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HSCI Reports Results for First Half of 2016 under RAS

HSCI Reports First Half 2016 Operating and Financial Results under RAS

Moscow – 2 August, 2016.  PJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, today announced its unaudited unconsolidated results for the first half of 2016 in accordance with the Russian Accounting Standards (RAS).

Operating and financial results of HSCI under RAS for the first half of 2016 – for their correct comparison with HSCI’s results for the first half of 2015 – it is necessary to consider taking into account the separated business since at the end of 2015 the business activity of Gemabank® was separated into a subsidiary (IMCB LLC). Therefore, this press-release contains all applicable adjustments.

            • -HSCI’s revenue for 1H 2016 amounted to RUB 71.1 millioncompared to RUB 125.5 million in the same period of the previous year.
            • -Gross profit amounted to RUB 36.9 million representing gross profit margin of 51.9%[2], compared to RUB 41.6 million and 33.2% in the same period of the previous year respectively.
            • -Operating loss was RUB 14.6 million[3], as opposed to operating profit of RUB 4.6 million in the same period of the previous year.
            • -HSCI’s net loss in 1H 2016 amounted to RUB 22.7 million compared to RUB 9.8 million in the same period of the previous year.

[1] In order to ensure comparability of the Company’s RAS revenue for 1H 2016 with the one for 1H 2015, it should be taken into account that the revenues for isolation and cryopreservation of cord blood stem cells starting Q4 2015 have been recognized in the financial statements of IMCB LLC – HSCI’s 100%-subsidiary, as, starting October 1, 2015, rendering of this service was transferred from HSCI to IMCB. The above mentioned IMCB’s revenues for isolation and cryopreservation of cord blood stem cells for 1H 2016 amounted to RUB 57.1 million. Therefore, the Company’s total revenue for 1H 2016 under RAS, сomparable with the one for 1H2015, amounted to RUB 128.2 million (a year-on-year increase of 2.1%).

[2] Taking into account the gross profit received by IMCB LLC, HSCI’s and IMCB’s combined 1H 2016 gross profit, comparable to HSCI’s gross profit for 1H 2015, totaled RUB 71.3 million – a year-on year increase of 70%, with a gross profit margin of 100.3%.

[3]Taking into account the operating profit received by IMCB LLC, HSCI’s and IMCB’s combined 1H 2016 operating profit, comparable to HSCI’s operating profit for 1H 2015, totaled RUB 6.7 million – a year-on year increase of 45%, with an operating margin of 9.4%.

 

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

Revenue, generated by PJSC HSCI (hereafter – “HSCI”, “the Company”) in 1H 2016 amounted to RUB 71.120 million – a year-on-year decrease of 43.3% (if adjusted by including revenues from cord blood stem cell isolation and cryopreservation service, which starting Q4 2015 has been rendering through 100%-subsidiary IMCB LLC, the total revenue is RUB 128.174 million, a year-on-year increase of 2.1%).

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).

Consolidated 1H 2016 financial statements under IFRS will be published on August 29, 2016.

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

In 1H 2016 revenues from the sales of Neovasculgen® amounted to RUB 2.2 million (3.0% of the Company’s total revenue), compared to RUB 1,2 million for 1H 2015 (+83.3%).

To explain these figures, it’s important to mention that:

    • -in the first quarter of 2016 the Company did not sell the drug to distributors due to the ongoing process of the registration of cap price limit following the inclusion of Neovasculgen® into the VED list for 2016. And overall, the distributors are yet offloading the rest of stock previously supplied by the Company. The real notable effect from public purchases due to inclusion in the VED list is expected to start from 2017.

  • -in 1H 2016 the distributors sold Neovasculgen® from the batches previously supplied by HSCI (in line with RUB 200 million contract for 2013-2014).

  • 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.

    In order to facilitate patients' access to Neovasculgen®, the Company are actively interacting with the professional medical community and regulatory authorities. One of the first sound results of this work was the inclusion of Neovasculgen® in the list of vital and essential drugs (VED), which enables a significant increase in hospital purchases.

    The Government directive on the inclusion of Neovasculgen® into the VED list for 2016 (# 2724-р.) was published on December 26, 2015 and 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.

