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Derma Sciences, Inc. (NASDAQ:DSCI)

Q1 2014 Earnings Conference Call

May 8, 2014 11:00 ET

Executives

Kim Golodetz - Senior Vice President, Principal, LHA, Inc.

Ed Quilty - Chairman, President, CEO

John Yetter - CFO, EVP, Finance

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

Analysts

Scott Henry - ROTH Capital

Kyle Stanley - Canaccord Genuity

Traver Davis - Piper Jaffray

Joe Munda - Sidoti & Company

Operator

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

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, Chairman and Chief Executive Officer and John Yetter, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q&A portion of the call, we also will have Barry Wolfenson, the company's Group President of Advanced Wound Care and Pharmaceutical Development, Fred Eigner, Executive Vice President for Operations and General Manager of Derma Sciences Canada and Bob Cole, President of Traditional Wound Care and Corporate Accounts.

Earlier today, Derma Sciences announced financial results for the 2014 first quarter. 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 in 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 8, 2014. 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, I would like to turn the call over to Ed Quilty. Ed?

Ed Quilty

Thank you, Kim. And my thanks to each of you for joining us here this morning.

It's been less than two months since our last conference call and I'm pleased to report that we continue to make excellent progress toward our goal leadership and advanced wound care with the focus of the treatment of chronic wounds in particular diabetic foot ulcers. We are delighted also to be informing our full year financial guidance today as well as our guidance regarding the DSC127 Phase 3 timetable and program cost.

During the quarter, we introduced AMNIOEXCEL to the marketplace, a full quarter ahead of plan. Just a first of two important placental-derived wound care products that we licensed from BioD in January.

Skin substitute had a key presence at our booth at the Spring Symposium on Advanced Wound Care or SAWC held in Orlando a few weeks ago. Also at SAWC, MEDIHONEY and TCC were the subjects of numerous presentations on independent and sponsored studies.

Later in this call, I will give you more color on the symposium and the reception Derma Sciences received from the key opinion leaders and practitioners.

As you know, we are expanding our sales organization and during the quarter, we added 24 terrific people to our global sales and marketing operations. We initiated a direct to patient program to further drive enrollment in DSC127 Phase 3 studies for diabetic foot ulcer healing. And this program is performing as planned. With considerable enthusiasm for DSC127 both among those conducting the trials and otherwise. Need awareness of this drug in our pivotal trials, it is growing by the day. I'm pleased that we are making steady progress and our comfortable we will reach the halfway market enrollment in our studies by the end of this year.

Before I turn the call over to John Yetter, I wanted to provide a quick comment on our financial results for the quarter.

Mentioned during our last conference call, the first quarter was impacted by severe winter weather, which caused declines in patient visits to wound clinics of 15% to 20% by some estimate. The same time, we were realigning our sales territories and integrating many new sales representatives and related professionals. So there was some temporary moderating effect on sales. However, its important to note that growth in sales of the AWC products has begun to show strength in recent weeks, our organization is performing well and we expect to meet our sales goals for the year.

Now, I will turn the call over to John, who will go through the financial results in more detail and then I will come back and give you more color on the quarter and coming months. John?

John Yetter

Thank you, Ed, and good morning for our listeners.

I want to point out we filed our 10-Q last night and that document contains more details on our quarter. I will limit my discussion this morning to key financial highlights and should anyone want to drill down further I will be happy to answer additional questions during the Q&A portion of the call.

Net sales for the first quarter of 2014 were $19.8 million, up 5.3% in the first quarter of 2013. This included AWC, Advanced Wound Care products sales of $8.4 million up 11.5% over the prior year quarter and Traditional Wound Care product sales of $11.4 million up 1.2%.

As Ed mentioned, Advanced Wound Care sales were negatively impacted by the severe winter weather during the quarter, yet still posted double-digit growth. Traditional Wound Care results reflect improved Canadian sales.

