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HSCI Reports Full Year 2015 Results under RAS

Moscow – April 1, 2016. PJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, today announced its audited unconsolidated results for 2015 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the full year 2015 amounted to RUB 227.4 million1 compared to RUB 234.4 million in 2014.
  • Gross profit amounted to RUB 112.0 million representing gross profit margin of 49.3%.
  • OIBDA2amounted to RUB 16.0 million for an OIBDA margin of 7.0%.
  • Operating profit was RUB 2.6 million.
  • HSCI’s net profit in 2014 amounted to RUB 9.1 million.

1 HSCI’s RAS revenue for 2015 does not include in full the revenues from Gemabank’s service of cord blood stem cell banking comprised of isolation, cryopreservation and storage of umbilical cord blood stem cells (SCs). Since from October 1, 2015 the Company started transferring Gemabank’s activities into IMCB LLC – HSCI’s 100%-subsidiary (for details – see page 4). So HSCI’s FY 2015 RAS revenue lacked the revenues from isolation and cryopreservation of cord blood CSs received in Q42015 and recognized in IMCB’s financial results – in the amount of RUB 21.9 million. Therefore, the Company’s total RAS revenue for 2015 under RAS, comparable with the one for 2014, amounted to RUB 249.3 million.

2 OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company calculates as total revenues less operating expenses excluding depreciation and amortization. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance investments and to incur and service debt. OIBDA should not be considered in isolation as an alternative to net income, operating income or any other measure of performance under U.S. GAAP or IFRS.


General Director of HSCI Artur Isaev commented:

“Year 2015 for us has been a year of intense and fruitful work in almost all areas. Results are already visible within the Company, and soon they will positively affect our financial performance and shareholder value.

We continued corporate restructuring that was initiated in late 2014 with the purpose to improve management efficiency and to reduce costs. It will also help us to use all the opportunities provided by the government for medical and R&D companies.

HSCI is entering a new stage of its development, and we want approach it as prepared as possible. From 2011 to 2015 we were aimed on developing products and technologies, market access and receiving feedback from doctors and professionals considering to implement those treatments in practice. In 2015 situation began to actively change. Today our technologies are not just developments that are ready for use, but products and services accepted by key opinion leaders within respective medical communities. We are talking about Neovasculgen®, SPRS-therapy®, Reprobank®, PGD and other Genetico® services. For the most part, they overcame critical points of product development, and currently we started to more actively invest in their promotion, advertising and sales.

During the reporting year, we worked well and did a lot for promoting our products and services in the Russian market. It is worth mentioning that special attention was paid to the interaction with the professional medical community and regulatory authorities in order to facilitate patient access to our innovative drug Neovasculgen® – according to the government directive it was included into the Vital and Essential Drug list for 2016 in Russia.

And last year we began work on licensing and developing Neovasculgen® in new promising markets. The success in those markets may have a significant impact on our intellectual property valuation and the company’s valuation itself.

First of all, we are targeted at the U.S. market – to increase the chances for the success of Neovasculgen® in the other international markets, since the regulatory systems of many countries throughout the world are more adopted to approve the drugs coming from the developed markets, and the first-in-class drug from Russia is something extraordinary for the regulators of the most countries.

To obtain marketing authorization in the USA for the drug candidate based on IP connected with the Russian innovative drug Neovasculgen®, HSCI and its partners plan to conduct clinical trials based on contract manufacturing according to the U.S. regulatory requirements. Organization of contract manufacturing in the USA is of great importance as our current production capacities in Russia are not sufficient to produce the drug in volumes necessary for conducting clinical trials and making sales in the foreign markets”.

HSCI’s total revenue and revenues generated by key products and services

Revenue, generated by PJSC HSCI (hereafter – “HSCI”, “the Company”) in 2015 amounted to RUB 227.426 million – a year on year decrease of 38.8% (if adjusted by including revenues from cord blood stem cells isolation and cryopreservation service, which starting Q4 2015 has been rendering through 100%-subsidiary IMCB LLC, the total revenue is RUB 249.345 million, a year on year decrease of 32.9%).