    In order to actively work with regional key opinion leaders, hospitals and healthcare authorities as well as to support distributors in the formation of proposals and tender procurement, the Company has started to form its own sales force in the Russian regions.

    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 (therapeutic angiogenesis). The data on therapeutic effect following a treatment course of Neovasculgen® according to 5-year observation were reported at the professional conferences, and publication of relevant papers is expected in the near future.

    International development and licensing of Neovasculgen® can have a significant impact not only on the value of intellectual property, but also on the valuation of the company itself. Therefore, in addition to promoting Neovasculgen® in the Russian market, HSCI is working on the development of Neovasculgen® in the foreign markets.

    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.

    In addition, the work is proceeding to conclude distribution agreements for the sales of Russian Neovasculgen® in the  developing markets (currently our partners are conducting activities to register the drug in several countries with results to be disclosed upon the completion).

    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®. To start with, HSCI aims to work in the therapy of IHD (Ischemic Heart Disease), Diabetic Foot Syndrome.


    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. Over 202 million people are diagnosed with PAD worldwide. In the 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 its use in practical healthcare starting autumn 2012, 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.

    In addition, the drug has a significant healthcare economic efficiency (cost-saving effect).

    Neovasculgen® has a long-term effect (over 3 years – compared to 6-8 months for standard therapies) and can be effectively applied at PAD, including CLI (Stages 2a-3 of low limb ischemia according to Fontaine-Pokrovsky).

Cord blood stem cell isolation, cryopreservation and personal storage service – bio-insurance (Gemabank®)

Revenues from this service recognized in HSCI’s 1H 2016 financial statements under RAS amounted to RUB 45.7 million (64,3% of the Company’s total revenue).

IMCB LLC (100%-subsidiary of HSCI) in 1H 2016 demonstrated the revenues amounting to RUB 57.1 million.

Therefore, the cumulative amount of revenues received from Gemabank® operations during 1H 2016 amounted to RUB 102.8 million.

Compared to 1H 2015, Gemabank® revenue increased by 0.9% - 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 25.2 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.

Gemabank® plans include expanding the number of services in order to attract new groups of customers, as well as an introduction of differentiated pricing.

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, and recorded the revenue from new clients.

In the course of 2016-2017 the whole client base from Gemabank’s first days up to Q4 2015 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® (annual charges from new and old clients).

IMCB’s net income, starting 2016, is allocated to the parent company in the form of dividends to contribute to HSCI’s net profit under RAS (unconsolidated) which may be distributed through dividend payment to the HSCI’s shareholders

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 1H 2016 amounted to RUB 17.5 million (24.6% of the Company’s total revenue) – a year-on-year increase of 0,9%.

The main cause behind the revenue growth impairment is a decrease of primary appeals because of unstable economic situation of potential clients (the service belongs to the premium segment of esthetic medicine market and primary demand is suffer from economic recession in the country). However, we should note a stable growth of secondary appeals: right now more than 70% of patients return for the second and/or additional skin treatments in other areas besides the face. This fact shows us patients’ satisfaction by the result. From financial point of view it should be noted that an additional or repeated service is cheaper for the client as for such service we use the  patient’s skin fibroblast culture from his/her personal cryobank.

Therefore, the increase in number of requests for services within the spectrum SPRS-therapy (both initial and follow-up applications) is securing revenue stability/growth.

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 17 cities as of June 30, 2016). The total number of patients that had used this service, as of the end of the reporting period, exceeded 610 people.

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, the Company maintains the protection of the IP related to SPRS-therapy®. The Company thwarts violation of exclusive rights to the intellectual property, including trademarks, in court.

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 in the second half of 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.

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, for 1H 2016 amounted to RUB 64.7 million – 99% of revenues from these services received for FY 2015.

Compared to 1H 2015, the revenues increased by 2.4 times.

More detailed information on the development of Genetico® services will be given in the press-release on HSCI’s 1H 2016 IFRS results (which is to be distributed after the publication of the Company’s 1H 2016 consolidated financial statements under IFRS on August 29, 2016).

 

Operating Expenses, OIBDA, Profits and Losses

Financial results of HSCI are presented in this chapter according to HSCI’s RAS financial statements (as stand-alone). Duly comparable to 6mo2015 aggregated figures for 1H 2016 (HSCI + IMCB as for Gemabank results) – see below in the notes to the table "Key Financial Results".