Total international net sales excluding Canada were $1.7 million up 54% from the prior year. Majority of this increase was from MEDIHONEY due to typical growth in the timing of Middle East order fulfillment.

Gross profit for the first quarter of 2014 was $6.9 million or 34.9% of net sales. This compares with gross profit for the first quarter of 2013 of $6.7 million or 35.7% of sales, a slightly lower gross margin reflects higher manufacturing costs and unfavorable product mix partially offset by the increased sales of higher margin advanced wound care products.

Selling, general and administrative expense for the first quarter of 2014 was $13 million compared to $9.9 million for the first quarter of 2013. The increase was principally due to higher expenditures associated with advanced wound care growth initiatives including incremental BioD start-up cost and higher timing and growth related equity based compensation expense.

Research and development expense for the first quarter of 2014 was $4.2 million compared to $3 million in the first quarter of 2013. The increase is principally attributable to ramp up of DSC127 diabetic foot ulcer, clinical trial activity.

Net loss for the first quarter of 2014 was $10.3 million or $0.46 per share compared with a net loss for the first quarter of 2013 a $6.2 million or $0.38 per share. The increase in net loss was principally due to the higher operating expenses related to our growth initiatives.

Drilling down into the business segments, advanced wound care had a negative contribution of $3.7 million compared with a negative contribution of $1.6 million in the first quarter of 2013. This lower contribution is due to the increase in sales and marketing expenses growth related discussed earlier.

Traditional Wound Care products contributed $1.7 million during the first quarter of 2014 compared to $1.9 million same time the prior year. Higher product costs and operating expenses contributed to the slight decline – this slight decline in contribution.

During the first quarter of 2014, the company raised net proceeds of approximately $80.6 million from an underwritten offering of 7.5 million shares of common stock. As of March 31, 2014, Derma Sciences net cash, cash equivalents and investments of $92.4 million. This excludes our $6.5 million in investment in Comvita common stock held as long-term investment and compares to $23 million in cash and cash equivalents as of December 31, 2013.

With that, I will turn the call back to Ed.

Ed Quilty

Thank you, John, for that review.

We are very excited about the sales growth we have achieved in Derma Sciences over the last several years and believe we are well-positioned to continue along that trajectory. With aging population and well-known increased incidence of diabetes better therapies for healing wounds are unperturbed.

Our advanced wound therapy product portfolio provides a wide range of choices for practitioners to treat chronic wounds of various types, while the 1,200 wound care clinics in the United States provide efficient call points for our growing core of sales reps. Supporting our focus on providing technologically innovative proprietary products, we added two placental-derived products to our portfolio.

As I said earlier, we introduced the first of those AMNIOEXCEL to the marketplace and recorded modest initial sales during the first quarter. We put in place a comprehensive plan to address each Medicare administrative contractor in order to secure reimbursement for our AMNIOEXCEL products including the initiation of our clinical trial program.

The price point for the AMNIO products will be significantly higher than our current AWC products in its full launch, there will be a meaningful contributor to the overall revenues of our sales organization and the return on investment.

Podiatrist presented the first three cases of five wounds treated with AMNIOEXCEL at the SAWC last month. These cases were presented in our booth and were well-attended. One case, after feeling the heat, after failing to heal using the competitors’ skin substitute the patient healed completely in six weeks after three applications of AMNIOEXCEL.

MEDIHONEY posted double-digit sales growth during the quarter and this line of products continues gather champions in the wound care community as clinicians try the product and see it for themselves that this relatively inexpensive dressing produces excellent wound healing results. There were no fewer than five presentations in posters at SAWC on MEDIHONEY including a case series we sponsored on pediatric patients. In addition, a clinician presented cases on wounded warriors and retirees. These were all very compelling examples of the safety and effectiveness of MEDIHONEY.

Our investment in Comvita, our New Zealand based partner affords us a steady supply of medical grade honey and helps to shelter us from the price inflation of raw product as demand as grown worldwide for Manuka Honey. This partnership becomes more meaningful over time as our sales of MEDIHONEY continue to grow.

