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HSCI Announces Full Year 2014 Consolidated Results under IFRS

Moscow, 8 May 2015 – OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, today announced its audited consolidated results for the full year 2014 under International Financial Reporting Standards (IFRS):

  • Consolidated revenue for the full year 2014 amounted to RUB 359.4 million compared to RUB 419.8 million in 2013.
  • Operating loss amounted to RUB 51.3 million compared to an operating profit of RUB 42.6 million in the previous year.
  • Net loss in 2014 amounted to RUB 16.6 million compared to net profit of RUB 16.7 million in 2013.

RUB thousands

2014

2013

% change, y-o-y

Revenue

359,371

419,770

-14.4%

Operating expenses, incl.

(410,630)

(377,107)

8.9%

Depreciation & amortization

(25,002)

(22,502)

11.1%

OIBDA1

(26,257)

65,165

n/a

OIBDA margin, %

n/a

15.5%

n/a

Operating profit / (loss)

(51,259)

42,663

n/a

Operating margin, %

n/a

10.2%

n/a

Net profit/ (loss)

(16,602)

16,670

n/a

Net margin, %

n/a

4.0%

n/a

Total comprehensive income/ (loss)

(16,016)

16,734

n/a

Consolidated revenue and income generated by key products and services

Consolidated revenue for 2014 amounted to RUB 359.371 million – a year-on-year decrease of 14.4%.

The largest portion of the consolidated revenue – 55.9% - was generated by OJSC HSCI as well as its subsidiary Cryonix CJSC from cord blood stem cells isolation and storage services.

The decrease in consolidated revenue compared to 2013 is primarily attributable to lower revenues received from the sales of Neovasculgen® to distributors. In 2013 they amounted to RUB 166.680 million compared to RUB 86.083 million for 2014.

Patient access to the drug and respectively Neovasculgen® sales on the Russian market are highly influenced by the absence of this first-in-class innovative drug in the list of Vital and Essential Drugs (VED) and state drug reimbursement programs. This strongly constrains the accessibility of Neovasculgen® for all patients suffering from PAD – 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 published data, the therapeutic effect following a treatment course of Neovasculgen® continues for up to 3 years. It is suggested that the drug's mechanism of action can provide an even longer effect – observation of patients participated in clinical trials and received the treatment will continue.

According to a pharmacoeconomics research study issued in July 2014, the cumulative cost-saving effect for Russia’s Healthcare Budget from the application of Neovasculgen® will amount to nearly RUB 4 million per patient. The cost-saving aggregate gain of RUB 3.93 million (calculated from analysis of the drug’s cost-effectiveness data) per patient includes gains from lower cost of treatment with Neovasculgen® as well as benefits from quality-of-life improvements. The researchers concluded that a wide application of the drug in a public hospital delivers clinical and economic advantages.

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

Revenues from the sale of HSCI’s own innovative drug Neovasculgen® to distributors in Russia in 2014 amounted to RUB 86.083 million (24.0% of the Company’s consolidated revenue) – a decrease of 48.4% year on year.

Neovasculgen® received marketing authorization on December 7, 2011 (registration decision RU № LP-000671). After industrial production of the first batches of Neovasculgen was launched and certified (in late-September 2012), the drug went on sale in Russia in the form of a ready-to-use drug (lyophilisate to prepare an injection solution; the treatment course comprising 2 sequential injections /i.e. 2 vials/) offered through distributors.

Due to the fact that this drug is innovative and expensive, the dynamics of sales to end-customers is highly dependent on its inclusion in state pharmaceutical assistance programs. Therefore, one of the Company’s key objectives is the inclusion of Neovasculgen® in federal and regional drug reimbursement programs. An important step in this direction would be the inclusion of Neovasculgen® in the list of Vital and Essential Drugs (VED). However, in the VED list for 2015 approved in December 2014 Neovasculgen® was not included. In the end of March, 2015 the Company submitted a new application to the Ministry of Healthcare for the inclusion of Neovasculgen® in the VED list which will be formulated for 2016.

In late December 2014, the expert panel of the Agency for Strategic Initiatives (the autonomous non-profit organization established by the Government of Russia in order to implement set of measures in economic and social spheres) has reviewed and approved HSCI’s program “The production and marketing of the innovative pharmaceutical drug Neovasculgen®”. According to decision of the expert panel the program was recognized as critical and important and the Agency for Strategic Initiatives will widely promote the project providing administrative and methodological support on federal and regional levels with the aim to confront PAD problem employing this innovative Russian drug.

