $13,230,106 in the second quarter of 2010, an increase of 20%. This growth reflects higher sales of both advanced and core wound care products. Gross profit increased 18% to $4,626,815, or 29.1% of net sales, compared with $3,913,104, or 29.6% of net sales, in the second quarter of 2010. The slightly lower gross margin reflects an increase in sales of lower-margin core products, unfavorable core sales mix towards lower margined products, and higher cost of goods, partially offset by increasing sales of higher-margin advanced wound care products.

Selling, general and administrative expenses were $4,945,322, compared with $4,574,974 in the second quarter of 2010, with the increase due to investment in sales and marketing associated with the expansion of the advanced wound care sales force, and marketing and clinical personnel added in the second half of 2010. The net loss for the second quarter of 2011 was $551,295, or $0.07 per share, compared with a net loss of $976,640, or $0.15 per share, in the prior year’s second quarter.

For the six months ended June 30, 2011, net sales were $30,250,879, compared with $26,074,487 in the prior year six-month period, an increase of 16%. The Company reported a net loss of $1,098,358, or $0.16 per share, in the six months ended June 30, 2011, compared with a net loss of $1,555,329, or $0.25 per share, in the prior year period.

Working capital as of June 30, 2011 was $37,244,840, compared with $9,943,929 as of December 31, 2010. This increase reflects financing activities, positive cash flow from operations, and funds received from warrant and stock option exercises during the quarter. As of June 30, 2011 the Company had cash and cash equivalents of $27,981,224. Subsequent to the close of the quarter, the Company repaid the $3,340,176 balance on its line of credit. Management is in the process of evaluating the cost/benefit of terminating this line of credit. Based on achieving three consecutive months of MEDIHONEY sales in excess of $600,000 (equivalent to an annual run rate of $7,200,000) the Company achieved its first MEDIHONEY milestone objective. Accordingly, it will make a cash payment of $1,000,000 to Comvita New Zealand Ltd. in August 2011 under the terms of the MEDIHONEY license agreement.

Conference Call and Webcast

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

To access the conference call, from the U.S. please dial (888) 563-6275 and from outside the U.S. please dial (706) 634-7417. All listeners should provide the following passcode: 90475666. Individuals interested in listening to the live conference call via the Internet may do so by logging on to the Company’s website, www.dermasciences.com.

Following the end of the conference call, a telephone replay will be available through August 22, 2011, and can be accessed by dialing (855) 859-2056 within the U.S. or (404) 537-3406 outside of the U.S. All listeners should provide the following passcode: 90475666. The webcast will also be available for 30 days.

About Derma Sciences

Derma Sciences is a medical technology company focused on the wound care marketplace, addressing; traditional dressings, advanced wound care dressings, and pharmaceutical wound care products. Its MEDIHONEY product is the leading brand of honey-based dressings for the management of wounds and burns. The product has been shown to be effective in a variety of indications, and was the focus of a positive large-scale, randomized controlled trial involving 108 subjects with leg ulcers. Other novel products introduced into the $14 billion global wound care market include XTRASORB for better management of wound exudate, and BIOGUARD for infection prevention. Derma Sciences has successfully completed a Phase 2 clinical trial in diabetic foot ulcer healing with DSC127, a novel pharmaceutical drug under development for accelerated wound healing and scar reduction. For more information please visit www.dermasciences.com.

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, product demand, market acceptance, impact of competitive products and prices, product development, completion of an acquisition, commercialization or technological difficulties, 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 OPERATIONS

(UNAUDITED)

  Three Months Ended

June 30,

    2011   2010 Net Sales $ 15,879,609   $ 13,230,106 Cost of sales   11,252,794   9,317,002 Gross Profit   4,626,815   3,913,104 Operating Expenses       Selling, general and administrative 4,945,322   4,574,974 Research and development   150,566   123,744 Total operating expenses   5,095,888   4,698,718 Operating loss   (469,073)   (785,614) Other expense, net:       Interest expense 121,800   134,707 Other income, net   (41,321)   (68,625) Total other expense   80,479   66,082 Loss before income taxes (549,552)   (851,696) Income taxes   1,743   124,944 Net Loss   $ (551,295)   $ (976,640) Net loss per common share- basic and diluted   $ (0.07)   $ (0.15) Shares used in computing net loss per common share – basic and diluted   7,375,521   6,558,562   Six Months Ended

June 30,

    2011   2010 Net Sales $ 30,250,879   $ 26,074,487 Cost of sales   21,195,683   18,171,484 Gross Profit   9,055,196   7,903,003 Operating Expenses       Selling, general and administrative 9,683,339   8,762,719 Research and development   294,394   239,851 Total operating expenses   9,977,733   9,002,570 Operating loss   (922,537)   (1,099,567) Other expense, net:       Interest expense 215,429   294,599 Loss on debt extinguishment -   114,072 Other income, net   (114,750)   (178,131) Total other expense   100,679   230,540 Loss before income taxes (1,023,216)   (1,330,107) Income taxes   75,142   225,222 Net Loss   $ (1,098,358)   $ (1,555,329) Net loss per common share – basic and diluted   $ (0.16)   $ (0.25)

Shares used in computing net loss per common share – basic and diluted

  7,006,902   6,105,386

DERMA SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

   

June 30

December 31,

ASSETS

 

2011

 

2010

Current Assets       Cash and cash equivalents $ 27,981,224   $ 404,216 Accounts receivable, net 5,795,587   5,441,511 Inventories 11,515,818   12,498,519 Prepaid expenses and other current assets   1,509,086   609,164 Total current assets 46,801,715   18,953,410 Equipment and improvements, net 3,859,796   3,608,242 Identifiable intangible assets, net 6,124,626   6,971,626 Goodwill 7,119,726   7,119,726 Other assets   266,741   316,859 Total Assets   $64,172,604   $36,969,863 LIABILITIES AND SHAREHOLDERS’ EQUITY         Current Liabilities       Line of credit borrowings $ 3,340,176   $ 3,075,555 Current maturities of long-term debt -   5,851 Accounts payable 4,306,405   3,777,454 Accrued expenses and other current liabilities   1,910,294   2,150,621 Total current liabilities 9,556,875   9,009,481 Long-term liabilities 305,915   211,581 Deferred tax liability   1,105,135   1,068,088 Total Liabilities   10,967,925   10,289,150 Shareholders’ Equity      

Convertible preferred stock, $.01 par value; 1,468,750 shares authorized; issued and outstanding: 284,635 shares at June 30, 2011 and 284,844 at December 31, 2010 (liquidation preference of $4,191,394 at June 30, 2011)

2,846

 

2,848

Common stock, $.01 par value; 18,750,000 authorized; issued and outstanding: 10,302,421 at June 30, 2011; 6,563,076 at December 31, 2010

 

103,024

 

65,631

Additional paid-in capital 76,228,805   48,803,210

Accumulated other comprehensive income – cumulative translation adjustments

1,764,278

 

1,604,940

Accumulated deficit   (24,894,274)   (23,795,916) Total Shareholders’ Equity   53,204,679   26,680,713 Total Liabilities and Shareholders’ Equity   $64,172,604   $36,969,863