We are also targeting the burn market and believe MEDIHONEY gel and HCS along with BIOGUARD represent good products for this large market. Indeed, we have already achieved several conversions to MEDIHONEY and key burn centers and have clinical evaluations ongoing in various stages at other centers.

Next quarter, we expect to report to you the initiation of one or more randomized controlled studies comparing the efficacy of MEDIHONEY against a much more expensive widely used product in the burn setting.

Continue to be very excited about TCC-EZ, another product that posted double-digit sales growth during the quarter. At SAWC two key opinion leaders previewed two important publications that will be available later this year including that more offloading is needed for the management of diabetic foot ulcers and that total contact casting is the preferred method to do. It also contains some new data that TCC may reduce amputation rates. Presentation will be available online in about a month.

Our sales reps have been making considerable progress in expanding awareness for this treatment regimen and adding customers. Note, that total contact casting is still extremely underutilized and less than 5% of the addressable market.

Let me turn my attention now to DCS127, which continues to be a powerful driver of our long-term growth plan and a potential platform technology. The drug candidate is directed to an enormous yet woefully underserved market. We have made steady progress in enrolling patients in our Phase 3 trials during the quarter with a successful pilot direct to patient media campaign that we are now scaling up in size and geographic reach.

The opening of new clinical trial sites in South Africa and the United States support our expectations for both timing and the cost of these trials. These are the largest ever clinical trials for diabetic foot ulcers and our goal is to generate the data that we will require achieve U.S. regulatory support. We are determined to run a program that is well-designed and tightly administered and will show without question the efficacy of our drug.

Our timing and expectations are unchanged from what we provided during our last conference call. We are working toward and continue to expect trial enrollment to be completed in mid-2015 with top line data read out in the first quarter of 2016.

We expect that we will reach the mid-point of the trial by the end of the year and as we have repeated in the past at that point we will make a press release to investors telling them that we have reached that halfway point.

Our current cost estimate for this program up to the filing of the new drug application continue to be between $55 million and $60 million and through the close of March, the first quarter, we have spent to-date $23.2 million.

We are continuing the pre-clinical work with DSC127 on scar reduction. According to the CDC in 2010 there were 51.4 million patient surgical inpatient surgical procedures performed in the United States about 1.5 aesthetic procedures and about 1.2 million reconstructive surgical procedures, I have to say 1.5 million aesthetic procedures, I know that I said million, I apologize. As such we believe that the markets for an effective scar reduction program to be as high as $4 billion.

BARDA grants, our funding studies evaluating DSC127 as a treatment for ionizing radiation exposure or dermal burns resulting from exposure to radiation in the event of a nuclear attack. We will meet with BARDA again in the coming weeks and hope to have additional information on how this is – this program is going to be moving forward.

Based on early encouraging data in wounds related to radiation exposure, we are all still contemplating initiating a Phase 2 clinical trial program for the treatment of radiation dermatitis. But at this point, there isn't anything new for us to discuss and so we work that a little further.

According to the American Society of Radiation Oncology nearly 2/3rds of all cancer patients will receive radiation therapy during their illness. Approximately 85% of patients treated with radiation therapy will experience a moderate-to-severe skin reaction. Thus, we think this market could be at least as large as the one for diabetic foot ulcers. There is currently is no FDA approved drug indicator for the treatment of radiation dermatitis.

DSC127 represents a platform technology that addresses a potential market of well over $1 billion when considering the three indications that I just discussed with you.

Our international advanced wound care sales continue to be a focus. Our Asia Pacific and America markets grew 12% year-over-year. The EMEA which has direct distribution from our U.K. office, it had a 51% increase in sales during the first quarter, once again, led by sales of MEDIHONEY.

