Zila's Revenue Growth Continues in FY04 First Quarter

PHOENIX, Dec 15, 2003 (BUSINESS WIRE) -- Zila, Inc. (Nasdaq:ZILA) announced results for its fiscal first quarter of 2004 that ended October 31, 2003. Highlights of those results, compared with the same period a year ago, are as follows:

-- Continued strong support for Zila's highly regarded Ester-C(R)
brand, and improved sales of pharmaceutical products, drove
net revenues up 12.3 percent to $12.1 million from $10.7

-- As expected, there was a loss for the quarter of $1.57 million
compared with a loss of $1.61 million last year (the prior
year loss was $5.7 million when an accounting change is
included). The net loss was 4 cents per common share for the
fiscal 2004 quarter. The comparable fiscal 2003 period
included a 9-cent charge resulting from the accounting change,
which led to a net loss of 13 cents per common share.

-- This year's loss reflects $1.2 million in higher ascorbic acid
costs, $440,000 in increased OraTest(R) clinical program
investment, and $469,000 in legal fees related to the
settlement of two matters, offset in part by $840,000 in lower
severance and related costs.

-- EBITDA (Income (Loss) Before Interest, Taxes, Depreciation and
Amortization), excluding the prior year accounting change, was
a loss of $895,000 for the first quarter, improved versus a
loss of $950,000 in the first quarter a year ago (see
reconciliation of EBITDA to Loss Before Accounting Change

Zila's Chairman, President and CEO, Doug Burkett, Ph.D., said, "Our first-quarter results are on track with what we expected for the start of fiscal 2004, given the current sky-high ascorbic acid prices and our unwavering commitment to complete our OraTest clinical program as quickly as possible. The first quarter loss was an expected part of our overall plan to achieve a goal of breakeven-to-positive EBITDA for the FY04 year.

"Zila's strategy remains to capture strong demand for its key pharmaceutical and nutraceutical products with stepped-up marketing and selling investment, emphasizing Zila's core message of enhanced body defense and pre-disease detection/intervention. We will continue to develop, test and launch new products, including ViziLite(TM), Ester-E(TM), and OraTest, while revamping existing products to appeal to focused, targeted customers."

Zila Nutraceuticals:

Net revenues for the Nutraceuticals Group for the three months ended October 31, 2003 increased 8 percent to $7 million compared to $6.5 million for the three months ended October 31, 2002. This growth was driven by a 15 percent increase in Ester-C sales for the quarter, partially offset by $400,000 in lower sales of saw palmetto oil products as we have exited that commodity business. Sales of Ester-C as a bulk ingredient rose 39 percent during the quarter, driven principally by new Ester-C brand development programs, which debuted late in the quarter. The new advertisements in both radio and national TV messages feature the company's emphasis on improving defenses against illness. We expect even stronger growth of Ester-C in the second quarter as our new advertising takes hold.

Cost of products sold as a percentage of net revenues for the Nutraceuticals Group increased to 41 percent for the three months ended October 31, 2003 compared to 33 percent for the three months ended October 31, 2002. This increase dramatically affected Zila's overall EBITDA for the quarter and was caused primarily by higher costs of ascorbic acid. The Nutraceuticals Group has obtained stable sources at lower prices than it is currently paying for a portion of its ascorbic acid needs for fiscal year 2004 and part of fiscal year 2005 and continues to actively pursue lower cost extended supply arrangements for its remaining needs. These lower costs may begin to improve margins in the third and fourth fiscal quarters.

In November, Zila signed a long-term license agreement with Vital Health Sciences Limited of Australia for exclusive rights in the dietary supplement market in the United States, Canada and Indonesia for certain intellectual property pertaining to tocopherol phosphate, an enhanced form of vitamin E. Zila will launch its Ester-E product in early 2004 -- the first branded line extension under the successful "Ester" umbrella. Zila's Ester-C customers have indicated that they are eager to begin receiving shipments of our new Ester-E product.

