FINAL TRANSCRIPT
DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
Event Date/Time: Aug. 17. 2009 / 3:00PM GMT
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FINAL TRANSCRIPT
Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
CORPORATE PARTICIPANTS
Ed Quilty
Derma Sciences, Inc. - CEO, Chairman and Director
CONFERENCE CALL PARTICIPANTS
Matt Campbell
Knott Partners - Analyst
Patrick Tully
Endeavor Asset Management - Analyst
PRESENTATION
Operator
Good morning, and welcome to Derma Sciences second quarter 2009 conference call. On the call today from Derma Sciences
is Mr. Ed Quilty, Chairman and Chief Executive Officer. Following management's prepared remarks, the call will be opened for
a brief question-and-answer session.
Before we begin, I would like to take a moment to read the Safe Harbor statement. I would like to remind our listeners that
remarks made during this call may contain forward-looking statements that involve risks and uncertainties. Forward-looking
statements on this call are made pursuant to the Safe Harbor provisions of the federal securities laws. Information contained
in the forward-looking statements is based on current expectations and is subject to change, and actual results may vary -- may
differ materially from forward-looking statements.
Some of the factors that could cause actual results to differ are discussed in the reports Derma Sciences files with the SEC. These
documents are available on Derma Sciences' website at www.DermaSciences.com, and we encourage you to review these
documents carefully.
Now I will turn the call over to Mr. Ed Quilty. Ed?
Ed Quilty - Derma Sciences, Inc. - CEO, Chairman and Director
Thank you Rachael. Good morning, and thank you for taking time to join in and listen to our second quarter report for 2009. I
have with me today John Yetter, our Chief Financial Officer, and Bob Cole, who is our Executive Vice President of Sales. When
we get to the Q&A portion, any one of the three of us is available to answer your questions.
I will start by talking a little bit about the quarter and how we perceive that the company is doing. Then we'll take your questions
and answer them to the best of our ability.
Overall, we are very pleased where the company is moving toward. There's three areas that we are really concentrating our
efforts in -One is the sales and the development of our advanced wound care business, led by our MEDIHONEY line of dressings, which
are doing very well in the marketplace.
We are also focused on finishing our clinical phase 2 trial on DSC127 and getting the report for that, and we'll talk a little bit
about that.
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Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
And then we are focused on improving our operating results by tight expense controls and improving -- as a result, improving
our cash flow and income as the quarters proceed. The advanced wound care business will help that effort, because as you've
seen in our quarterly filing, the advanced wound care margins are significantly higher than the core business -- probably 25%
to 30% on average. So as we increase the sales of the advanced wound care products, it has a dual effect of not only increasing
sales but also increasing the overall margin of the company.
MEDIHONEY, as I mentioned, is doing very well. The sales for the quarter were right around $665,000, which is an increase of
125% over the quarter in 2008. MEDIHONEY has seen on a month to month basis a kind of growth that we expect to see from
the 10 direct sales reps that we have in the field. MEDIHONEY is averaging now between $250,000 and $280,000 a month and
will continue to grow.
We've also added to the sales effort by contracting with -- right now we have 15 manufacturer's reps who work on a
commission-only basis who represent other lines, but in interviewing them were quite interested in taking up our advanced
wound care line, especially MEDIHONEY, and we just started to train those people in July, and they are onboard. So hopefully
we'll see some increased sales come from that. As our as sales continue to strengthen in the advanced wound care, it would be
our plan to add more direct reps as our cash flow and our earnings will allow us to do it.
And the good news about that is the 10 people we have in the field right now are in some ways the pioneers of getting out and
telling the MEDIHONEY story. They've taken it from its inception to where it is today, a product that is at at about an over a $3
million run rate, and for a dressing in this category, that's some pretty nice results.
To put it in perspective, the leading silver dressing with -- that came out about seven years ago had over 100 sales reps selling
it, and I think in the first year they did about $4 million. So we think we are on track to make MEDIHONEY a real worldwide brand.
Speaking of the worldwide brand, we are continuing to negotiate the worldwide license for MEDIHONEY with our partner,
Comvita. We expect that those negotiations and the contract will be concluded -- it's our plan to conclude that contract by year
end.
We've also spent a significant amount of time and effort adding other products to the bag or the sales portfolio of our direct
sales reps so that they will become profit generators to the company more quickly. We introduced BIOGUARD in the second
quarter of this year, and it in its first month did just close to about $60,000, and it's doing even better than that in July. So by -making BIOGUARD the most impressive new product in its first month that we've had. We did have quite a buildup of pent-up
demand for BIOGUARD, our antimicrobial gauze wound dressing, and we expect that that product will continue to grow.
The other new products are doing very well. Our XTRASORB dressing is growing about where we -- the way we thought it would
since it was introduced at the latter part of last year. Our MedEfficiency product is doing well. So we are quite satisfied that our
new products are really going to continue to provide growth in the advanced wound care space.
