Picking up pace
Derma Sciences Inc (NASDAQ:DSCI) delivered a robust Q414 with rebounding sales growth but slowing cost growth. Based on lower overhead and R&D costs, we have tempered our forecast losses 2015-16e and our DCF-based valuation has been raised from $312m to $320m. Accelerated recruitment in the ongoing diabetic foot ulcer trials (DSC127) and improved cost absorption in Advanced Wound Care may lead to profitability as of 2018.
Sales growth pick up while cost growth slows in Q4
Derma Sciences ended FY14 on a high note with 10.5% sales growth y-o-y in Q4, (5% for FY14), driven by 22% growth in Advanced Wound Care (AWC) and $4m lower operating loss versus our forecast. While leaving sales forecasts unchanged, lower overhead and R&D costs prompt us to reduce our loss per share by 2% in FY15e and 1% in FY16e.
MEDIHONEY rebounding despite challenges
Encouragingly, the lead product, MEDIHONEY, delivered 26.5% sales growth in Q4. We forecast 12% growth in FY15, helped by a favourable reassessment of its clinical data by the previously critical Cochrane Collaboration. We expect the Medicare non-coverage decision in January, affecting $3m of sales, to prove transient.
TCC-EZ growth and DSC127 trial set to accelerate
Sales of TCC-EZ, the second biggest product, should accelerate in FY15 helped by a 61% Medicare reimbursement hike as well as the recent publication of a policy document supporting its use in the treatment of diabetic foot ulcers (DFU). Further, we expect the new chief medical officer to provide impetus to the DSC127 DFU clinical trial, making a mid-2016 conclusion probable, despite the initial challenges with enrolment. Overall, we forecast sales CAGR 2014-18e of 16% in AWC, 1% in TWC (helped by a new private label contract) and 9% for the group (22% when including $70m DSC127 revenues in 2018e).
Valuation: Healthy upside thanks to DSC127
Based on our revised forecasts which have been rolled forward one year, we value Derma Sciences at $320m vs $312m before. This corresponds to $12.6 per share or $10.6 per diluted share. The valuation is particularly sensitive to the progress of DSC127, which represents 56% of group value.
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