The decrease compared to 2014 is primarily attributable to lower revenues from the sales of HSCI’s own innovative drug Neovasculgen® (for details - see below).

It should be noted, that revenues from the provision of genetic diagnostic and consulting services as well as Reprobank® services starting Q2 2013 have been reflected in the revenue of GENETICO LLC (renamed from RGMC HSCI LLC in October 2015) – a subsidiary of HSCI, and, therefore, are reported in the consolidated IFRS statements. In order to present regular comparative information on the development of the Genetico project HSCI RAS results press-releases include information on the RAS revenues of GENETICO LLC received from aforementioned services for the period under review (see the Genetico section below - page 5).

 

Neovasculgen® – the first-in-class gene-therapy drug for treatment of Peripheral Arterial Disease (PAD), including Critical Limb Ischemia (CLI)

In the reporting year revenues from the sales of Neovasculgen® amounted to RUB 1.454 million, while for the full year 2014 revenues from the sale of this drug to distributors amounted to RUB 123.695 million.

Neovasculgen® is an innovative drug, mostly intended for the treatment of patients in stationary (hospital). Therefore, Neovasculgen’s sales are highly dependent on its inclusion in the state public medicine subsidy programs (state drug reimbursement), and the Company began this work already in 2012, when Neovasculgen® went on sales in Russia.

One of the steps in this direction is inclusion of Neovasculgen® into the List of Vital and Essential Drugs (VED)1 – to substantially increase hospital procurements of this drug.

Up to this moment, patient access to Neovasculgen® and, accordingly, its sales in the Russian market have been cut by the absence of this first-in-class innovative drug in the VED list and state drug reimbursement programs. This strongly constrained the ability of hospitals to purchase the drug for all patients suffering from PAD.

On September 4, 2015 after thorough study of the drug’s safety, clinical efficacy and pharmacoeconomics, the Ministry of Health Commission made the decision to include Neovasculgen® into the VED list for 2016. Corresponding Government directive (# 2724-р.) was published on December 26, 2015. The drug was included in the VED list under the group name “Plasmid Deoxyribonucleic acid [supercoiled circular double-stranded]”.

In mid-March 2016, following the obligatory rule and procedure for all drugs included into the VED list, the cap price limit for manufacturer’s wholesales was set for Neovasculgen® in the amount of RUB 120,000 (VAT excluded).

Consequently, the drug’s sales volumes are expected to notably increase in 2017 upon the placement of Neovasculgen® in hospital’s procurement plans budgeted by the State.

As of today, dozens of healthcare centers (hospitals) across the Russian Federation have positive track of Neovasculgen® clinical administration. The Company continues to work on further promotion of the drug within medical community as well as on increasing vascular surgeons’ and angiologists’ awareness of this new therapy approach.

In November 2015, the data on therapeutic effect following a treatment course of Neovasculgen® according to 5-year observation were reported at the XXI All-Russian Congress of Cardiovascular Surgeons in FSBSI «A.N. Bakoulev SCCVS» and also at the XXXI International Conference «Selected topics of cardiovascular surgery» at A.V. Vishnevsky Institute of Surgery.

In addition, active work with the Agency for Strategic Initiatives (ASI) is under way as ASI renders a support to HSCI’s program of production and marketing of Neovasculgen® innovative drug. Currently, under the aegis of ASI regional events (round tables) are held for the discussion of therapeutic angiogenesis application in PAD treatment.

During the reporting year HSCI also received from the Federal State Institution “The Fund for Promotion of Small Innovative Enterprises in Science and Technology” a grant of RUB 12 million to finance the project “Neovasculgen® innovative gene-therapy drug commercialization in Russia and abroad”.