We expect Latin American to be a particularly a fruitful geography, Mexico alone has the sixth highest rate of diabetes in the world, estimated at 1 and 6 or almost 17% of the population. At our global sales meeting in Miami in February distributors from Asia and Latin America along with our full EMEA team were trained on TCC-EZ gauze. This product is now being launched in these territories and we expect to begin recording TCC-EZ sales soon. As in the United States, we believe this product can be meaningful in many regions due to its relatively low cost and exceedingly high clinical outcomes.

Our traditional wound care segment continues to provide positive cash flow and we did have a small return to growth with sales up 1.2% year-over-year. We will support this business for the cash flow provides for our other initiatives and we will invest in growth if we judge the returns to be there, continue to give guidance and expect 2004 (sic) 2014 traditional wound care sales growth to be between 2% and 5%.

Also we continue to expect AWC organic sales growth to be more than 30%. We expected our sales for 2014 will grow to $92 million in none of the guidance I just mentioned as changed since our communication in January.

Really down a bit we believe gross margins will improve in Advance Wound Care. But there will be modest pressure on traditional wound care margins. Overall, we expect corporate gross margins to increase by more than 1% this year.

During 2014, we will spend $35 million on sales and marketing mostly in the United States. We will spend $28 million on R&D, almost all of that on DSC127 and $17 million on G&A. About $9 million of our expenses are non-cash items. Project during this year, we will burn approximately $40 million that should leave us at the end of this year with a cash balance in excess of $65 million.

I'd like to mention that once again this year, we will host an Analyst and Investor Day in New York City. We will be announcing the date shortly that will be on June the 17th. This year the agenda will include discussions from three physicians on their recent usage of AMNIOEXCEL and three physician researchers on the full DSC127 program covering DFU, scar, and radiation dermatitis. And a short presentation by a leading burn surgeon on MEDIHONEY and the dramatic impact they can have on the lives of burn patients.

We are just playing this together now and it is going to be a very exciting afternoon and I hope many of you will be able to make it. As we get a foot together, we will be sending out more details in the upcoming days.

Before I open our call for questions. I want to remind you that Derma Sciences has never been in a better position. We have the right people, right products and the funds we need to see us through our transformation to a leading competitor in the wound healing space.

With that operator, I will open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Henry from ROTH Capital. Please go ahead.

Scott Henry - ROTH Capital

Thank you, gentlemen. Just a couple of questions, lot of information there, first, I did want to fully understand, I noticed gross margins declined a little bit in the current quarter, my understanding from your comments are that perhaps alluded the Advanced Wound Care growth margins declined, I'm guessing because of lower volumes and that wouldn't improve back to what we saw the prior quarter?

And then on the traditional side, it does sound like cost have just increased, is that a fair takeaway from it?

Ed Quilty

Hi, Scott. I will John Yetter answer that question for you.

John Yetter

Yes, Scott. That is a fair assessment in the advanced wound care area part of it was due to mix as we mentioned before Europe, Middle East, Africa had a very nice quarter, some of that was due to Middle East business growth in that area. But that businesses had a lower margin. And we also had some cost increases in the wound care area.

On traditional wound care, yes, that's a commodity based business, we have done a nice job of holding cost there. But, in Canada which is our primary source to those products through China, we have an exchange issue there the Canadian dollars weakened a little bit. And that as resulted in a increase on Canada, Scott, in terms of procuring these products from China. So those contributing factors are the reason for the slight quarter-to-quarter decrease in gross margin.

Scott Henry - ROTH Capital

Okay. And staying on the income statement, SG&A about 13 million in the quarter, was a little higher than what we see now, now obviously you added some reps.

My question is, should we think about the $13 million has – should that be our go forward quarterly rate. I mean we are looking at SG&A greater than $50 million or other – is there any one time knowings in that quarter?

Ed Quilty

Again, I will let John address that. John?

