Derma Sciences, Inc. (DSCI)

DSCI 
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Derma Sciences, Inc. (DSCI)

Analyst Day Conference Call

June 12, 2013, 04:30 pm ET

Executives

Edward Quilty - CEO

Maurice Donnelly - VP, Sales & Marketing

Barry Wolfenson - Group President, Advanced Wound Care & Pharmaceutical Development

Bob Cole - Group President, Traditional Wound Care & Corporate Accounts

John Yetter - EVP, Finance & CFO

George Omburo - VP, Product & Clinical Development

Jeffrey Jensen - Dean & Professor, Podiatric Medicine & Podiatric Surgery, Barry University; Inventor TCC-EZ

Christine Gryglik - Clinical Nurse Specialist, Massachusetts General Hospital

Greg Bohn - Director, Trinity Center for Wound Care & Hyperbaric Medicine at Trinity Bettendorf & Moline Clinics at Trinity Regional Medical Center, Iowa

Alan Dunton - Founder, Danerius LLC,

Laura Bolton - Adjunct Associate Professor Department of Surgery (Bioengineering), The University of Medicine & Dentistry of New Jersey; Chief Scientific Advisor to Derma Sciences and wound healing expert

Gere diZerega - Professor, Department of Obstetrics and Gynecology, University of Southern California; co-inventor of DSC127

Peter Balingit - Chief, Division of Hospital Medicine, Olive View - UCLA Medical Center; clinical investigator in DSC127 Phase 3 trial

Analysts

Presentation

Edward Quilty

I want to try to keep everybody, keep on time. I have been accused for years of running Board meetings that never get over on time, so trying harder. I would like to thank all of you for taking the time out of your schedules to come to visit Derma Sciences here on our Analyst and Investor Day. We are looking forward to telling you the latest and what’s going on at Derma Sciences and there is a lot of exciting things going on into Derma Sciences these days. And we’ve get some of them leading experts in our fields with us today to help make the presentations.

I would like to start by introducing members of the senior management team who are here with us today. At far we’ll start Maurice Donnelly; he is our Vice President of Marketing and Sales for our Advanced Wound Care business, Maurice. Next to him is Barry Wolfenson; Barry is the Group President of our Advanced Wound Care and Pharmaceutical Development business. Next to Barry is, Bob Cole, who is the Group President of our Traditional Wound Care and Corporate Accounts businesses and next to me is John Yetter, our Vice President and Chief Financial Officer, Executive Vice President and Chief Financial Officer.

So we are pleased to have all of you guys with you. There are also some other Derma Sciences key employees in the audience, George Omburo over there is our Vice President of Drug Development and we have got [Joe Sullen] who is in the back, who is our Senior Product Manager for Medihoney; Beth Joy-Dougherty is over here in the corner, and our marketing manager as well. We are fortunate to have two of our directors could make it today; Steve Wills in the back is our lead Director and next to him, C. Richard Stafford, who has been a Director for about 10 years with Derma Sciences. So I think both been with us for a long period of time.

The format today is going to be that we're going to start by talking a little bit about the company and peoples roles in the company. John is going to give a report on our financial status. Bob will talk a little bit about his businesses and then Barry will talk a little bit about his businesses. After that, we're going to go into a panel format where we're going to have two 45 minute panels and the first panel will be on our Advanced Wound Care business and that will be moderated by Maurice Donnelly, our Head of Marketing and Sales and specifically we're going to focus on the Medihoney product line and our TCC-EZ Cast product line, which, frankly are two anchors in our Advanced Wound Care business and we're doing quite well.

And on that panel will be Dr. Jeffrey Jensen who is up here in the front who is the inventor and the founder of MedEfficiency, the company we acquired to get TCC-EZ cast. Dr. Greg Bohn from Iowa is here with us and we're very happy to have you as well. And one more person on this panel, Christine Gryglik from Mass General in Boston and one of our very important Medihoney accounts and we're happy to have you down to spend some time with us as well. And then after the Medihoney panel, we’ll have a DSC127 panel discussion and Dr. George Omburo will moderate that panel. Dr. Alan Dunton, who is one of our key MD advisor’s will be on that panel, Dr. Gere diZerega, who is the inventor of DSC127 will be on that panel; Dr. Laura Bolton, who has been advisor to Derma Sciences for many years and was instrumental to us finally acquiring rights for DSC127, Barry was the original guy who found it, but Laura we’re happy to have you here and Barry Wolfenson will be on both those panels; he will sit on the panel for Advanced Wound Care and also for DSC127. So that going to be the format, after we get through all that, we will wrap it up and we’ll have some light snacks and cocktails too, we will enjoy and we would even get a chance to go around and talk to each one of you.

Let’s skip the forward-looking statement and the right to Derma Sciences. I think most of you know a little bit about Derma Sciences. We are already medical technology company focused on developing and delivering solutions for Advanced Wound Care management. At Derma, we work in three businesses, the first is pharmaceutical, where we are developing what we call DSC127 which is our drug for to healing of diabetic foot ulcers. The program is now reached a phase where we’re in our pivotal studies. We have two pivotal studies, one has two ARMs the other has three ARMs, each ARM has 211 patients, so there is a 1,055 patients in the two studies.

