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HSCI Reports First Half 2014 RAS Net Profit Growth of 65%

Moscow, 18 August 2014 – OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, announced its unaudited unconsolidated results for the first half of 2014 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the first half of 2014 amounted to RUB 169.2 million, compared to RUB 219.1 million in the same period of the previous year.
  • Gross profit amounted to RUB 55.3 million representing gross margin of 32.7%; operating loss amounted to RUB 0.7 million.
  • OIBDA1 amounted to RUB 7.8 million; OIBDA margin was 4.6%.
  • Net profit for the first half of 2014 increased by 65% year on year to RUB 32.7 million compared to RUB 19.8 million in the same period of 2013.

General Director of HSCI Artur Isaev commented:

“For 2014, our company has the objective to grow sales of our products and services in the existing markets and expand into the new markets. We shall pursue this objective through the rest of this year and 2015. This is especially important now, since in the light of economic instability businesses are better off when they improve efficiencies and rely on internal resources.

Expectation of the crisis tends to dampen consumer activity and change the structure of the consumption affecting those segments where HSCI and its affiliated companies operate. There is only one recipe for this – a focus on more effective marketing and sales, and efficiency improvement through cost reduction. We are going to concentrate on this through the rest of 2014 and most likely, in 2015.

In addition, the capital markets in Russia today are in a pessimistic mood. We have been meeting with potential investors and although there is an apparent interest with regard to our projects, investors in general are cautious to make decisions now before there is more certainty in the markets about domestic and international risks. A number of projects that are under way in our Company involve R&D and, therefore, require long-term financing. We are going to continue with such projects by supporting them mostly through external financing.

We believe that a crisis does not only create risks and dangers but also opens new opportunities. In light of the above-mentioned facts, the Company is planning a business restructuring that will reduce costs and enhance efficiency. Down the road, such a restructuring will be instrumental in improving profitability since carving out business lines into separate business units will help optimize control and reduce costs”.

HSCI revenue and income generated by key products and services

Revenue generated by OJSC HSCI (hereafter – “HSCI”, “The Company”) in 1H 2014 amounted to RUB 169.194 million, which is down 22.8% compared to 1H 2013.

The decrease is primarily attributable to lower revenues received from the sales of Neovasculgen® to distributors (RUB 41.8 million compared to RUB 90.1 million in the first quarter of 2013).

Neovasculgen® sales on the Russian market in 2014 are highly influenced by the absence of this first-in-class innovative drug in the list of Vital and Essential Drugs (VED), which has not been updated in Russia for the past 3 years (i.e. the list approved for 2012 is still in case though must be updated annually). This strongly constrains the accessibility of Neovasculgen® for all patients in need via state drug subsidy programs. In Q2 2014 HSCI didn’t have revenues from the sale of Neovasculgen® to distributors because the deliveries were stopped until the prospects of its inclusion in the VED list become clear (see Neovasculgen® section on page 2).

Also, in contrast to 1H 2013, in the reporting period the Company total revenue does not include revenues from the provision of genetic diagnostic and consulting services which 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 (starting the one for Q1 2014) include information about the revenues of RGMC HSCI LLC received from aforementioned services for the period under review (see the Genetico section on Page 4).

 

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 1H 2014 accounted for 24.7% of the Company’s total revenue (RUB 41.8 million).

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.

In March 2013 HSCI signed a sales agreement with Sotex Pharm Firm, which is part of Protek Group and has extensive experience in bringing medicines to market.

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 medicine financing programs. Therefore, one of the Company’s key objectives is the inclusion of Neovasculgen® in federal and regional public drug subsidy programs.

An import step in this direction would be the inclusion of Neovasculgen® in the list of Vital and Essential Drugs. However, changes the list were not approved by the Government for either 2013 or 2014 (a government directive from December 19, 2013 stipulated that the list would not be changed for 2014, thus leaving in place for a third year in a row the list confirmed for 2012).

In Q2 2014 the Company submitted application for the inclusion of Neovasculgen® in the Vital and Essential Drugs list to be formulated for 2015. If this new list is confirmed by the government, it must be published before the year end.

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

Taking into consideration Neovasculgen’s market scale and its growth rates in Russia, HSCI has decided to start the process of development, FDA clearance and launch of Neovasculgen® in the United States and China.

HSCI has prepared a business plan to introduce Neovasculgen® to the US market, analyzed the potential of the market (which is substantially larger than the Russian market), selected potential partners for addressing regulatory issues and contract production as well as preclinical studies and clinical trials, and made calculations of the financing required. According to preliminary estimations, the required volume of investments for carrying out preclinical studies and clinical (Phase I and II) trials in the United States would be approximately US$20 million. The Company intends to attract required funds from both Russian and international investors.

A business plan for bringing Neovasculgen® to the Chinese market is also in the works.

Neovasculgen® is 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. By the moment preclinical studies have been completed and based on their results another target nosology is selected – IHD (Ischemic Heart Disease). The Company is now preparing clinical trial protocols for receiving regulator’s permission to initiate clinical trials Phase I.