John Yetter

I think that is you can use that as a model for expectations going forward. We did add as we mentioned approximately 24 sales and marketing people so we are investing heavily in sales and marketing growth. There is a little bit of spill over volume related, growth related in distribution and in G&A but 13 times 4 is I believe is representative of expectations going forward. And I will mention that we did work very hard in the first quarter to bring all those increases on. So I think the 13 is probably a good representation.

Scott Henry - ROTH Capital

Okay. Great. And a final question for Ed, can you give me any color on the AMNIO sales in the quarter, will you be given or will you give us numbers for that product line as we go forward or will you just kind of group into advanced wound care?

Ed Quilty

We try not to focus Scott on the individual products. We will – but obviously knowing that the average sell price of those products and it's a pretty dramatic impact because it – as it starts to become more meaningful. So I think you will be able to tell and we will give you some information on how sales are going on a volume basis.

So directionally I think you will be able to figure out when it really starts to gain its way and grow.

Scott Henry - ROTH Capital

Okay. Great. Thank you for taking the question.

Operator

Your next question is from William Plovanic from Canaccord Genuity.

Kyle Stanley - Canaccord Genuity

Great. This is Kyle on for Bill. Can you hear me all right?

Ed Quilty

Okay.

Kyle Stanley - Canaccord Genuity

Great. So I just wanted to kind of drill into some of the color on the AWC in the quarter, I know you touched on the impact of weather and the sales addition. But, 11% growth in the quarter that's a big gap to make up to get back to 30% overall. Just wondering if you kind of misspeak to some of the comps – speak to some of the things that give you confidence so you can get back to that level. And then maybe talk about the monthly cadence for wound care sales as we progressed through the quarter and now, then into the second quarter?

Ed Quilty

I will let Barry take that one for you.

Barry Wolfenson

Sure. Specifically, when you look at our past couple of years, our Q1 has been lower than our previous Q4. So there is definitely a seasonal related timing issue, obviously that compounds with the weather and then on the top it with the territories we are aligning from 38 to 50. So actually in our budget, we had a quarter that we anticipated being less than even more so less than Q4.

And when you look to the actual delta from a wound care center perspective as Ed have mentioned 15% to 20% down. We actually beat that. So we still grew. But we did definitely get hurt with the seasonality. With regard to moving forward, remember that we have 50 reps out in the field as supposed to 38. So we believe that we could increase the pace of what had been our traditional growth over these last couple of years. And we think ultimately, as those reps come align of that is a large part of what we will make up the delta plus the maybe some added benefit by the end new products.

Kyle Stanley - Canaccord Genuity

And then can you just remind us historically how long it taken us to get up to speed and to become productive and how that's trending this time. Just trying to get an understanding of how we should think about AWC growth as we go through the year, and six months to the rest to get up to speed, nine months, any more color there would be helpful.

Ed Quilty

Still too early on to give you sort of guidance as far as how they are doing so far. They have been there really just a couple of months in some cases more than just a couple of month’s maybe three or four months. But, they are trending the way that we would anticipate for new reps to trend, they are going to ignore their territories and getting to new products. We are having good conversations about evaluations of these products to their customers.

It take around 18 months for a rep to become net contribution, and we don't see any reasons to believe that this trenche of reps will take any longer in fact again, with the addition of AMNIO which is a gross margin product we anticipate that would end up being sooner.

Kyle Stanley - Canaccord Genuity

And then one more on advanced wound care and then I have got a follow up on the DSC127. Just wondered, Ed, you gave some details on MEDIHONEY and TCC growing double digits in the quarter. Just wondered, are there any products in that AWC portfolio that are lagging or anything that stepped down?

Ed Quilty

No. Products are performing as we expected. Obviously, the focus – complete part of the selling focus now is – MEDIHONEY and the TCC where we can specifically in the VA hospitals. They are starting to spend some time there at AMNIO itself and in fact we – some of the people we hired had some previous experience in selling – doing good work selling the VA hospitals. So all of that's going to help us sign products up. AWC is just fine, its looking very good and we will continue to grow.

