Derma Sciences (OTC:DSCI): Unique Opportunity in Advancing Wound Care Print E-mail
Friday, 28 August 2009 15:11

Derma Sciences presents a unique opportunity in the micro-cap biomed space. The company is developing a patented topical drug for accelerated healing and scar prevention and newly launched Advanced Wound Care products approaching $10M, including the highly received MEDIHONEY® dressings at greater than 70% gross margin.

The corporate presentation for wound care specialist Derma Sciences (OTC:DSCI) is available in PDF format at the stock research section.

The presentation highlights the following about Derma Sciences:  (1) new Advanced Wound Care Products are selling at a current run rate approaching $10 million in revenue, including total annualized MEDIHONEY revenues in excess of $3.5 million with a gross margin of 70%; (2) total revenues are expected to exceed $50 million in 2009 including sales from the introduction of four new advanced wound care products since 4Q08; and (3) an enterprise value for the Company that is about 0.5X trailing 12-month sales despite its recently launched wound dressing product, a strong novel pharmaceutical candidate for wound healing in Phase 2 development (at an estimated expense of $1.7M), and $3.5 million dollars in core business EBITDA to help support future growth/R&D initiatives.

As of its corporate presentation dated 8/21/09, Derma Sciences reported that it continues to move forward with a Phase 2 clinical trial of DSC127, which has the potential to be only the second approved drug on the market for accelerated wound healing. The Company stated that 33% of patients are currently enrolled in a Phase 2 diabetic foot ulcer study. DSC127 (which is an analog of a naturally occurring peptide called Angiotensin that has been shown to increase keratinocyte proliferation, increase extracellular matrix production, and increase vascularization) was licensed from the University of Southern California during 4Q07 and patient enrollment for a Phase 2 study began during 4Q08.

This study of 75 patients will look at the percentage of diabetic ulcers completely healed over a 12-week period in addition to other outcomes. Histological examination reveals that DSC127 accelerates collagen deposition six-fold and the patented amino acid peptide optimizes the wound healing capabilities of Angiotensin while removing all blood pressure effects of the compound. The Phase II results for the DSC127 Diabetic Ulcer trial are scheduled for release during early 3Q10, with an estimated date for this entry of 7/31/10.

Systagenix, which is a division of Johnson & Johnson (NYSE:JNJ), currently markets Regranex as the only FDA-approved treatment for wound healing with annual sales of about $100M. However, this product carries a black box warning that states, "An increased risk of mortality secondary to malignancy was observed in patients treated with three or more tubes of Regranex Gel in a post-marketing retrospective cohort study. . .  should be used with caution in patients with known malignancy." In addition, DSC127 has been shown in pre-clinical animal studies to be more effective than Regranex and Shire (NASDAQ:SHPGY) licensed the rights to a scar prevention drug (Juvista or Human TGFbeta3) from UK-based Renovo (LON:RNVO) (ROVOF.PK)  in June 2007 which was in late Phase 2 development at the time (now in Phase 3 trials) in a deal that included $75M in up-front cash, milestone-related payments that could total approximately 10X the up-front payment, and future sales royalties if approved for marketing.

Derma Sciences reported that gross U.S. MEDIHONEY sales increased by 125% and 94% to $664,766 and $1.14 million (M) during 2Q09 and 1H09, respectively, compared to the year-ago periods. The Company also announced record first-month sales of $58,458 for BIOGUARD, which was launched in late June and represents a new anti-microbial advanced wound care product. Gross sales of key new advanced wound care products in the U.S. increased by 93% during 1H09 to a level of $2.14M versus $1.1M in the year-ago period.

On 7/27/09, the Company announced that a paper published in the European Journal of Clinical Microbiological Infectious Diseases details how a certain kind of honey can be an effective agent in topical wound care, particularly where antibiotic resistance is an issue. The report describes the palliative effects of Leptospermum honey, which contains unique plant-derived components that make it an ideal wound dressing with favorable properties that include low pH levels, the ability to help remove non-vital tissue from the wound area, stimulate new tissue growth, and reported reduction in scarring and pain levels. This study adds to a growing base of scientific literature for medicinal honey and wound care, including 15 peer-review published journal articles and 25 clinical posters or abstracts presented at major wound care conferences since the Company launched MEDIHONEY.

The paper concluded that honey is an effective topical antimicrobial agent that could help reduce some of the current pressures that are promoting antibiotic resistance. Derma Sciences has strong IP (intellectual property, patents) around dressing configurations that include honey, exclusive rights for MEDIHONEY in the Americas (with the expectation of obtaining worldwide rights by the end of 2009), and a partnership with New Zealand-based Comvita, which controls 75% of the Leptospermum honey harvested. MEDIHONEY dressings, a unique line of products containing active Leptospermum honey, provide a moist, occlusive environment conducive to optimal wound healing, enabling them to work effectively in the presence of wound fluid, blood, and tissue, promoting an optimal healing environment.

