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HSCI reports first half 2012 RAS results

Moscow, 7 August 2012 – OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MICEX: ISKJ), one of Russia’s leading biotech companies, today announced its unaudited results for the first half of 2012 in accordance with the Russian Accounting Standards (RAS).

  • Revenue for the first half of 2012 increased by 60% year on year to RUB 137.2 million.
  • Gross profit rose 80% year on year to RUB 52.6 million; first half 2012 operating profit totaled RUB 7.7 million compared to RUB 0.8 million operating loss in the first half of 2011.
  • OIBDA amounted to RUB 10.2 million compared to RUB 1.7 million in the first half of 2011;
    first half 2012 OIBDA margin amounted to 7.4%.
  • First half 2012 net profit amounted to RUB 2.7 million compared to RUB 0.3 million a year ago. 

HSCI’s General Director Artur Isaev commented on the key events of the first half of 2012 and the Company’s plans going forward:
“Since the start of this year we have begun active work on the commercialization of the products and service which HSCI is introducing to the market, including the construction of a new laboratory and production complex for implementing our program of planned projects in regenerative medicine and genetic diagnostics.

The main focus of the management’s attention in the reporting period was on issues concerning organization of sales and market promotion of new Gemascreen services and also the innovative drug Neovasculgen®.

A key event in the Russia-wide launch of Neovasculgen® took place at the 23rd Annual Conference of the Russian Society of Angiologists and Vascular Surgeons held in St. Petersburg on June 30, 2012. The beginning of Neovasculgen® sales is planned for August 2012 upon certification of the drug’s first batches. Neovasculgen® is the world’s first gene-therapy drug intended to treat Peripheral Arterial Disease (PAD), including Critical Limb Ischemia (CLI). It provides a new approach to treatment – the activation of the naturally programmed process for the formation and growth of blood vessels, which has been called therapeutic angiogenesis.The adoption of this approach in practice is such a notable event in the world of medical science that the March issue of  NatureMedicine (March 2012, V.18, № 3, p.328) – one of the most influential and authoritative scientific journals – published a special article devoted to the development of gene-therapy treatments for PAD and CLI and in particular Neovasculgen® developed by HSCI.

During the reporting period the Company continued to see growth in demand for its cord blood stem cell isolation and banking services as well as SPRS-therapy, which was introduced to the market a year and a half ago. In May HSCI received marketing authorization and in the third quarter of this year plans to begin distribution in Russia of the Celution® System produced by Cytori Therapeutics (USA). This innovative medical technology allows for collection and processing of the patient’s own human adipose tissue for subsequent use in reconstructive and aesthetic medicine (injection of a patient’s own adipose-derived regenerative cells /ADRCs/). All laboratory and cell processing tasks are carried out by one device – the patient’s own cells are used with minimal manipulation, which simplifies the procedure and makes it effective and convenient for both the doctor and the patient (“Auto and Fresh” approach).

I would also point out that we have succeeded in bringing this technology to the Russian market only three years following its registration in Europe.
The year 2012 is the first year of the implementation of our new five-year business plan. Over this span of time the increase in the number of HSCI’s products and projects brought to market should lead to both top- and bottom-line growth as well as further diversification of revenue structure. In the first half of 2012 revenues from SPRS-therapy and Gemascreen services accounted for 10% of the HSCI’s total revenue.”

HSCI’s first half 2012 revenue amounted to RUB 137.180 million, representing an increase of 60.3% year on year.

The Company’s main source of revenues came from the isolation, cryopreservation and storage of umbilical cord blood stem cells.

In the reporting period HSCI signed 1,914 contracts on the banking/storage of cord blood stem cells, which met the Company’s targets and represented a 42.3% increase from the first half of 2011 (1,345 contracts), when the market stagnated as a result of post-crisis structural changes in consumer demand. In the second quarter of 2012, the number of contracts was up over the first quarter by 8%.