Kyle Stanley - Canaccord Genuity

Great. And then just one last question on the DSC127, just wanted to know are those new sites that you opened up in South Africa and the U.S. are those actually up and running and enrolling patients now? And then lastly, year end enrollment, you have done some things as far as adding new sites and getting direct to patient advertising out there. How do you characterize the cadence of the enrollment thus far in 2014 versus the prior 12 months and then that's all I have got. Thanks a lot.

Ed Quilty

To answer your first question, the sites in South Africa are up and running and enrolling patients. And to the second question not all of them have enrolled patients but they are working toward it, they are prepared to ready the one to – screen and enroll patients. We are doing. We are happy. We are very happy with the rates of enrollment. It's a lot better there was than it had been. I would tell you and we said, we are not going to talk about this on a daily basis. But, the month of April was good as we are at. So like that.

So directionally we are going where we want to go. And I was fortunate enough go to various meeting yesterday where in the last two days we had all our project leaders, all our people involved in DSC127, all positions involving DSC127. I had a meeting in our office and I walked away from that feeling that we really assembled a really good team at this point. And we continue to also say to you that it's a difficult trial to enroll. It is because you have – want to make sure that you are getting the right patients and we are doing and we have to keep our discipline as well as continue to drive enrollment, keep our discipline, so that in the end we have a good chance of getting this drug approved. And I'm very proud of the job our team is doing.

Kyle Stanley - Canaccord Genuity

Great. Thanks a lot for taking my question.

Operator

Your next question is from Steve Lichtman from Oppenheimer & Company.

Unidentified Analyst

Hi, guys. This is (indiscernible) in for Steve. Can you hear me okay?

Ed Quilty

We can hear.

Unidentified Analyst

Great. Thanks. I just wanted to start off following upon that question Ed, you highlight bit of success in the pilot TCC campaign and can you maybe give us a sense of the magnitude of improvements you are able to see in the pilot. And also how are you ramping up that TCC in terms of scale and reach more specifically?

Ed Quilty

Didn't understand your first question about the pilot…

Unidentified Analyst

Sorry. Just show us whether any metrics in terms of the improvements you are able to see with the pilot?

Ed Quilty

As we said, we are not going to talk about specific numbers of patients enrolled on a monthly basis in DSC127. We will make announcement or press release when we reach the half way point and as we said in the remarks that will be during this year.

Unidentified Analyst

Okay. Sure. Maybe then we can talk a bit more about the knocks for AMNIOEXCEL reimbursement and the clinical trial program there. What's your outlook in terms of your plan to address these knocks blocking and tackling and what are some of the milestones, we can look for in the coming quarters?

Ed Quilty

Yes. I will give that one to Barry. Since he is running that part of the program.

Barry Wolfenson

I believe truly that the only milestones you should be expecting our announcements that we have coverage of max anything short of that would be just far internal strategic tactics. But each max is a little bit different. There is a path that's been paved by some competitors. We have a very keen understanding of that pathway and what's required in order to gain reimbursement. And so for each and everyone of those max we have a very different and detailed plan. And as we get coverage investors will be the very first to know.

Ed Quilty

This is a top priority for us. Making sure you understand reimbursement for anything we – or all the things that we are selling and that we are in the best position we can as we speak to you today Barry and I are in Washington DC working on those very things. So it's a top priority for the company.

Unidentified Analyst

Got it. And then on the publications for total contact castings that you expect later in the year, is there anything more you can share on, timing as to when later in the year and I think our previous expectation was just for one publication, so can you tell us more about the second one?

Ed Quilty

This is a consensus document that we have discussed and we anticipated that's going to be published potentially as earlier as third quarter and lead into the fourth. And that would be in a journal specific for the American Podiatry Association. And the other one is with regard to a gap in practice which really was done through looking into registry data base, retrospectively on patients that have been treated with offloading devices, which devices have been used, that's the heal rates and amputation rates as well. And that's a publication that is in the process of coming together.