Neovasculgen® is an innovative, first in class, drug. Its 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. For this reason HSCI aims to implement new pre-clinical studies and clinical trial protocols in order to expand the range of indications for applying the drug. HSCI starts to work for the therapy of IHD (Ischemic Heart Disease), and also reviews the opportunities for applying Neovasculgen® for Diabetic Foot Syndrome and for treatment of trauma-induced peripheral nerve damage. Also, the R&D is in progress for the creation of tissue-engineered products based on Neovasculgen®.

In addition to the Russian market, HSCI intends to make Neovasculgen® available on other markets.

In 2013 marketing authorization for Neovasculgen® was received in Ukraine, but HSCI cannot expect the planned sales because of political and economic situation in this country.

Taking into consideration the safety and efficacy data for Neovasculgen®, received during clinical trials and after launch on the market (extended post- market authorization studies), HSCI has decided to start the process of development, FDA clearance and launch of Neovasculgen® in the United States and China. At the moment the Company is negotiating with potential co-development partners as well as working on attracting required funds from Russian / international investors, and also grants.

In addition, the talks to potential partners and reviewing of opportunities to license the drug manufacturing and marketing on other foreign markets are underway.

In March, 2015 the first publication about Neovasculgen® was issued in English. The article authored by the Russian group of physicians dedicated to results of the drug’s clinical application as well as prolonged patient’s monitoring has been released in Journal of Cardiovascular Pharmacology and Therapeutics. JCPT (“J Cardiovascular Pharmacology and Therapeutics”): “pCMV-vegf165 intramuscular gene transfer is an effective method of treatment for patients with chronic lower limb ischemia” (DOI: 10.1177/1074248415574336).

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

In 2014 consolidated revenue from this service amounted to RUB 200.785 million (55.9% of the Company’s consolidated revenue) – a year-on-year decrease of 3.7%.

During the reporting year the Company’s revenues from the storage of cord blood stem cells rose (+9.1%), while revenues from the isolation and cryopreservation of cord blood stem cells declined (-8.7%). As of the moment, the total number of personal cord blood stem cell samples held in storage at Gemabank® exceeded 22,500.

During 2014 there were 5 cord blood samples delivered to clients from Gemabank® for the treatment of various diseases (for therapy of the elder sibling), including for the first in Russia clinical case, implementing a technology that combines preimplantation genetic diagnosis (PGD), IVF, and transplantation of cord blood stem cells (see more in Genetico section, page 4).

In Q1 2015 Gemabank® set in operation a new automated cryostorage facility which allows to store up to 40,000 cord blood samples with monitoring and controlling each bio-storage unit in real time mode.

Research and assessment of the cord blood stem cell banking market in Russia conducted by the Company has shown that, according to 2014 year results, Gemabank® retained its leading positions. However, it should be noted that competitors have become more active and new players have emerged. Despite the noticeable consolidation of the market, the important fact for the future is that, as statistics shows, the Russian market for personalized cord blood stem cell banking has potential for growth. In Russia cord blood stem cell banking services are used for about 0.3% of newborns, while, for instance, in the U.S. penetration is around 4%, in Germany – 2%. According to experts, in the mid-term prospective market penetration in Russia may reach 0.6% (out of total births) due to higher growth rates in the Russian regions.

However, speaking of the current situation, the resumption of Gemabank’s® sales growth on quarterly base will directly depend not only on global market trends and marketing efforts of the Company, but also on future economic situation in Russia. Russia’s engagement in political crisis in Ukraine along with the economic sanctions from Western countries and Russia’s counter measures negatively affect the country’s economy and therefore consumer demand as a result of customers’ negative expectations.

Up to the moment, the cord blood stem cell market has demonstrated down trends, however, according to preliminary results of Q1 2015, the market’s bottom is likely to have been already reached and there is a strong possibility of growth dynamics to recover.

During the period year the significant progress was made on the lawsuit “HSCI vs Russian Reporter and Expert Media Holding”.

“Russian Reporter” (well-known Russian weekly magazine) made a publication in its paper issue and on its website on January 24, 2013, entitled “Money Made on Children’s Blood”. The article contained false information about the Gemabank (largest family cord blood stem cell bank in Russia and CIS) belonging to the Human Stem Cell Institute and about cord blood banking in Russia in whole, discrediting HSCI’s business reputation. “Russian Reporter” magazine was established by CJSC Expert Media Holding.

HSCI demanded in its legal claim made to the Moscow Arbitration Court on June 25, 2013 that Expert Media Holding publish HSCI's response in “Russian Reporter” magazine (as complied with the Russian legislation). The Moscow Arbitration Court fully upheld HSCI’s claim and ordered Expert Media Holding to publish HSCI’s full response in the next issue of “Russian Reporter” magazine following the date when the court’s decision comes into force. However Expert Media Holding continually deviated from fulfilling the court order (it was fulfilled only in December, 2014).