At the start of the year the Company began implementing a new outreach strategy for providing information to doctors and pregnant women by expansion of the number of information sources available. During the reporting period HSCI representatives took part in major medical conferences in the regions and the promotion of umbilical cord blood stem cell banking/storage services via the Internet was enhanced. During the second quarter of 2012 Gemabank’s own regional network was expanded: medical representatives have begun working in three new cities. As planned, during the second quarter Gemabank® underwent rebranding with the aim of achieving better congruity with the medical practice of preserving invaluable biomaterials.

Starting in the third quarter of this year, plans call for expanding the scope of the highly focused and directed engagement of target audiences as detailed in the Company’s strategic principles.

Ukraine’s largest cord blood bank Hemafund (in which HSCI holds a 50% stake) signed 721 contracts for cord blood banking/storage during the first half of 2012, which represents a 28.8% increase year on year. In the second quarter of 2012 the number of contracts signed reached 376, which was 9% more than in the first quarter of the year.

 

The commercialization of proprietary innovative drugs, technologies and services (regenerative medicine /cell services/, medical genetics, gene therapy):

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

This service was authorized by the Russian healthcare regulator Roszdravnadzor 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. SPRS-therapy is offered at the leading dermatology and cosmetics clinics of Moscow.

In the first half of 2012 revenues from SPRS-therapy totaled RUB 10.036 million or 7.3% of the Company’s total revenue. More than 160 patients had used this service as of the end of the first half of 2012 (144 patients fully completed their treatment, with approximately one-third returning for second and/or additional skin treatments in other affected areas).

One of the Company’s goals for the near future is the launch of SPRS-diagnostics as a separately offered service (beginning in early 2013).

Gemascreen – a project to provide genetic medicine consultation with the aim of early detection, prevention and treatment of inherited diseases.

Throughout 2011 HSCI developed a project to create a Russia-wide genetic medicine service network to provide genetic diagnostics and consultation regarding the inherited diseases most commonly found among the peoples of the Russian Federation.

The Gemascreen project includes a portfolio of genetic diagnostics and consulting services to identify carrier status of inherited diseases and predisposition to them as well as subsequent consultation regarding prevention or early treatment measures in the case that susceptibility is discovered. Gemascreen’s services can be used by various groups of customers: newborns, couples planning children and pregnant women.
The Company began to implement the first phase of this project in the fourth quarter of 2011, launching in Moscow and a number of other regions pilot sales of Gemascreen services, namely presymptomatic identification of the six most common inherited diseases in the Russian Federation and their carrier status through DNA screening using umbilical cord blood of a newborn.

This service was launched Russia-wide in January 2012 and during the first half of the year generated RUB 3.261 million in revenue or 2.4% of HSCI’s total revenue.

The opening of HSCI’s own genetic medicine consultation offices is planned in a number of major cities throughout Russia through the end of 2012.

During the second quarter management focused its attention on augmenting informational and consultative work among doctors and expecting mothers and also the training of doctors who specialize in genetic medicine on the latest trends in the practical application of discoveries in genetics in modern medicine. On May 28, 2012, a satellite symposium was held in Moscow on “Modern Possibilities in Prevention of Inherited Diseases among Newborns and People of Reproductive Age,” where leading medical geneticists made presentations before an audience of practicing obstetricians and gynecologists from various regions of Russia.

In the third quarter of 2012 efforts will be made to optimize the positioning of the Gemascreen project with the aim of broadening perceptions of its social importance as well as the practical value of genetic diagnostics.

Before the end of 2012 the Company expects to complete its work on the creation and technical and clinical validation of its own diagnostics DNA array, reflecting the specifics of inherited diseases characteristic of peoples of the CIS. Thus, by using HSCI’s own DNA array, the Company plans to increase the list of diagnosed diseases to 80 or more. Such medical devices have never undergone licensing and certification in Russia. HSCI plans to obtain a product license and then undergo certification with the aim of subsequent sale for use in laboratories of other medical institutions.

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

Neovasculgen® passed phase 2b/3 clinical trials and received marketing authorization on December 7, 2011 (the decision to include the drug in the state registry of medicinal products for medical use in the Russian Federation was adopted by the Ministry of Health and Social Development on September 28, 2011 – RU № LP-000671).