BIOGUARD Barrier Dressings provide a barrier to bacterial contamination while also providing greater than 5-log (99.999%) average reductions of common pathogens within the dressings with a distinguishing feature that includes the ability to function even in the presence of wound fluid and blood. The active component of the dressings is a non-toxic polymer (p-DADMAC) that is patented for use in wound dressings and licensed on an exclusive basis since 2007 from Quick-Med Technologies (QMDT.OB). Also, the active component is non-leaching, which is an important feature since leaching antimicrobials can interfere with wound healing and lead to the development of resistant strains of microbial pathogens.

Overall net sales came in at $11.6M and $22M during 2Q09 and 1H09, respectively, compared to $13.1M and $24.8M in the year-ago periods. The revenue decline was principally driven by lower sales from the First Aid Division, which the Company attributed to a weakening of the economy and a decrease in Canadian net sales attributable to unfavorable foreign currency exchange and inventory rationalization on the part of its exclusive Canadian distributor. During 1H09, the majority of the Company's sales occurred in the U.S. market (73%) with 22% of sales occurring in Canada. However, the Company noted that despite the sales decline for the First Aid division, gross margins for this segment have improved during 2009.

The Company's gross profit margin increased to 29.6% and 30.8% during 2Q09 and 1H09, respectively, as compared to 27% and 26.9% in the year-ago periods. Derma attributed the increase in gross profit margin to cost-effective manufacturing for its First Aid division combined with growth in its higher margin advanced wound care business. Selling, general, and administrative expenses decreased by 17.4% and 14% during 2Q09 and 1H09, respectively, compared to the year-ago periods.

Derma Sciences posted a net loss of $560,502 or ($0.01/share) and $1.3M or ($0.03/share) during 2Q09 and 1H09, respectively, as compared to the year-ago periods. The Company's posted an impressive improvement in its overall cash flow during 1H09 as it generated positive cash flow from operating activities of $198,492 as compared to the use of $5.26M in cash from operating activities in the year-ago period. The Company ended 2Q09 with about 40.3M shares of common stock outstanding, $167,040 in unrestricted cash + equivalents, $11.5M of inventories, restricted cash of $2M (reflecting the amended credit and security agreement with use subject to approval by the lender), accounts receivable of $3.2M, total current liabilities of $9.2M (including $3.8M in amended line of credit borrowings and $2.6M in accounts payable), and long-term debt of $2.9M.

As of 6/30/09, the Company had warrants outstanding to purchase 8.8M shares of its common stock at a weighted average price of about $0.98 over a period of five expiration dates ranging from April 2011 to March 2014. In addition, Derma Sciences has 9.4M options outstanding and 6.6M which are exercisable at the end of 2Q09 with average exercise prices of $0.63 and $0.68, respectively. The Company had a total of 25.1M shares of common stock shares reserved as of 6/30/09, which include the warrants and options outlined above in addition to convertible preferred shares and restricted common stock.

The Company consists of the following three operating segments: wound care, wound closure and specialty securement devices and skin care. Products in the wound care segment account for about 94% of total net sales and 91.4% of gross profits through 1H09 and this division consists of basic + advanced dressings, adhesive strips, ointments, and sprays. Wound closure and specialty securement device products include wound closure strips, nasal tube fasteners, and a variety of catheter fasteners while the skin care segment consists of antibacterial skin cleansers, hair and body soaps, lotions, and moisturizers.

Derma Sciences has an impressive track record with regard to insider ownership and open market buying and as of the Company's 8/21/09 corporate presentation there is 17% insider + 63% institutional ownership of the outstanding shares of common stock. Excluding the recent option grants at a zero cost basis on 6/1/09 for a total of 150,000 shares; insiders have purchased 228,100 shares of common stock since 12/3/07 at a weighted average cost basis of $0.56/share, which represents a 36.5% premium to the closing stock price on 8/27/09 of $0.41/share.

Derma Sciences presents a unique opportunity in the micro-cap biomed space since it has a core business focused on wound care which generates revenue and operating cash flow to fund the Phase 2 clinical development for a treatment (DC127) that targets a prescription drug market that is about 5X the Company's current market cap (based on Regranex sales of $100M). In addition, pre-clinical data suggests DC127 may offer both safety and efficacy advantages over Regranex and the licensing deal by Shire for a scar prevention treatment that included a $75M up-front payment suggests Derma Sciences has the potential to secure a licensing deal that could include an up-front cash payment in excess of its current market cap of around $20M.

Disclosure: No positions

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