Derma Sciences Inc (NASDAQ:DSCI)

CAPS Rating: 1 out of 5

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Player Avatar zzlangerhans (99.85) Submitted: 4/9/2011 4:27:31 PM : Underperform Start Price: $9.28 DSCI Score: +6.35

I'm cycling back to Derma Sciences after they were unratable the first time I reviewed them. I wasn't much impressed with the phase II trial that more than doubled the share price. 54% of wounds closed with DSC127 vs. 33% with placebo, although the study was too small to show statistical significance.

Strange things happen at low market caps and low floats, so I'm not shocked that the street hasn't dropped the share price back down to equilibrium yet. I'm pessimistic about the future of DSC127 and Derma for several reasons.

The phase II study has very little meaning. There are dozens of approved wound treatments for diabetic ulcers, and the phase II study does little to convince me that DSC127 is destined for significant market share. Comparisons with placebo and demonstrations of safety may eventually lead to FDA approval, but won't convince anyone to use the product. They'll probably have to demonstrate some kind of superiority to standard of care to change the way people are treating these wounds.

The finances remind me of Oculus, another wound treatment company I despise. The company does book revenue, but there's no convincing quarter-to-quarter trend and they don't turn a profit. Meanwhile, they have no cash and seem to have a minimal margin of safety for continuing their operations. I'd project an upcoming debt financing on unfavorable terms, or a journey into the capital markets if they want to progress their clinical studies.

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