Peripheral Arterial Disease (PAD) is a serious, incapacitating disease, which is exceeded in frequency (amongst cardiovascular diseases) only by ischemic heart disease (IHD) and brain stroke. In Russian Federation the number of patients with critical form of the disease (CLI, Critical Limb Ischemia) annually amounts up to 145,000, of which 35,000 - 40,000 undergo amputations, while around 25% of patients die. A part of patients diagnosed with CLI is inoperable, and for them Neovasculgen® could be the only treatment, allowing the opportunity to evade amputation as well as to significantly improve the quality of live.

According to the drug’s clinical trial results and more than 3-year track of its use in practical healthcare (starting autumn 2012 when the drug was launched in the Russian market), Neovasculgen® increases the functioning capillaries number in ischemic tissues, improves the blood supply, reduces the rate of amputation and mortality in patients with lower limb ischemia, especially in those who are inoperable. Containing the gene of the Vascular Endothelial Growth Factor (VEGF) embedded in a plasmid vector (carrier), Neovasculgen® stimulates the growth of collateral blood vessels (аngiogenesis) and, as a result, promotes a long-term therapeutic effect and improves patients’ quality of life, first of all manifested in a substantial increase of Pain Free Walking Distance.

As the drug’s action mechanism – therapeutic angiogenesis – introduces a new approach to the treatment of ischemia (the use of an evolutionarily programmed process of blood vessel creation and growth), HSCI plans to implement new clinical trial protocols in order to expand the range of indications for applying Neovasculgen®. HSCI aims to work in the therapy of IHD (Ischemic Heart Disease), Diabetic Foot Syndrome, trauma-induced peripheral nerve damage. Also, the R&D is in progress for the creation of gene-activated bone grafts based on Neovasculgen®.

In addition to the Russian market, HSCI intends to make Neovasculgen® available on the other markets as well, particularly the the markets of the U.S. and China, which, taking into consideration their size, present great prospects.

Thus, as for the development of the drug candidate based on IP connected with the Russian drug Neovasculgen® in the United States – the partners have been selected and preparation of the agreements to be announced upon signing are under way. In the course of 3 years from the project start, the contract manufacturing are planned to be set up on the U.S. grounds and pre-clinical studies and the Phase I clinical trials are expected to be completed.

The work with potential partners for the registration of the drug in China is also in progress.

For the development of the drug in the USA and China, HSCI’s partners plan to raise necessary funds.

In addition, there are talks to potential partners and reviewing of opportunities to conclude distribution agreements for the sales of the Russian Neovasculgen® on some other foreign markets.

 

Isolation, cryopreservation and storage of umbilical cord blood stem cells – bio-insurance (Gemabank®)

Revenues from this service flowing into HSCI’s total FY 2015 revenue under RAS amounted to RUB 178.052 million (78.3% of the Company’s total revenue). Nevertheless, since this service starting Q4 2015 has been rendered through HSCI’s 100%-subsidiary IMCB LLC (see below), the cumulative amount of revenues received from Gemabank® operations during the full year 2015 amounted to RUB 199.971 million.

Compared to FY2014, Gemabank® revenue increased by 2.1% - due to sustainable growth in revenues from the storage of cord blood stem cells but the decrease in revenues from the isolation and cryopreservation of cord blood stem cells (new contracts) which was attributable to the decline in consumer demand because of economic recession in Russia.

As of today, the total number of personal cord blood stem cell samples held in storage at Gemabank® has exceeded 24.5 thousand.

Despite the increase in activity and the number of competitors, Gemabank® retains its position as a leading player in the Russian market, traditionally outpaced the peers as for geographical coverage.

Currently the market of bio-insurance - personal cord blood banking has stabilized and almost does not grow, it becomes more competitive. With that said, its penetration in Russia is rather low and the market has great potential for growth, therefore competition will inevitably decrease. Also, an increase in the number of treatment cases with the application of stem cells should provide a significant positive impact on the growth of this service both in Russia and globally.

Gemabank® plans include expanding the number of services in order to attract new groups of customers.