Unidentified Analyst: Got. I think that's helpful. And then just lastly for me, I know you are not going to break-out the AMNIO product contributions for the year, but are we still looking roughly on chart to hit that maybe 2 million mark this year?

Ed Quilty

Yes.

Unidentified Analyst

All right. Great. Thank you, guys.

Operator

Our next question comes from David Amsellem from Piper Jaffray.

Traver Davis - Piper Jaffray

Hi, guys. This is Traver Davis on for David. Thanks for taking the question. Maybe just a broader question, as a starting point, what are you guys latest thoughts on business development now that you guys of course have the AMNIO products in the portfolio and launched. And also bearing in mind that you just went through, I guess what you could call pretty meaningful expansion to the sales force.

So just on the business development front, what types of products interest you given now you have a little bit more of an infrastructure to promote products in the bag? And is there any idea of the type of scale that we could see from business development future from you guys?

Ed Quilty

So we are Traver, we certainly not going to change our focus. So as it pertains to our business its tissue regeneration focusing on tissue. So we are looking at a number of things. We think that bolt-on acquisitions if they make sense. We are prepared to recommend them and the Board is ready to act on.

But we have to make sure it's the right thing. And if we saw something that we really like we would have done it already. So we are evaluating things that are margin, fit it to our proprietary physicians like MEDIHONEY and TCC-EX gauze and things that would be great to find some products that we could layer over sales force and had high margin and be able to cover the expense and having that sales force out there and continue to grow.

So we will continue to look at those things and hopefully we can pull the trigger on a couple that will really help our – help us move that business forward from a cash flow standpoint and support quickly cover a big expense that we put out there. $35 million good amount of money we will be spending on our sales and marketing but we think we will get that return. And that those brands will become very valuable.

But what you won't see us do is, is go out and start new R&D programs or byproducts that require that type of development funding. We just don't think that make sense for Derma Sciences at this. DSC127 as a platform is very meaningful to us. We continue to work that. So the acquisitions that we are looking at will be in the advanced wound care space, if we saw something that would help us in the retail market and there is something there that have some high margins, we might let something still into that as well. But, clearly our focus is building out the brands in the advanced care business.

Traver Davis - Piper Jaffray

Great. That's very helpful. And then just one last one going back to reimbursement for the AMNIO products. I was just curious of the – around 2 million that you guys said that you can do in sales for that franchise this year. What's implying that in terms of reimbursement or is there no implication in there for any types of, I guess broader coverage, when it goes out?

Barry Wolfenson

There is none.

Traver Davis - Piper Jaffray

None.

Barry Wolfenson

And anticipate – now that's not to say that we don't hope, so we get some help from some good coverage. And that would help to increase our abilities from a first year sales perspective. But currently, our noses are down to grain stones thinking about selling into the VAs and some in patient settings as well.

Traver Davis - Piper Jaffray

Great. That's helpful. Thanks guys.

Ed Quilty

Welcome.

Operator

(Operator Instructions) Our next question is from Joe Munda from Sidoti & Company. Please go ahead with your question.

Joe Munda - Sidoti & Company

Good morning, guys. Thanks for taking the question. Can you hear me, okay?

Ed Quilty

Yes. Thanks Joe. Good to hear you.

Joe Munda - Sidoti & Company

Ed, you guys spoke about adding 24 people to the sales force this quarter, is that sequentially or from start of the year as well as where were these additions made?

Ed Quilty

That's from the first of the year, some of those people are critical marketing people that we needed to support the growth of the brands. As far as where we put the sales force, I could tell you but then I have to kill you, but we don't want our competitors to know that. So we don't – we put – we have sales reps in – with the 50 territory managers we have. And then the specialist that we have for TCC-EZ, we have a couple of people that are focusing on the tissue substitute. We have coverage. We believe that that this number, we have very good coverage. We can cover everywhere in the United States.