MOBILITY-1, our pneumatic device for treating lymphedema and other vascular diseases, has been lagging a little bit behind,
but we're optimistic that we can get some more favorable reimbursement codes for that product and that that will help us
make that business grow.
So advanced wound care is clearly our focus for future growth. The 10 reps that we have are exclusive to advanced wound care.
That's all we have them selling, so they are selling those new products to wound centers, acute care hospitals, extended care
facilities, home health care; and we expect that as the quarters continue to grow, that will be the most impressive part of Derma
Sciences' overall growth.
Happy to report that DSC127 is about now I think around 40% -- almost 50% enrolled in the phase 2 trial. Some very impressive
institutions participating in that trial. We are still on-track to finish that trial by the end of the year. As we mentioned in our last
conference call, there's three arms to the trial. There's the control group, there is a group that gets one concentration of the
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Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
drug, and then there's a group that gets a second concentration of the drug. And that's quite common in these trials to try to
figure out what the most effective dosing of the drug would be. We expect this time next year that we will be able to report the
results of the phase 2 trial.
It's our plan to begin in the first part of 2010 to talk to potential partners for DSC127. We think it can be a very -- will be a very
valuable asset if we show the statistical significance in the phase 2 trial, and believe also that it probably makes sense for Derma
Sciences, which is not a drug development company, to look very carefully at bringing in a partner to help us take that product
through the phase 3 and to the market. A very exciting part of our future, and one that you will be hearing more about as the
quarters go on.
Sales for the -- overall sales for the quarter were $11.6 million versus $13.1 million in the second quarter of 2008. Let me just
comment on the decrease in sales, two drivers causing that to occur. One is the exchange rate in Canada, where the -- an
unfavorable exchange rate has cost us some sales when we transfer the Canadian dollar into US dollars. We also had a situation
in Canada where our sole distributor initiated a program, not uncommon in today's economic times, they initiated a program
to reduce their inventories in the first part of the year, and when we bring product -- when we sell product into the Canadian
market, we sell it through this one distributor, and they brought their inventories down. They did a nice job of doing that, but
that affected our sales to them for the first couple of quarters of 2009.
I am happy to report that overall sales to the end users in Canada are up about 10%, which is quite a good effort by our sales
team in Canada, and we hope that that will continue in the third and fourth quarter. We also expect strengthening of the
Canadian operation in the third and fourth quarter as this inventory reduction program is now over and sales will return to their
normal level and hopefully even be driven further by the increase in business in the Canadian market.
Second factor that is affecting us is the first aid division, where we've done an excellent job of improving our overall margins
in the first aid division, but many of the customers that we sell to in that division have lowered their inventories in the first
couple of quarters of this year. Many of those customers are kit packers that sell to the automotive industry and the institutional
market, the occupational health market, and we've seen a weakening there.
I am happy to report that I did see some favorable growth in the last month in that business, and we expect that it will continue
to improve. We also are not -- we are not suffering too much on a dollar for dollar basis between the sales shortfall and the gross
margin, as we have significantly improved the margins as we shut down the domestic manufacturing of those products at the
end of last year, and we've moved those to new locations, and that's helped improve our margins.
The rest of the business is doing just fine. Our traditional wound care business, which is gauze dressings, basic wound dressings
in the United States is running at about the same sales that it did last year. We don't expect much growth in that business. It's
a fairly mature business, but we do have some good products in that area. Our wound closure and securement business is up
a little bit over prior year and running ahead of our plan, so we are quite happy about that.
Expenses -- expenses have been a focus for Derma Sciences. We've done a good job of eliminating any -- most discretionary
expenses, and as a result expenses overall have reduced $780,000 or 17.5% over the same period last year, and we expect tight
expense controls to continue so that we can improve our cash flow and our profitability. You did notice that we had positive
cash flow in our operating activities in the second quarter. We -- our plan is for that trend to continue to improve in the third
and fourth quarter. So overall from an operating expense, we are quite happy with where we -- the way we've been running
the business.
And it's a delicate balance for Derma Sciences. We are a growth company. We also are an R&D company developing a
pharmaceutical product. We will spend $2.5 million on DSC127 through the phase 2 trial. We are funding that program in-house,
a benefit from another $2 million of expenses in that area from an NIH grant that had been given to the founders of the product
at the University of Southern California before we licensed it. So we are funding back, and we believe it's quite important.
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Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
We're trying to fund the growth of our advanced wound care business and fund it through additional direct selling assets. But
we're being very careful about the timing of doing that and also maintaining positive cash flow and improving the overall
profitability of the business. So we want to grow the business and also improve the profitability and the cash flow at the same
time. A delicate balance to do that, but I think the team is doing a good job of making that happen.
So overall, as I mentioned at the outset, the quarter was a solid quarter for Derma Sciences. We expect that trend to continue,
and we'll be looking forward to continuing to report to you.
So with that, Rachael, I am happy -- we are happy -- the three of us -- to take any questions that the group might have.
QUESTIONS AND ANSWERS
Operator
(Operator Instructions). Matt Campbell, Knott Partners.
