If Derma Can Weather The Storm Of Competition, Then Good Things May Be Ahead

Nov.14.12 | About: Derma Sciences (DSCI)

The biotech sector revolves around two things, FDA decisions and EPS announcements. In this article I wanted to focus on one company, which, in the wake of a very strong quarter, should be considered based on the recent developments of its lead drug candidate, DSC127.

Derma Sciences (NASDAQ:DSCI) of Princeton, New Jersey is

a medical technology company providing advanced wound care products, including Medi-honey dressings that are used for the management of non-chronic and hard-to-heal wounds, such as chronic ulcers, burns, and post-operative wounds; Bioguard dressings that are used for prophylactic use in the prevention of hospital or community acquired infections through wound sites.

On Monday November 12th, the company announced quarterly EPS results of -$0.24/share on revenue of $19.60 million, which is pretty impressive since analysts were only expecting DSCI to post a loss of -$0.37/share on revenue of $19.30 million.

The impressive earnings beat isn't the only positive catalyst potential investors should give consideration to. In my opinion, the development of the company's lead drug candidate DSC127 (is a novel investigational analog, which has been shown to improve epithelialization, granulation and vascularization, accelerating wound healing in a variety of normal and diabetic animal models, that is also known as Angiotensin) should play a key role in most investment decisions. On October 22nd the company announced that it was set to begin Phase III clinical trials of the drug and such trials could begin in early December. Angiotensin's primary use will be to reduce the severity of foot ulcers in patients with diabetes.

According to the National Institute of Diabetes and Digestive Kidney Diseases (a unit of the National Institute of Health),

Diabetes affects 25.8 million people of all ages, or 8.3% of the U.S. population and nearly 2 million new cases are diagnosed yearly in people age 20 or older. More than 60% of non-traumatic lower-limb amputations occur in people with diabetes and in 2006, about 65,700 non-traumatic lower-limb amputations were performed in people with diabetes. About 80% of amputations were preceded by a foot ulcer.

As the company comes closer to initiating such trials, should potential investors be concerned about the current competitive environment DSCI faces? Generally speaking, Derma Sciences faces stiff competition from several of the major drug makers in the diabetic drug sector; however, DSC127 should be seen as an ancillary solution for most types of patients.

On one hand, Novo Nordisk (NYSE:NVO) recently announced that a panel of federal health advisors would recommend that the company's experimental diabetes drug, Degludec, be approved by the FDA (as long as additional safety measures are taken into account). Degludec is a new type of insulin designed to help early to mid-stage diabetics control their blood sugar levels beyond the standard 24-hour period offered by current products on the market. Though not necessarily a direct competitor of DSC127, Degludec could essentially reduce the number of patients experiencing foot ulcers, and therefore reduce the potential market size of the drug.

On the other hand, Eli Lilly (NYSE:LLY) currently has four diabetes drugs in its pipeline (all in Phase III trials) that are aimed at patients currently diagnosed with Type-2 diabetes. The four drugs are Dulaglutide (a biologic entity being studied as a once-weekly treatment for Type-2 diabetes), Empagliflozin, (a chemical entity that inhibits the sodium glucose co-transporter-2 in patients with Type-2), an unnamed Insulin Glargine Product (a biologic entity that consists of basal insulin) and lastly a Novel Basil Isulin Analong (a biologic entity that is used for the treatment of patients with both Type-1 and Type-2 diabetes).

The last of the four drugs in Eli Lilly's pipeline is what concerns me the most. Why? Since the drug will most likely be a direct competitor of Derma Sciences, such variables as sales growth and market share could be simply out classed by the reputations of the bigger drug makers such as Eli Lilly.

Final Analysis

Are there any negative catalysts to consider in the wake of the recent developments at DSCI? I think long-term potential investors need to weigh the entire set of possible outcomes before establishing a position in the company. For example, and from a broad perspective, DSCI could very well miss a specific endpoint during clinical trials or get caught up burning through much more cash then was first thought of as enough.

From a sector specific standpoint, it's very hard to tell whether or not Derma Sciences has the ability to actually compete with the likes of Novo Nordisk and Eli Lilly simple because of each company's current value. Derma Sciences has a market cap of roughly $145 million whereas Novo Nordisk has a market cap of $84.30 billion and Eli Lilly has a market cap of $54.08 billion. Lastly, there is always the possibility of an acquisition, though nothing official has been announced in terms of such a transaction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.