The false and defamatory information caused harm to HSCI’s business reputation and led to a significant reduction in the number of contracts signed for Gemabank’s® services for cord blood banking from February, 2013. As compensation for the reputational harm and losses incurred, HSCI sued CJSC Expert Media Holding and CJSC Expert Group for 75,930,000 rubles, and also asked the court to oblige CJSC Expert Group to delete Internet pages with the published article on “Russian Reporter’s” website.

On October 28, 2014, the Moscow Arbitration Court ordered CJSC Expert Group and CJSC Expert Media Holding to pay a total of 44.4 million rubles (or about 1 million US dollars) as compensation for the losses incurred by HSCI, and for damage to the company’s reputation. The court also ordered Expert Group to remove its web pages with the published article that was made in the end of November 2014 (see the related press-release for details).

In March 2015, following HSCI’s readiness to settle with “Russian Reporter” and the defendants, the parties signed amicable agreement which terms include providing for HSCI an advertising space in “Expert” magazine as a compensation for harm done to HSCI’s business reputation and losses incurred. HSCI came to this decision as print media are experiencing economically challenging times, while Expert Media Holding still creates one of best print publications in Russia. Advertising space received under this settlement agreement will be used in particular to promote socially significant projects and technologies related to bone marrow and cord blood hematopoietic stem cell transplantations as well as to prediction, prevention and treatment of genetic disorders.

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

Revenues from SPRS-therapy, including the long-tern storage of autologous skin fibroblasts, in 2014 amounted to RUB 23,206 million (6.5% of the Company’s consolidated revenue) – a year-on-year increase of 16.4%.

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.

This 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 (covering 13 cities as of December 31, 2014). The total number of patients that had used this service as of the end of 2014 was more than 500 people. Almost 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 the SPRS-bank service was launched for younger clients, allowing them to store personal fibroblasts with the aim to use in the future to repair skin damage due to aging in areas such as face, neck, décolleté or hands, applying the unique SPRS-therapy service developed by HSCI, as well as to threat patient’s skin after burn injury or other trauma-induced skin damage.

In parallel with continued work with doctors and clinics specializing in aesthetic medicine, the marketing strategy continues to also include a focus on the promotion of SPRS-therapy services directly to consumers (including Social Media engagement).

In the reporting year the first research publication on SPRS-therapy was made in an international scientific journal. In December, 2014 Journal of Tissue Engineering and Regenerative Medicine published results of SPRS-therapy cell-based service clinical trials (Zorin V, Zorina A, Cherkasov V, Deev R, Kopnin P, Isaev A. Clinical-instrumental and morphological evaluation of the effect of autologous dermal fibroblasts administration. J Tissue Eng Regen Med. 2014 Dec 19. doi: 10.1002/term.1976. [Epub ahead of print]: http://onlinelibrary.wiley.com/doi/10.1002/term.1976/abstract).

In September 2012, Vitacel LLC (HSCI’s subsidiary) applied for an international patent (PCT) to protect its IP for the related “Diagnostic method for connective tissue and its application”, which is necessary to receive global patent protection for the unique part of SPRS-therapy service, i.e. personalized skin diagnostics (“Skin Passport”). This PCT application was published on April 11, 2013, which provides temporary legal protection of the technology in countries which allow for patent applications in English. In 2013-2014 the international patent application moved to the national and regional phases (EU, Eurasia, USA, Brazil, 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).

Genetic diagnostics and consultation as well as Reprobank services at Genetico medical genetics centers

Revenues from genetic diagnostic and consulting services as well as Reprobank services in 2014 amounted to RUB 22.408 million (6.2% of consolidated revenue) which represents almost a fourfold increase year on year (compared to RUB 5.555 million in 2013).

These services are provided by the Regenerative and Genetic Medical Center of the Human Stem Cells Institute (RGMC HSCI LLC), a subsidiary of HSCI, which develops the Russia-wide network of advanced medical genetic centers under the Genetico brand. RVC BioFund, a state investment fund, is HSCI’s partner in this project. The investment agreement signed by the parties was approved by HSCI’s EGM on March 27, 2014 and has come into force (for details, see: the press-release on EGM results and the press-release on the Investment agreement for RVC BioFund to become a participant in RGMC HSCI LLC). As for the moment, RVC BioFund holds a 23.89% stake in RGMC HSCI LLC.