Look, if the brands continue to grow and we do better and we start to realize the reimbursement that Barry was talking about with the AMNIO products, then we will add some more reps because as I said earlier those products carry us really significantly higher average sale price. So we could afford to do that. So – right now we are holding with the group we have and we will see how they do and see how the growth is and we think we need more people, we will have them. But, at the moment, the country is well covered.

Joe Munda - Sidoti & Company

Barry, you touched on, I believe it was you, you touched on the 1,200 wound care clinics in the U.S. I'm wondering how penetrated are you guys within that number and is that where the growth is coming from that you are anticipating, further penetrating that number or is there something else?

Barry Wolfenson

The way that we look at market is sort of a hub and spoke kind of model where the wound center is the hub. And those physicians in the wound centers often times are the treating physicians in the hospitals that the wound centers are attached to. There their referring physicians homecare and the long-term care. So sort of where we call sort of our basic operations in the next expand out from there. They have very good relationships with the companies that are the management companies for us the wound centers. So out of the 1200 there are several management companies that control the vast majorities of them. We did training in a lot of their corporate facilities. And we got pretty good penetration.

No doubt from an AMNIO self-perspective with the relationships that we have frankly in the quality of products that we have, when we get reimbursement, it allows us for to settle into those wound centers. We are going to be a very, very strong force.

Joe Munda - Sidoti & Company

Okay. That's very helpful. And I guess my final question for you guys in terms of MEDIHONEY, I know Ed, you talked about demand for Manuka Honey is on the rise and based on your relationship with Comvita, I was wondering, is there an opportunity to leverage that platform that you guys have built there into other indications or other uses for MEDIHONEY or even other products. I know you have just said that you aren't going to significantly put a lot of capital towards future business development. But, is there an opportunity there without spending that much capital to do something like that?

Ed Quilty

You know, let Barry take part of this. But, we are – as you know we invested in Comvita in 2013 and I'm a member of the Board of Directors of Comvita. And we have done a very nice job of making some acquisitions of some [APRs] (ph) that have helped us vertically integrate the honey supply.

Barry could talk to you about the products we have developed, but, yes, we are always looking at new products. And as you know, we did develop one product with a leading – we are a leading retail chain in the United States and that product is on the shelves and frankly doing quite well. So there is a lot of interest in doing that. And (indiscernible) and traditional wound care group are – as we speak of visiting with people and things that we can add into the consumer market.

Do you want to add?

Barry Wolfenson

I would just add, in the coming months there might be an opportunity to discuss expanded indications on our file 10-K. And from a product development perspective as you know we spent 2013 educating ourselves in the burn setting. It's a very important market.

We did some good product development exercises with some leading burn surgeons, learned a lot. And 2014, is about taking those learnings and translating them into products. And so we are in the process of doing that right now.

Ed Quilty

We had a meeting earlier this week on -- a new indication for honey in treating skin disorders that Comvita is launching on their own and we may peg you back on that and help them with some things here in the United States. So there is some opportunity. Every opportunity we can look at grow the use of MEDIHONEY will – is being looked at.

Joe Munda - Sidoti & Company

Okay. Thank you.

Operator

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Ed Quilty

Thank you, operator. So in closing I would just like to again, thank all of you for participating in the conference call today. Our team is working very, very hard and very, very smart to build value for our investors. And I'm just so proud of the work that we are doing. DSC127 is making the progress that I hope it would make. So we are all – we will continue to move toward that announcement of reaching that halfway point and then the completion of the trial.

So things are good at Derma Sciences, the new people we hired are just really, really fitting in and helping us roll forward.

In closing, I just like to mention that tomorrow morning, I will be presenting at the Sidoti Micro-Cap Conference in New York City. And I'm looking forward to that. It's my first presentation. So I'm looking forward to seeing those folks and we will look forward to coming back and talking to you about our second quarter.

With that, thank you, again, and have a good day.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Source: Derma Sciences' (DSCI) CEO Ed Quilty on Q1 2014 Results - Earnings Call Transcript

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