Derma Sciences, Inc. (DSCI)

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Derma Sciences, Inc. (DSCI)

Q1 2013 Earnings Conference Call

May 16, 2013 11:00 a.m. ET

Executives

Kim Golodetz - IR, Lippert/Heilshorn & Associates

Edward Quilty - President, Chief Executive Officer

John Yetter - Chief Financial Officer, Executive Vice President, Finance

Barry Wolfenson - Group President of Advanced Wound Care and Pharmaceutical Development

Analysts

David Amsellem - Piper Jaffray

Scott Henry - ROTH Capital

William Plovanic - Canaccord Genuity

Presentation

Operator

Welcome to the Derma Sciences' First Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded May 16, 2013.

I would now like to turn the conference over to Kim Golodetz. Please go ahead, ma'am.

Kim Golodetz

Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Derma Sciences are Ed Quilty, President and Chief Executive Officer, and John Yetter, Executive Vice President of Finance and Chief Financial Officer. Barry Wolfenson, the company's Group President of Advanced Wound Care and Pharmaceutical Development will join us for the Q&A portion of the call.

Earlier today, Derma Sciences announced financial results for the first quarter of 2013. If you have not received this news release or if you would like to be added to the company's distribution list, please call LHA, New York, at 212-838-3777, and speak with Carolyn Curran.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of Derma Sciences. I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation, the company's forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward looking statements. 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, commercialization or technological difficulties, the success or failure of negotiations and trade legal, social and economic risks.

Also, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live call, today, May 16, 2013. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Ed Quilty. Ed?

Edward Quilty

Thank you, Kim. And thanks to each of you for joining us this morning. We have got a lot of things to cover, so we will jump right in.

I am very happy with what we achieved during the first quarter, both financially and operationally. We are reporting continued strong financial momentum with total net sales of 23%, advanced wound care or as we refer to it, AWC, growth of 67%, including TCC and organic advanced wound care growth. Excluding TCC of 33% which is right in line with our expectations for the first quarter. I do want to point out however that on a quarter-to-quarter basis both advanced wound care and traditional wound care sales tend to be seasonally soft in the first quarter. Historically, if you go back and look three years, that’s been the case every year and internally we plan for that.

So when we look at our comparisons for the fourth quarter of 2012 versus first quarter of '13, they are flat but within our expectations and within our plan for 2013. Having said that, we still full expect to meet our commitment of 30% to 40% growth in AWC during 2013. That said, advanced wound care sales during the first quarter reached 40% of total net sales. As you know that’s very important to us. That’s up versus 29% in last year's first quarter. Why that’s important is as the margins, as the sales in advanced wound care become a bigger percent of the overall sales, the margin in the company begins to shift upward. And that’s shift happened in Q1 of this year.

Our gross margins were 35.7% in Q1, and even when you exclude the contribution of TCC, gross margin was 33.6%, up from 31.9% on the same group of products last year. In addition I am pleased to report again that our both our Phase 3 trials are now underway with the DSC127, our topical drug candidate for the treatment of diabetic foot ulcers. And as announced, earlier this week we have engaged Plexus Ventures to help us explore strategic options in markets outside the United States.

In addition, we are just beginning to look at DSC127 for the prevention and reduction of scars and we are formulating our plan for further early stage research in coordination with the peptide inventors at the University of Southern California. I will go into a lot more detail on our quarter and our execution and discuss upcoming milestones that you can look for, but first I would like to turn it over to John Yetter, our Chief Financial Officer, who will give you a run down on our first quarter financial results. John?

John Yetter

Thank you, Ed. Good morning to our listeners. I assume at this point that everybody has had a chance to review the 10-Q and the press release, so I will limit my comments to the highlights of our operating performance and financial condition. Ed gave you a very good run down of the first quarter of 2013 versus '12, so I will just skip the highlights there. Obviously, net sales increased $3.5 million or 23%. Sales in the U.S. experienced consistent growth, 30% plus. Our sales in Canada declined due to carryover of loss of traditional wound care business.

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