HSCI’s operating expenses (cost of sales + SG&A) in 1H 2016 decreased by 29.1% year on year to RUB 85,721 million. 

The decrease in operating expenses is attributable to the reduction in cost of sales (-59.3%). Gross profit of the Company amounted to 36.936 million – a year-on year decrease of 11.3%. However, we see the growth ofgross margin: 51.9% for 1H 2016 compared to 33.2% for 1H 2015.

However, the increase in commercial and administrative expenses (including expenses associated with the promotion of Neovasculgen®) resulted in the operating loss and negative OIBDA[4] for 1H 2016 (RUB -14.601 million and RUB -9.135 million respectively).

Other gains & losses for 1H 2016 amounted to a net loss of RUB 10.380 million which is mainly attributable to the loss from revaluation of the Company’s financial instruments (purchased quoted securities) alongside with an increase in interest expense - due to the borrowing of funds (see below the table "Key Financial Results").

As a result, in 1H 2016 the Company delivered loss before tax in the amount of RUB 24.981 million and net lossof RUB 22.673 million.

[4]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.

Key Financial Results:

Profit and Loss Statement, ’000 RUB

1H 2016

1H 2015

% change,
y-o-y

Revenue

71,120*

125,533

-43.3%

Cost of goods sold (COS)

(34,184)

(83,892)

-59.3%

Gross profit

  36,936**

41,641

-11.3%

Gross margin

51.9%

33.2%

n/a

SG&A

(51,537)

(37,053)

39.1%

Total operating expenses, including:

(85,721)

(120,945)

-29.1%

Depreciation & amortization

(5,466)

(6,971)

-21.6%

OIBDA

(9,135)

11,559

n/a

OIBDA margin

n/a

9,2%

n/a

Operating profit / (loss)

   (14,601)***

4,588

n/a

Operating margin

n/a

3,7%

n/a

Other gains & losses, net – including:

(10,380)

(9,452)

9.8%

Dividends from subsidiaries

13,950

-

n/a

Interest gain/ (loss), net

(4,180)

(300)

by a factor of 13.9

Other income / (loss), net, incl.

(20,150)

(9,152)

120.2%

Gain / (loss) from revaluation of financial instruments /purchased quoted securities/

(12,096)

16,888

n/a

Loss before tax

(24,981)

(4,864)

413.6%

Profit tax

-

(1,558)

n/a

Deferred tax liabilities

2,714

(3,083)

n/a

Deferred tax assets

(406)

(298)

36.2%

Net loss

(22,673)

(9,803)

131.3%

Net margin

n/a

n/a

n/a

*In order to ensure comparability of the Company’s RAS revenue for 1H 2016 with the one for 1H 2015, it should be taken into account that the revenues for isolation and cryopreservation of cord blood stem cells since Q4 2015 have been recognized in the financial statements of IMCB LLC – HSCI’s 100%-subsidiary, as, starting October 1, 2015, rendering of this service was transferred from HSCI to IMCB. The above mentioned revenues for isolation and cryopreservation of cord blood stem cells for 1H 2016 amounted to RUB 57,054 thousand.

Due to the fact that HSCI’s revenue for the first half of 2015 includes all revenues generated by Gemabank® (both from long-term personal storage of samples and from new contracts for isolation and cryopreservation of cord blood stem cells), it can be compared with HSCI’s revenue for the reporting period only after adding to it revenues, generated by IMCB LLC.

Therefore, the Company’s total revenue for 1H 2016 under RAS, comparable with the one for 1H2015, amounted to RUB 128,174 thousand (year-on-year increase of 2,1%).

**Taking into account the gross profit received by IMCB LLC, HSCI’s and IMCB’s combined 1H 2016 gross profit, comparable to HSCI’s gross profit for 1H 2015, totaled RUB 71.3 million – a year-on year increase of 70%, with a gross profit margin of 100.3%.

***Taking into account the operating profit received by IMCB LLC, HSCI’s and IMCB’s combined 1H 2016 operating profit, comparable to HSCI’s operating profit for 1H 2015, totaled RUB 6.7 million – a year-on year increase of 45%, with an operating margin of 9.4%.



Full Version of the Press Release

02 August 2016