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HSCI released its FY 2014 RAS results

Moscow – 7 April 2015 OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, today announced its audited unconsolidated results for 2014 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the full year 2014 amounted to RUB 371.6 million compared to RUB 402.0 million in 2013.
  • Gross profit amounted to RUB 170.4 million for a gross profit margin of 45.9%.
  • OIBDA1 amounted to RUB 71.0 million representing an OIBDA margin of 19.1%.
  • Operating profit was RUB 55.5 million, while operating margin amounted to 14.9%.
  • Net profit in 2014 amounted to RUB 6.8 million.


General Director of HSCI Artur Isaev commented:

“The Company completed the first corporate restructuring stage in 2014, thereby reducing expenditures and separating business units by segment so as to increase their operating efficiency. We’ve seen positive dynamics in the Company’s financial results and internal processes so far this year, despite the negative trends in the Russian economy overall. 

We will continue promoting our services on the Russian market in 2015, paying special attention to interaction with the professional medical community and regulatory bodies. We thereby aim to provide easier access for patients to our innovative Neovasculgen® gene-therapy drug. We are also focusing this year on developing the Company’s products and services in the field of medical genetics, since we see great prospects for this field. Lastly, we’ve started the process of licensing and developing markets for our Neovasculgen® gene-therapy drug abroad”.


HSCI’s revenue and income generated by key products and services

Revenue, generated by OJSC HSCI (hereafter – “HSCI”, “the Company”) in 2014 amounted to RUB 371.583 million – a year-on-year decrease of 7.6%.

The decrease is primarily attributable to lower revenues received from the sales of Neovasculgen®. In 2013 revenues from the sale of this drug to distributors amounted to RUB 166.680 million, while in the reported year they decreased to RUB 123.695 million.

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.

It should be noted, that revenues from the provision of genetic diagnostic and consulting services starting Q2 2013 have been reflected in the revenue of RGMC HSCI LLC (a subsidiary of HSCI) and, therefore, are reported in the consolidated IFRS statements. The Company releases IFRS reports for half-year and full year results, while RAS reports are released for 3, 6, 9 months and for the full year. Thus in order to present regular comparative information on Genetico project development (medical genetic diagnostic and consultation services as well as Reprobank services), HSCI RAS results releases include information about the revenues of RGMC HSCI LLC received from aforementioned services for the period under review (see the Genetico section below - page 4).


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

In 2014 revenues from the sale of HSCI’s own innovative drug Neovasculgen® to distributors in Russia amounted to RUB 123.695 million (33.3% of the Company’s total revenue).

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 and at the moment the Company is going to apply 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. In addition, 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 as well.

In February 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.

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

 

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

In 2014 revenue from this service amounted to RUB 195.862 million (52.7% of the Company’s total revenue) – a year-on-year decrease of 2.7%.

During the reporting year HSCI’ s revenues from the storage of cord blood stem cells rose (+16.0% – RUB 65.419 million compared to RUB 56.402 million in 2013), while revenues from the isolation and cryopreservation of cord blood stem cells declined (-9.9% – RUB 130.443 million compared to RUB 144.821 million in 2013). The total number of personal cord blood stem cell samples held in storage at Gemabank® at the end of 2014 increased to 22,100.

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 the 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.

Revenue from SPRS-therapy, including the long-tern storage of autologous skin fibroblasts, in 2014 totaled RUB 23.2 million (6.2% of the Company’s total revenue). Revenue from the service was up 16.4% from 2013.

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. 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 SPRS-therapy and, in particular, 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).

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), which provides the opportunity to protect the SPRS-therapy know-how (including its unique diagnostic component) in the United States. For this purpose, in May 2014 the relevant application was made (which describes direct link between skin diagnosis results and SPRS-therapy treatment as well as frequency of treatment).

 

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

As it was mentioned before, starting Q2 2013, genetic diagnostics and consulting services as well as Reprobank services are provided by RGMC HSCI LLC (a subsidiary of HSCI). As a stand-alone, in 2014 RGMC HSCI LLC generated revenues from genetic diagnostics and consulting as well as Reprobank services in the amount of RUB 23.0 million which represents a fourfold increase year on year.

More detailed information on the development of all services provided by a Russia-wide network of advanced medical genetics centers under the Genetico brand will be given in the press-release on HSCI’s FY 2014 IFRS results, which is to be distributed after the publication of the Company’s FY 2014 consolidated financial statements under IFRS in the end of April, 2015.

 

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

At the moment HSCI 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, Profits and Losses

In 2014 HSCI’s operating expenses decreased by 7.2% year on year to RUB 316.078 million. The decrease in operating expenses is attributable to the reduction in cost of sales as well as in administrative and particularly commercial expenses.

Business costs optimization primarily include minimization of rental fees, advertising expenditures and 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 as well as by the use of outsourcing services).

As a result, the reduction of operating expenses balanced the revenue decline and the Company managed to prevent operating margins from a significant drop in comparison with 2013 (see Key Financial Results table in full version of the press-release below).

OIBDA amounted to RUB 70.967 million, OIBDA margin – 19.1% (compared to RUB 78.459 million and 19.5% respectively for 2013).

Operating profit in 2014 totaled RUB 55.505 million (compared to RUB 61.484 million in 2013), with operating margin of 14.9% (compared to 15.3% in 2013).

Other gains & losses for 2014 amounted to a net loss of RUB 33.154 million compared to a net loss of RUB 39.287 million in 2013 – down 15.6% year on year:

  • Due to a decrease of the principal long-term debt, in the reporting year the interest expense decreased, which, along with the increase in interest income (from loans granted), led to a drop of net interest expensein 2014 compared to 2013 (RUB 4.938 million and RUB 13.960 million respectively).
  • However in 2014 the Company demonstrated a net other loss (the difference between other expenses and other income in the Financial results statements) which amounted to RUB 28.216 – a year-on-year increase of 11.4%.

Despite a significant gain from revaluation of the Company’s financial investments (purchased quoted securities) which comprised RUB 57.816 million (against RUB 13.491 million in 2013), in 2014 the Company recognized additional reserves to cover the impairment of financial investments, notably the impairment loss of HSCI’s 50% stake in Hemafund in Ukraine in the amount of RUB 29.0 million (due to its sale in 2015 at the price less than a purchase price).

However, during the reporting year the substantial negative result from other (mainly, non-operating) activities was compensated by the volume of operating profit, resulting in a HSCI’s 2014 profit before tax of RUB 22.351 million and a net profit of RUB 6.840 million.

1OIBDA 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 (339 kb)


07 April 2015