The development of Genetico socially significant project includes the creation of the Company’s Russia-wide network of advanced medical centers as well as a testing lab to provide genetic diagnostics and consulting services with the aim of early identification, prediction and prophylactic treatment of genetic disorders.

In Q2-Q4 2013, the following services were launched on the Russian market:

-A range of medical genetics consulting services using complex genetic testing technologies, including proprietary Ethnogene DNA-array:

- Neonatal screening with aim of early identification (preventing the development of clinical symptoms / complications) as well for prophylactic treatment of the most widespread inherited disorders.

- Preconception screening (for couples in pregnancy planning to minimize the risks of giving birth to a sick child). In the case that carrier status is identified among future parents, the development of the pathology in future generations can be prevented with the help of modern assisted reproductive technologies, namely, the use of IVF with PGD (preimplantation genetic diagnosis of embryos for monogenic inherited diseases during an IVF cycle, see below).

- Medical genetics consulting for patients with infertility.

- Prophylactic genetic screening for adults (determination of the genetic features and identification of risks for clinically healthy individuals and their future offspring).

- Prenetix (non-invasive prenatal testing of fetal chromosome aberrations).

- PGD (preimplantation genetic diagnosis of early-stage embryos for monogenic inherited diseases and chromosomal aberrations during an IVF cycle, which allows specialists to determine which embryos can be recommended for transplantation into the uterus).


The PGD laboratory, which operates within the HSCI’s new laboratory and production complex, was created in cooperation with the pioneer and world leader in this field – the Reproductive Genetics Institute in the United States. The laboratory uses a broad arsenal of methods and technologies which meet the strictest requirements for the fullness, informative value and reliability of the analysis as applicable to any situation in which preimplantation genetic diagnosis is required.

Specifically, a simultaneous embryo analysis for histocompatibility (by HLA typing) and absence of a genetic disorder conducted at the HSCI’s PGD-laboratory gives Russian families an opportunity to have a healthy child to be a donor for UCB stem cell transplantation to the elder sibling having an inherited disease, such as congenital hereditary immunodeficiency, Krabbe disease, Omenn syndrome, Blackfan-Diamond anemia, Shwachman-Diamond syndrome, Fanconi anemia, etc. Parents, who request HSCI for PGD services to give birth to a healthy child and further treat his / her brother / sister suffering from an inherited disease, are enrolled in a special program named after Adam Nash.

Within the framework of this program, in 2014 a first child was born in Russia to save the elder sister. This first case was implemented by HSCI in order to introduce in Russia the technology (which are applied mainly in the USA and few other countries) that combines preimplantation genetic diagnosis (PGD), IVF, and transplantation of hematopoietic cord blood stem cells.

The patient was a girl suffering from Shwachman-Diamond syndrome. Using PGD, HSCI’s specialists helped the family give birth to a healthy boy, for which it was chosen for implantation the embryo who was not only free of the genetic mutation causing the disease of his elder sister, but also 100% HLA-matched with her. Therefore, on the one hand, HSCI helped the family to get a healthy child; while on the other hand, fully compatible hematopoietic cord blood stem cells were collected at birth, which hematologists can use for treating the Shwachman-Diamond syndrome of the elder child. The transplantation is planned for 2015.


- Genetico clients have also access to the services offered by Reprobank (reproductive cell and tissue bank) which started operations in Q3 2013 with the sale of donor sperm samples as well as the service of the personal sperm storage for bio-insurance purposes. In 2015 the oocyte cryopreservation service to be launched.

Genetic diagnostics and consulting services as well as Reprobank services are provided based on HSCI’s new laboratory and production complex, opened in 2013 in Moscow.

HSCI plans to expand the range of medical genetics consultation services offered by Genetico, built on highly-technological diagnostics methods. As of today, the company has already brought to the market the services in areas of oncogenetics (identification of genetic predisposition to oncological diseases – in particular to breast and ovarian cancer) and bioinformatics (genome sequencing and interpretation /employing NGS methods/, including Whole Exome Sequencing for the diagnosis of complicated inherited disease cases).

Other plans include an introduction of new diagnostics platform that will have more affordable price, comparing to Ethnogene DNA array – with the aim of broadening the market for DNA screening and diagnosis. In addition, the Company considers investment opportunities for creation of its own NGS laboratory for genome sequencing.

Expanding into new geographic markets – international markets entry (development of the Company’s products and services outside of Russia)

At the moment the Company is making evaluations and plans as well as conducting preliminary actions, including fundraising, towards the development and marketing of its proprietary services and Neovasculgen® drug on the global markets which are substantially larger than the Russian market and, therefore, definitely present greater opportunities.