NB: From October 1, 2015 the Company started rendering Gemabank® services through IMCB LLC (HSCI’s 100%-subsidiary) – with the aim to increase effectiveness as well as to use state tax allowance for medical companies.

IMCB (International Medical Center for Biomaterials Processing and Cryostorage) was set up in October, 2014 and in July 2015 obtained the license for hematopoietic cord blood stem cell isolation, transportation and storage services. In Q4 2015 IMCB started providing this complex service of personal cord blood stem cell banking which used to be provided by HSCI itself. The revenues, received by IMCB in Q4 2015 from the provision of isolation and cryopreservation of cord blood SCs service to new clients, amounted to RUB 21.919 million.

In the course of 2016 the whole client base from Gemabank’s first days is planned to be handed over from HSCI to IMCB. Therefore, IMCB total revenue will include both revenues from isolation & cryopreservation of cord blood SCs and revenues from the storage of cord blood SCs samples in Gemabank® (year charges).

IMCB’s net income, starting 2016, will be paid to the parent company in the form of dividends which contributed to HSCI’s net profit.

SPRS-therapy – a set of personalized diagnostic and treatment procedures for repairing skin damage due to aging or other structural changes

Revenue from SPRS-therapy, including the long-term storage of autologous skin fibroblasts, for FY2015 amounted to RUB 30.762 million (13.5% of the Company’s total revenue) – a year-on-year increase of 32.6%.

This service was authorized by the Russian healthcare regulator and introduced to the Russian market starting in January 2011. An innovative medical technology, SPRS-therapy entails the use of autologous skin fibroblasts to correct the effects of aging and skin damage. The service includes diagnostics of the condition of the patient’s skin; a therapy course using the cell product with the patient’s own fibroblasts; and long-term storage of the patient’s skin fibroblast culture in a cryogenic bank.

The service is primarily offered through the leading dermatology and cosmetics clinics of Moscow (more than 30); however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions and CIS (covering 15 cities as of December 31, 2015). The total number of patients that had used this service, as of the end of the reporting year, exceeded 570 people. More than 50% of patients have returned for second and/or additional skin treatments in other areas besides the face. Therefore, the increase in number of requests for services within the spectrum SPRS-therapy (both initial and follow-up applications) is securing revenue growth.

The age of patients undergoing SPRS-therapy ranges from 40 to 65. In the end of Q1 2015 a stand-alone SPRS-bank service was launched for the younger clients as the type of bio-insurance. The service allows them to cryostore autologous skin fibroblasts in order to use in future – for repairing skin damage due to aging in such areas as face, neck, décolleté or hands applying SPRS-therapy as well as for the treatment of skin after burn injury or other trauma-induced skin damage.

SPRS-therapy marketing strategy includes continued work in professional aesthetic medicine community (attracting new clinics, conducting trainings and seminars for doctors, lecturing postdoc students at field-specific medical universities) as well as the promotion of SPRS-therapy services directly to consumers (including Social Media engagement).

Also, we are working on protection of our IP related to SPRS-therapy®. In 2015, the Company has stopped the infringement of exclusive rights to SPRS-therapy® trademark owned by HSCI, violated by one of the clinics in St. Petersburg. The compensation assessed by the Arbitration Court of St. Petersburg in favor of HSCI amounted to 1.5 million rubles.

Talking about SPRS-therapy® promotion in the Russian market, we should note that its sales may be affected negatively by the new federal law "On biomedical cell products", which should pass the 2nd and 3d (final) readings in 2016. In the event the law is passed, all the technologies associated with the cultivation of cells - even if they have already been introduced to the market – will have to be re-registered and we will be forced to suspend sales for the time of re-registration. Currently, the Company is negotiating with public authorities regarding the fact that registered products should be provided with exceptions, just like SPRS-therapy which was authorized by Roszdravnadzor in 2009. In the event that no exceptions are given, the Company will have to re-conduct all preclinical studies and clinical trials, fill dossiers with trials results for the regulator etc., which is a long and expensive process.