Throughout the first half of 2012, preparations were underway to begin sales of the drug: preliminary marketing events, creation and organization of a proprietary network to promote the drug, and production of the drug.

A key event of the Russia-wide launch of Neovasculgen® took place at the 23rd Annual Conference of the Russian Society of Angiologists and Vascular Surgeons held in St. Petersburg on June 30, 2012. More than 300 leading Russian and foreign specialist in vascular surgery attended the conference’s symposium on Topical Issues Concerning the Treatment of Patients with Inoperable Lower Limb Occlusion: New Approaches, New Possibilities, where Neovasculgen® was actively discussed by leading experts in this field.

The beginning of Neovasculgen® sales is planned for August 2012 upon certification of the drug’s first batches. Neovasculgen® will be made available on the retail market as well as sold to hospitals in Russia as a finished product via a network of distributors.

Over the course of 2012-2013, HSCI will seek to include this new drug in federal and regional public medicine subsidy programs. In the second half of 2012 and early 2013 efforts will be made to expand the contract production of Neovasculgen®, in particular the certification of additional facilities for production of the drug.

In addition to Russia, future plans include bringing Neovasculgen® to other CIS markets as well as studying the possibility of introducing it in the European Union and United States. The process of registering the drug in Ukraine began in March 2012 and could be concluded by yearend.

As Neovasculgen® is the first-in-class gene-therapy product for PAD treatment via stimulation of angiogenesis, the drug has much potential for use in treating other ischemia-related conditions. At the moment, HSCI is preparing clinical trial protocols in order to expand the range of indications for applying Neovasculgen® (including in conjunction with surgical reconstruction and other nosologies, such as ischemic heart disease /IHD/).

 

HSCI’s operating expenses for the first half of 2012 amounted to RUB 129.508 million, up by 49.9% year on year. The primary driver behind this increase was planned expenditures on the development of new projects confirmed in the Company’s business plan for 2012-2016, which was primarily manifested in higher staff costs due to staff increases and the formation of highly professional teams for each of the projects.  SG&A costs were also influenced by marketing expenses on Neovasculgen® (preparation for launch and start of sales).

In addition, with the aim of supporting the growing demand for cord blood banking services, during the reporting period expenditures increased on advertisement of Gemabank and on salary budget related to the increase in the number of regional representative (expansion of regional network) in comparison to the first half of 2011.

Furthermore, the cost of sales increased with expenses related to the launch of construction of HSCI’s new laboratory production complex as well as higher expenses on the services of third-party medical organizations due to the increase in the number of cord blood stem cell samples accepted for storage by Gemabank and the provision of Gemascreen services.

However, with revenues gains outpacing increases in operating expenses, in the first half of 2012 the Company demonstrated an operating profit of RUB 7.672 million in contrast to operating loss of RUB 0.803 million reported for the same period a year earlier.

HY 2012 OIBDA amounted to RUB 10.201 million compared to RUB 1.655 million in the first half of 2011.

Therefore, during the reporting period the Company saw higher margins, with a gross margin of 38.3% and an OIBDA margin of 7.4%.

In the first half of 2012, the Company’s net interest income substantially decreased year on year and other losses rose, which impacted profit before tax, which amounted to RUB 4.218 million.

Other losses (the difference between other expenses and other income) increased primarily on account of the Company’s sale of treasury shares at the market price, which at the time of sale in the term stipulated by law was lower than the purchase price of the said shares (the mandatory buyback of own shares by HSCI from shareholders not participating in the voting or voting against a major transaction approved by the EGSM on March 17, 2011).

This reason behind the increase in other losses also influenced the size of HSCI’s net financial result for the second quarter of 2012. Due to the fact that operating expenses grew faster than revenues in the second quarter of 2012, operating profit  decreased (-10%), which along with the abovementioned increase in other losses led to no net profit for the quarter. The Company reported an insignificant net loss of RUB 0.071 million. OIBDA in the second quarter of 2012 amounted to RUB 4.908 and the OBIDA margin was 6.5%.

HSCI’s net profit in the first half of 2012 amounted to RUB 2.646 million compared to RUB 0.314 million in the first half of 2011.

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 (216 kb)

07 August 2012