Operating expenses, OIBDA, Operating profit

Consolidated operating expenses in 2014 increased by 8.9% year on year to RUB 410.630 million. Among other things, this was associated with the growth in expenses for materials and reagents necessary for the provision of services which demonstrated higher revenues in the reporting year – such as SPRS-therapy and medical genetic diagnostic services. The R&D costs also increased – due to the additional research of Neovasculgen® drug (its stability analysis, allowing for prolonging expiry (storage) terms of the product). At the same time, it is worth mentioning the management cost saving initiatives (decrease in payroll costs, advertising costs as well as representation expenses).

Due to the increase in operating expenses along with the revenue decrease, in 2014 the Company demonstrated negative operating profitability and margins – in comparison to 2013 (see Appendix I).

Operating expenses before depreciation and amortization amounted to RUB 385.628 million, resulting in a negative OIBDA of RUB -26.257 million.

The Company’s operating loss amounted to RUB 51.259 million.

Net other gain/ loss, Profit before income tax

In 2014, the Company’s net other gain (share of profit/ (loss) of associates + net interest expense + net other non-operating income + net foreign exchange gains) amounted to RUB 51.419 million compared to RUB 15.275 million in 2013.

The size of consolidated net other gain in 2014 was largely determined by:

    • Due to the increase in the number of purchased securities (quoted shares) along with the financial market trends in 2014, opposed to 2013, the Company reported a significant revaluation gain – in the amount of RUB 57.816 million (compared to RUB 13.490 million in 2013).
    • Due to a decrease of the principal long-term debt, in 2014 the interest expense decreased, which alongside with increase in interest gain from loans granted led to a drop of net interest expense in 2014 compared to 2013 (RUB -6.301million against RUB -15.613 million, respectively).
    • In 2014 the Company recognized an impairment of financial investments in its associated company Hemafund Medical Centre LLC, Ukraine to its fair value less cost of sale (as a 50% stake belonging to HSCI was sold in early 2015 for the price lower than at acquisition) – in the amount of RUB 21.296 million (see Notes 10, 26 to HSCI’s consolidated financial statements for 2014 under IFRS).
    • Other non-operating income for 2014 includes the gain in the amount of RUB 16.3 million related to write-off of the loan received from SynBio LLC in proportion to the Group’s participation, so long as SynBio LLC has created reserves for this loan granted to HSCI (see Note 12 to HSCI’s consolidated financial statements for 2014 under IFRS).



    • Consolidated financial statements for 2014 reflects the loss from associates in the amount of RUB -3.329 which is 57.5% less compared to 2013 (RUB -7.836 million) – see Note 10 to HSCI’s consolidated financial statements for 2014 under IFRS.

      As a result, the Company’s profit before income tax in 2014 amounted to RUB 0.160 million – a decrease compared to RUB 27.388 million for 2013 when the Company received a significant operating profit thanks to the greater revenues from Neovasculgen’s sales.

      Income tax expense amounted in 2014 to RUB 16.762 million, of which RUB 14.451 million are deferred income tax, mainly occurred due to revaluation of purchased quoted securities – see Note 15 to HSCI’s consolidated financial statements for 2014 under IFRS.

      Profit/ (loss) for the period (net profit/ (loss))

      Due to the reasons mentioned above, in 2014 the Company demonstrated a consolidated net loss totaling
      RUB 16.620 million, compared to a net profit of RUB 16.670 million in 2013.

      Consolidation

      The condensed consolidated financial statements for 2014 include the operating results of HSCI and its subsidiaries – Vitacel LLC, NextGen LLC, Cryonix JSC, RGMC HSCI LLC, Cell Technologies Laboratory LLC, IMCB LLC and also HSCI’s share in the loss of associated company IceGen LLC (see Notes 2, 9, 10 to HSCI’s consolidated financial statements for 2014 under IFRS).

      APPENDICES:

      1. Condensed consolidated statements of comprehensive income for the full year ended December 31, 2014 and December 31, 2013 – in RUB thousands
      2. Condensed consolidated statements of financial position as of December 31, 2014 and December 31, 2013 – in RUB thousands

      HSCI’s audited consolidated financial statements prepared in accordance with IFRS as of and for the full year ended December 31, 2014 can be viewed on the Company’s corporate website under “For Investors”(Financial Reports -> IFRS):
      http://eng.hsci.ru/investoram-i-aktsioneram/financial-reports/financial-reports-in-accordance-with-international-financial-reporting-standards-ifrs

1 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.

Full Version of the Press Release (741 kb)


08 May 2015