In addition to the Russian market, the Company is making efforts to promote SPRS-therapy and the Service of personalized skin diagnosis (“Skin Passport”) internationally. An international medical tourism project is being prepared for launch in order to attract patients globally to receive SPRS-therapy services in partner clinics in Moscow. The project is initiated in cooperation with a partner from Great Britain and the first sales are anticipated not later than mid-year 2016.

Alongside, work on receiving global patent protection for the unique diagnostic component of SPRS-therapy know-how, i.e. personalized skin diagnosis (“Skin Passport”), is underway.

In September 2012, Vitacel LLC (HSCI’s subsidiary) applied for an international patent (PCT) to protect its IP “Diagnostic method for connective tissue and its application” and this PCT application was published on April 11, 2013 and in 2013-2014 moved to the national and regional phases (EU, Eurasia, USA, Brazil and Japan).

In February 2014, the US Patent Office completed its expert review and issued Vitacel a patent for its “Method of determining tissue regenerative ability of the skin” (published on July 29, 2014).

Ukrainian patent application passed qualification expertise in February 2016, and, according to the Announcement of confirmability to patent requirements, the decision on patent’s issuance was made.

 

Genetico® services (genetic diagnostics and consulting as well as Reprobank® services at Genetico® medical center & testing lab)

In partnership with RVC BioFund, HSCI implements its socially significant project for the development of personalized medicine in the field of early identification, prediction and prophylactic treatment of genetic disorders, including reproductive system diseases.

The revenues from genetic diagnostic and consulting services as well as Reprobank® services, reflected in the RAS revenue of HSCI’s subsidiary GENETICO LLC (former RGMC HSCI LLC), for FY2015 amounted to RUB 65.2 million – almost tripled over 2014.

More detailed information on the development of Genetuco® services will be given in the press-release on HSCI’s FY2015 IFRS results (which is to be distributed after the publication of the Company’s FY2015 consolidated financial statements under IFRS on April 29, 2016).

 

Operating Expenses, OIBDA, Profits and Losses

HSCI’s operating expensesfor 2015 decreased by 28.9% year on year to RUB 224.850 million. The decrease in operating expenses is attributable to the reduction in cost of sales as well as in administrative expenses.

Business costs optimization primarily include minimization of overall staff costs - through optimization of the number and structure of HSCI’s personnel, including by the transfer of certain employees to subsidiary companies where specific projects are developed. In addition, it should be noted the decrease in royalty payments to HSCI’s subsidiaries for the use of IP (due to the fewer sales of Neovasculgen®, IP for which belong to subsidiary companies NextGen LLC and CTL LLC).

However, as the reduction in operating expenses did not outpace the revenue decrease, the Company failed to demonstrate a year-on-year increase in operating profitability and margins (except for gross margin profit) - see Key Financial Results below.

OIBDAamounted to RUB 16.022 million for an OIBDA margin of 7.0% (compared to RUB 70.967 million and 19.1% respectively in 2014). Operating profit totaled RUB 2.576 million (compared to RUB 55.505 million in 2014).

Other gains & losses for 2015 amounted to a net gain of RUB 14.651 million (compared to a net loss of RUB 33.154 million in 2014), which is mainly attributable to the gain from revaluation of the Company’s financial instruments (purchased quoted securities) which comprised RUB 42.423 million.

As for the operating profit and positive result from other (mainly, non-operating) activities, the Company delivered FY 2015 profit before tax of RUB 17.227 million. But the deferred tax liabilities of RUB -7.895 million had an impact on the amount of HSCI’s net profit, which totaled RUB 9.086 million (compared to RUB 6,840 million for 2014). Deferred tax liabilities were mainly attributable to the above mentioned net revaluation gain (20% rate on, in accordance with Russian Accounting Standards).

Full Version of the Press Release (362 kb)


01 April 2016