Matt Campbell - Knott Partners - Analyst
I missed the one comment with regard to sales being down. You said your distributor up in Canada initiated a program to lower
their inventories. Has that program now been completed? And do you expect to see a resumption of growth with regard to
revenue?
Ed Quilty - Derma Sciences, Inc. - CEO, Chairman and Director
Yes, I did mention that, that our sole distributor in Canada, which is Cardinal Health -- the Canadian branch of Cardinal Health
-- had decided to embark on a program to reduce their overall inventories. Now, the way that affects us is they carry a certain
amount of inventory to maintain a 97% fill rate, and they were able to carry less inventory and maintain that same customer
satisfaction rate to our end users, and they did that over a couple of quarters, they brought down their inventory.
But I also mentioned sales to end users are up about 10% in Canada through the second quarter of this year, which is good
news for us. Cardinal has finished implementing the program that they put in place, and we expect to see -- we expect and we
know that orders that they have going forward with us, which are generally 90 days in advance, are back to the previous levels,
and we would hope that that would also increase as they start to -- we start to see the effect of the sales increase in Canada.
So, yes, that program has been implemented, and we expect the overall operation to improve in Canada in the third and fourth
quarter.
Operator
Patrick Tully, Endeavor Asset Management.
Patrick Tully - Endeavor Asset Management - Analyst
Just real quickly, can you just talk about the other factors that are going to affect the first aid division in the back half, like the
animated bandages and the fact that you think the inventory -- if I understood you correctly, the inventory correction by your
distributors is abating, and the other positive factors that are going to affect the back half of the year.
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FINAL TRANSCRIPT
Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
Ed Quilty - Derma Sciences, Inc. - CEO, Chairman and Director
One thing I would mention about the first aid division in answering your question, Patrick, is it is a different business than our
wound care business in that, especially in the consumer part of the business where customers are doing their planogram for
2010 -- they've pretty much completed it this year -- so we're always looking at that business on a going-forward basis a little
further out than our wound care business. So right now, we're looking at customers that are coming on for 2010, the latter -last quarter 2009 and into 2010.
We have quite a impressive number of new contracts in that division that are going to show some real growth in 2010 and
beyond. And some of those, as we -- some of those we'll be announcing in the not-too-distant future, but we expect the overall
first aid division to rebound quite nicely based on that new business into 2010. So I think you will see some projections that
we'll be in a position to make in probably around the fourth quarter for growth for 2010 that will be quite impressive.
The balance of 2009 is going to be a little better than the second quarter of 2009 but not as good as 2010 is going to look. We
are still -- we're starting -- I think it's going to be a gradual buildup of inventories on those kit packers, some of the business that
we currently have.
We also had a -- as you know, we had some challenges in 2008 in the manufacturing part of the business that we spent the year
addressing. We spent a lot of money improving our manufacturing. As a result of some of those manufacturing problems in
2008, we did lose some contracts, some of which we are starting to gain back now. So it's -- 2009, the balance is still going to
be a little bit of a challenge for us, but the offset to that will be we've got about a 7% improvement in overall costs in that
division, which is -- was helping us.
We should be okay for the balance of 2009 and significantly better in 2010. The character bandages will help in the -- especially
in the fourth quarter of 2009. You probably know but maybe the others listening don't know that the margins are a little bit -are better on those character bandages, even though we do pay some royalties to the people we license them from.
So overall, I think we are still very optimistic about the future of the first aid division. This economic downturn has affected that
business a little more than our wound care business, but we expect that will turn around.
Operator
(Operator Instructions). We have no further questions at this time.
Ed Quilty - Derma Sciences, Inc. - CEO, Chairman and Director
Okay. Well, if there are no further questions, we will wrap up, and we are obviously -- anyone who wants to give us a call or call
me personally to ask a question, we are happy to answer it for you.
Summarize by saying that we are excited about the quarter, especially in the advanced wound care space where for the six
months of the year our sales are almost at $2.2 million and quite a bit ahead of last year, which was around $1 million, so that
business is realizing the kind of growth that we expect. Our manufacturing businesses are in good shape. Our costs are well
under control, and our expenses are consistent where we planned them, which was to be quite effective at managing our overall
expense in the business. So we expect progress to continue for Derma Sciences in the third and fourth quarter and into 2010.
We will be making a an effort here to -- you might have noticed that we just hired the Investor Relations Group. They are our IR
firm going forward. We are doing -- as our results have improved, we are going to be more active in the investor marketplace,
doing road shows and attending conferences and that sort of thing. So we hope to improve the overall knowledge and awareness
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FINAL TRANSCRIPT
Aug. 17. 2009 / 3:00PM, DSCI.OB - Q2 2009 Derma Sciences Earnings Conference Call
of Derma Sciences in the next couple of quarters, and as a result of that and the operating results, we would hope that the
shareholder value would improve significantly as time goes on.
So thanks again for joining us. We'll look forward to reporting the third quarter to you. And hope that everyone has an enjoyable
rest of the summer.
Operator
This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.
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