Derma Sciences, Inc.
Derma Sciences is a truly unique and highly undervalued company within the micro-cap biomed space which currently targets a prescription drug market that is about 5x its present market cap. The company is developing a patented topical drug for accelerated healing and scar prevention and newly launched Advanced Wound Care products approaching $10M, including the highly received MEDIHONEY, and BIOGUARD, both of which have garnered tremendeous success and continue to increase sales annually. The real gem however lies within their DSC127 phase II pipeline drug. Derma Sciences reported that it continues to move forward with clinical trials of DSC127, which has the potential to be only the second approved drug on the market for accelerated wound healing, a market with over $100M in sales anually.
Derma Sciences, Inc. is a fully integrated manufacturer, marketer and supplier of a complete line of products for wound and skin care. The products can be broken down into five categories: Advanced Wound Care, Traditional Wound Care, Burn Care, Skin Care and Bathing, and Specialty Securement and Closure Devices. With two wholly owned and operated manufacturing facilities in Toronto and China, they also offer exceptional contract manufacturing services for OEM or private label products.
Derma Sciences recently gave an Investor Relations presentation which shed light on key financial statistics, cash flows and revenues. The presentation highlights the following about Derma Sciences: (1) new Advanced Wound Care Products are selling at a current run rate approaching $10 million in revenue, including total annualized MEDIHONEY revenues in excess of $3.5 million with a gross margin of 70%; (2) total revenues are expected to exceed $50 million in 2009 including sales from the introduction of four new advanced wound care products since 4Q08; and (3) an enterprise value for the Company that is about 0.5X trailing 12-month sales despite its recently launched wound dressing product, a strong novel pharmaceutical candidate for wound healing in Phase 2 development (at an estimated expense of $1.7M), and $3.5 million dollars in core business EBITDA to help support future growth/R&D initiatives.
Products & Target Markets
MEDIHONEY – Wound and Burn Dressing
Like silver, honey has been used for centuries for its antimicrobial properties. Most regular honeys possess the ability to provide antimicrobial properties for limited times within a wound.
MEDIHONEY dressings provide a moist, occlusive environment conducive to optimal wound healing. As wound exudate is absorbed, the
alginate forms a gel, making the dressings easy to remove without disrupting the wound bed. The dressings are indicated for the management of moderate to heavily exuding wounds such as:
- diabetic foot ulcers
- Venous stasis leg ulcers
- Arterial leg ulcers
- Leg ulcers of mixed etiology
- Pressure ulcers (I-IV)
- 1st and 2nd degree burns
- Donor sites
- Traumatic and surgical wounds
Derma Sciences reported that gross U.S. MEDIHONEY sales increased by 125% and 94% to $664,766 and $1.14 million (NYSE:M) during 2Q09 and 1H09, respectively, compared to the year-ago periods.
MEDIHONEY was also the focus of a major press conference at North Shore Long Island Jewish Hospital in Manhasset, NY. At the press conference, clinicians detailed the case of a patient who appeared to be heading towards a lower extremity amputation (NYSE:LEA) due to a non-healing wound associated with an extremely rare fungal infection.
According to Mary Brennan, RN, CWOCN, Clinical Nurse Specialist for Wounds at North Shore, “MEDIHONEY helped to turn this wound around for him and allowed us back on track for healing. We had used other therapies, but this was the product that made the difference in a very short time.”
There are over 50,000 LEAs each year in the United States alone. The 3-year mortality rate post-LEA is estimated to be around 50%.
BIOGUARD – Barrier to Bacterial Contamination
BIOGUARD provides a barrier to bacterial contamination while also providing greater than 5-log (99.999%) average reductions of common pathogens within the dressings with a distinguishing feature that includes the ability to function even in the presence of wound fluid and blood. The active component of the dressings is a non-toxic polymer (p-DADMAC) that is patented for use in wound dressings and licensed on an exclusive basis since 2007 from Quick-Med Technologies (OTCPK:QMDT). Also, the active component is non-leaching, which is an important feature since leaching antimicrobials can interfere with wound healing and lead to the development of resistant strains of microbial pathogens.
The Company announced record first-month sales of $58,458 for BIOGUARD, which was launched in late June and represents a new anti-microbial advanced wound care product. Gross sales of key new advanced wound care products in the U.S. increased by 93% during 1H09 to a level of $2.14M versus $1.1M in the year-ago period.
DSC127 – Accelerated Wound Healing
DSC127 is an analog of a naturally occuring peptide, Angiotensin, and was developed at the University of Southern California. It has been shown to increase keratinocyte proliferation, increase extracellular matrix production, and increase vascularization. Additionally, histological examination has shown that DSC127 accelerated collagen deposition six-fold. All these help to accelerate dermal tissue repair. The patented amino acid peptide optimizes the wound healing capabilities of Angiotensin while removing all blood pressure effects of the compound.
Extensive pre-clinical studies have demonstrated the efficacy of the compound in accelerating healing and reducing scar formation. Pre-clinical studies thus far have shown:
- Improved in-growth of host tissue into artificial skins
- Accelerated healing in full thickness skin excision wounds in rats and diabetic mice
- Accelerated healing in partial thickness thermal injuries in guinea pigs
- Accelerated healing in a random flap skin model in rats Improved scar reduction in rats
A Phase I safety study in humans was completed in Q4 2007, and patients are currently enrolling into the Phase II efficacy study. This study of 75 patients will look at percentage of diabetic ulcers completely healed over a 12-week period, among other outcomes.
More importantly, DSC127 has shown to have a significant competitive and medical advantage over its rival Systagenix, which is a division of Johnson & Johnson (NYSE:JNJ). J&J currently markets Regranex as the only FDA-approved treatment for wound healing with annual sales of about $100M. However, this product carries a black box warning that states, “An increased risk of mortality secondary to malignancy was observed in patients treated with three or more tubes of Regranex Gel in a post-marketing retrospective cohort study. . . should be used with caution in patients with known malignancy.” In addition, DSC127 has been shown in pre-clinical animal studies to be more effective than Regranex and Shire (NASDAQ:SHPGY) licensed the rights to a scar prevention drug (Juvista or Human TGFbeta3) from UK-based Renovo (LON:RNVO) (OTC:ROVOF) in June 2007 which was in late Phase 2 development at the time (now in Phase 3 trials) in a deal that included $75M in up-front cash, milestone-related payments that could total approximately 10X the up-front payment, and future sales royalties if approved for marketing.
Insider & Institutional Holders
As with any company, insider and institutional holders represent a sense of stability and reassurance for potential investors. Derma Sciences does not disappoint in this aspect, maintaining an impressive track record with regard to insider ownership and open market buying. As of the Company’s 8/21/09 corporate presentation there is 17% insider + 63% institutional ownership of the outstanding shares of common stock.
Derma Sciences presents a unique opportunity in the micro-cap biomed space since it has a core business focused on wound care which generates revenue and operating cash flow to fund the Phase 2 clinical development for a treatment (DC127) that targets a prescription drug market that is about 5X the Company’s current market cap (based on Regranex sales of $100M). In addition, pre-clinical data suggests DC127 may offer both safety and efficacy advantages over Regranex and the licensing deal by Shire for a scar prevention treatment that included a $75M up-front payment suggests Derma Sciences has the potential to secure a licensing deal that could include an up-front cash payment in excess of its current market cap of around $20M.
—–Disclosure: Position in DSCI