Zila Pharmaceuticals:

Net revenues for the Pharmaceuticals Group for the three months ended October 31, 2003 increased 19 percent to $5.1 million compared to $4.2 million from the prior year period. Net revenues of the Zilactin(R) line of products were $2.0 million for the three months ended October 31, 2003, an increase of 5 percent from the same three months in 2002. Net revenues of the Peridex(R) product matched net revenues for the prior year period. Sales for IST (net of intercompany sales) were $1.6 million, compared to $892,000 last year, as we increased production to match the needs of our major customer. However, we will lose this customer in March 2004 when our current contract expires.

Cost of products sold as a percentage of net revenues for the Pharmaceuticals segment decreased to 42 percent during the three months ended October 31, 2003 from 45 percent for the prior year quarter, primarily due to the lower cost of product at IST. The IST improvement was partially offset by a 16 percent increase in Zilactin product costs, which rose to 48 percent for the quarter. The increased cost of Zilactin product was due primarily to the higher cost of product promotions.

Dr. Burkett said that the quarter included solid evidence of progress in Zila's Pharmaceuticals business under the leadership of new VP-General Manager David Barshis. Burkett noted that Barshis is beginning to roll out new targeted marketing efforts for each of the major Pharmaceutical products, Zilactin, Peridex, and ViziLite, while working toward cost improvements.

Zila Biotechnology:

Total operating expenses for the Biotechnology segment were $1.6 million for the three months ended October 31, 2003, a 64 percent increase over the $1.0 million for the three months ended October 31, 2002. This was driven by a 79 percent increase in the phase III clinical program expenses related to the OraTest product, an increase of approximately $440,000.

Active discussions with the Food and Drug Administration (FDA) continue as we strive to reduce the overall time and cost required to obtain OraTest market clearance in the United States. We have expanded the clinical program to include twice as many clinical sites as we had a year ago, an effort that is synergistic with our overall strategy.

About Zila:

Zila, Inc., headquartered in Phoenix, is an innovator in preventative healthcare technologies and products, focusing on enhanced body defense and the detection of pre-disease states. Zila has three business units:

-- Zila Biotechnology, a research, development and licensing
business specializing in pre-cancer/cancer detection through
its patented Zila(R) Tolonium Chloride and OraTest(R)

-- Zila Nutraceuticals, manufacturer and marketer of Ester-C(R)
and Ester E(TM), branded, highly effective forms of vitamin C
and E for Whole Body Protection.

-- Zila Pharmaceuticals, marketer of superior products to promote
oral health and prevent oral disease, including ViziLite(R)
oral examination kits, Peridex(R) prescription periodontal
rinse and Zilactin(R) OTC oral care products.

For more information about Zila visit www.zila.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based largely on Zila's expectations or forecasts of future events, can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond the Company's control. Therefore, actual results could differ materially from the forward-looking statements contained herein. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, margins, profitability, cash flows and capital needs, the continuation of the operational and financial turnaround, the ability of the Company to achieve break-even or positive EBITDA, the future trend of ascorbic acid prices, improvements in and maintenance of the gross margins of the Zilactin product line and appreciation in the market value of Zila's common stock. Such factors include but are not limited to: increased competition from current competitors and new market entrants; the Company's ability to gain or expand distribution within new or existing channels of trade; future increases in the cost of ascorbic acid, the primary raw material in the Ester-C(R) products, and the Company's ability to pass price increases along to its customers; Zila's ability to secure long-term supply arrangements for ascorbic acid at stable prices that are lower than those it is currently paying for part or all of its requirements; the market acceptance of the ViziLite(R) and Ester-E(TM) products; and Zila's ability to add new customers for IST to replace sales volume, in whole or in part, upon the expiration of its contract on March 30, 2004 with a major customer representing approximately 70% of IST's monthly sales. A wide variety of factors will impact the length, size and expense of the OraTest(R) clinical program; the FDA's ultimate decision regarding the OraTest(R) product; the limitations on indicated uses for the OraTest(R) product; and the ultimate market reception for the OraTest(R) product. There can be no assurance that the forward-looking statements contained in this press release will, in fact, transpire or prove to be accurate. For a more detailed description of these and other cautionary factors that may affect Zila's future results, please refer to Zila's Form 10-K for its fiscal year ended July 31, 2003, and its Form 10-Q for the three months ended October 31, 2003, filed with the Securities and Exchange Commission.

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