We also have a study going on for chronic use and Barry will talk more about these studies along with the other pharmaceutical development issues. Our Advanced Wound Care business is comprised of devices and dressings that treat chronic non-healing wounds. This business has been growing 30% to 40% a year and it is the growth engine for Derma Sciences; it’s where we are spending the majority of our sales and marketing dollars over the last couple of years, we developed a field sales force, sales and support team that now numbers 55 in the United States and we’ve been able to grow and we’ll continue to grow that business 30% to 40% a year.

Outside of the United States, in the UK, we have six reps and in Canada we have a direct sales force and in the rest of the world we have distributors. So that’s a business that we expect will become profitable in the not too distant future and one that we will continue to look to add new products for our sales force and add to that sales force. It’s important that you know that DSC127 if and when approved can be sold by that same sales force, so it’s the same point of call, as they’re calling on today, so we’ll be able to gear up to size of that sales force and introduce DSC127 hopefully sometime there in 2016.

And then the last part of our business is our Traditional Wound Care business. This is made up of what would be called commodity dressings and bandages that we sell both under our own brand Derma Sciences and we also have a robust private-label business as well and Bob Cole will tell you about some of the exciting things that are going on there. So those are our three businesses; that’s where we’re going to today focus on. Today, we’re going to focus in on DSC127, Medihoney and TCC-EZ cast which are our three key programs going on in the company right now.

So with that I am going to turn it over to John Yetter.

John Yetter

Okay. Good afternoon, my name is John Yetter and I am the CFO of Derma Sciences for going on 13 years. And I am not going to tell you very much about what Derma Sciences was 13 years ago, but rest assured, we transformed ourselves many times positively since then. I am very happy to be here to tell where we’re at, at this moment and as the finance guy I'll be brief.

So first, next slide here. Okay, our goal for the last few years have been to invest in and grow the advanced wound care business, okay. As Ed mentioned, that's our growth engine. Our commodities business which was here 13 years ago when I started, our goal there is to hold it steady okay, positive cash flow that helps us out in terms of our growth initiatives in investments and then we obviously have the development of our promising pharmaceutical product, DSC127.

So let's look at the sales. We've achieved our objectives. In terms of advanced wound care at the bottom of this slide, you can see we started off in the neighborhood of $3 million with some legacy advanced wound care business and we've grown that to, I can't even see that, further slide, it’s up here, we've grown it from $3 million and $25 million last year and we hope to be somewhere on or above $35 million in 2013. From 2007 to 2012, that's a compound annual growth rate of 53%.

Traditional wound care, let's hold on to it, that's our objective, starting $31 million in 2008, we had an acquisition that pumped it up and we've held it steady since then. 9% compound annual growth rate, overall $34 million company to $73 million in 2012, and we hope to be on or above $83 million this year. What is the $83 million, advanced wound care 30% to 40%, traditional wound care holding steady. So nice growth trends consistent with what we've been telling you for the last several years consistent with our strategy.

Okay. Let's look at statements, as Ed mentioned, advanced wound care, that’s our growth engine. We have traditional wound care and we also have the pharma R&D expense. 2012, we grew $24.8 million from $15.3. Our segment contribution in 2011 was negative 1.5 and went up to 5.2. You see that trend consistent with the pretty much year-to-date to say what's going on. That’s our growth investment, we went from 20 some odd reps to 38 to 42 in 2012. Expenses usually proceed revenues. What we hope to see in the advanced wound care segment is a gradual leveraging of sales growing and the segment contribution loss decreasing over the remaining three quarters of this year. Traditional wound care hanging right in there, 11.46 million, 11.47 and first quarter of 2013 is consistent with the first quarter of 2012, so no surprises there.

Pharma R&D, obviously no surprise there. We spent about $7.2 million last year versus $1.1 million in 2011 and that number is already starting to ramp up principally due to as fact that we’ve done a nice job with our tox work and CMC work. And now we just recently launched all of our clinical trials and thereby fire the more expensive aspect of that trial and so you can expect that number to increase.

What does it all mean? The overall financial performance is in line with our expectations. Sales 63, 73, consisting growth in the first quarter, 18.8 over 15.3, that’s a large number, you get a little bit of apples-to-oranges there with TCC, which we acquired in April of last year, but organic growth excluding TCC at 23% is 12%. Our margins are improving, that’s consistent with our advanced wound care products that have roughly 50% margins all in versus our traditional wound care which I had mentioned in the 25% to 30%.

Net loss last year was $12 million, excluding R&D, $7.1 million, was $4.9 million and our adjusted EBITDA because it includes equity-based comp expense was $1.8 million versus $1.2 million, again no surprise there. We're investing in growth. Our losses increased a little bit. And consistent with the three months, you have similar trends. Sales are up. Margins are up. Margin percents are up. Net loss is up due to R&D and some equity-based comp expenses that we incurred and will incur going forward and another big piece of that is amortization expense associated with our acquisition of MedEfficiency in April.

We're happy to pay a milestone payment for MEDIHONEY in October this year, a $1 million payment when we hit on a 12-month rolling basis, TTM basis, 10 million in sales and then we also made an acquisition licensing of BIOGUARD in July of last year which has a little bit of a intangible assets as well.

Our balance sheet, our liquidity is in excellent shape. Again, if I took you back 13 years, I am overjoyed with this. We have roughly $44 million worth of cash on hand. Our receivables are in excellent shape. Our inventory is properly positioned to support our business growth. There is not much going on in other current assets and other current liabilities. We are not a big CapEx user roughly between $715 million a year, no significant changes anticipated there, and based upon our long-term strategic plan, we feel we have enough liquidity to get us where we want to go with our growth initiatives through the success of DSC127.

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