At the international conference of the Russian Association of Angiologists and Vascular Surgeons (June 2014), the results of 3-year observation of patients receiving Neovasculgen® were presented, and the therapeutic effect over 3 years following a treatment course of the drug was also described in the publication in the Russian medical journal Khirurgiya (“Surgery”): №4, 2014: http://www.mediasphera.ru/journals/pirogov/1155/18794/.

 

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

In the first half of 2014 revenue from this services accounted for 59.8% of the Company’s total revenue (RUB 101.1 million) – a year-on-year decrease of 3.1%.

During the reporting period HSCI’ s revenues from the storage of cord blood stem cells rose while revenues from the isolation and cryopreservation of cord blood stem cells declined. As of the moment, the total number of personal cord blood stem cell samples held in storage at Gemabank exceeds 21,000.

Research and assessment of the cord blood stem cell banking market in Russia conducted by the Company has shown that in 2013 Gemabank retained its leading positions. However, it should be noted that competitors have become more active and new players have emerged. Another important feature is that the Russian market for personalized cord blood stem cell banking, according to the research, has potential for growth: over the past three years the country has seen rising birth rates and rising consumer demand while the market for cord blood stem cell banking has remained virtually unchanged from the level reached in 2011.

On the whole, it should be noted that in 2012-2013 the relative decline in consumer demand for cord blood stem cell banking has been observed not only in Russia but in other countries as well, now the market stabilizes and becomes more consolidated. In the current year, 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 potential crisis developments in consumer demand derived from negative economical expectations as a consequence of Russia’s engagement in political crisis in Ukraine along with the economic sanctions from Western countries.

Ukraine’s largest cord blood bank Hemafund, in which HSCI holds a 50% stake, as of the end of 1H 2014 held more than 7,700 cord blood stem cell samples in storage.

 

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 the first half of 2014 accounted for 6.3% of the Company’s total revenue (RUB 10.6 million) – a year-on-year increase of 20.0%.

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 (~ 30); however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions (covering 8 cities as of the end 1H 2014).

The total number of patients that had used this service as of the end of 1H 2014 was 421 people. А third of patients have returned for second and/or additional skin treatments (incl. 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.

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 July 2013 the international patent application moved to the national and regional phases, and in September the corresponding Eurasian Patent Application (covering the CIS) was published and in October the United States patent application was published.

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 in July 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.

In late-March 2014 national patent applications were submitted to the European Patent Office as well as to the Patent Office of Brazil.

Genetic diagnostics and consultation services 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), with corresponding revenues being reflected in HSCI’s consolidated financial statements. As a stand-alone, in 1H 2014 RGMC HSCI LLC generated revenues from genetic diagnostics and consulting as well as Reprobank services in the amount of RUB 7.6 million which represents a 50% increase over the revenues demonstrated by RGMC HSCI LLC from these services for the full year 2013.

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 1H2014 IFRS results, which is to be distributed after the publication of the Company’s 1H 2014 consolidated financial statements under IFRS on August 29, 2014.

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 towards developing and marketing its proprietary services and Neovasculgen® drug on to the U.S., European and Chinese markets which are substantially larger than the Russian market and, therefore, definitely present greater opportunities.

Operating expenses, OIBDA, Profits and Losses

HSCI’s operating expenses in the first half of 2014 increased by 19.6% year on year to RUB 169.942 million – mainly as a result of growth in costs of sales (COS), comprising 67% of total operating expenses in the period under review.

The COS increased largely due to the growth in royalty payments to HSCI’s subsidiaries for the use of intellectual property (IP). In 1H 2013 only the payments for the use of the know-how of SPRS-therapy were included in the cost of goods sold (the intellectual property rights for SPRS-technology are held by HSCI’s subsidiary Vitacel LLC, which is engaged in the further development of SPRS and other cell technologies), while in the period under review the payments for the use of know-how of “The method for producing the drug Neovasculgen®” were also added (the rights for the IP now belongs to HSCI’s subsidiary NextGen LLC, which in part is focused on R&D in the area of gene therapy – this IP was transferred from HSCI to NextGen in 2013).

Due to the increase in operating expenses along with the revenue decrease, in 1H 2014 the Company demonstrated a drop in operating profitability and margins – compared to 1H 2013 (see Key Financial Results below).

OIBDA amounted to RUB 7.788 million, OIBDA margin – 4.6%, while operating loss totaled RUB 0.748 million.

Other gains & losses for 1H 2014 amounted to a net gain of RUB 46.198 million compared to a net loss of RUB 50,495 million in 1H 2013. This gain is largely attributable to a revaluation of the Company’s financial investments (purchased quoted securities). In 1H 2014 HSCI recorded a RUB 55.025 million net revaluation gain (compared to a RUB 5.894 net revaluation loss for 1H 2013). In addition, due to a decrease of the principal long-term debt, in 1H 2014 the interest expense decreased, which, along with the increase in interest income (from loans granted), led to a drop of net interest expense in 1H 2014 compared to 1H 2013.

Substantial positive result from other (mainly, non-operating) activities during the reporting period contributed to HSCI’s 1H 2014 profit before tax in the amount of RUB 45.450 million and the net profit which amounted to RUB 32.712 million (comparing to RUB 26.586 million and RUB 19.819 million in 1H 2013 respectively).

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

6mo2014

6mo2013

% change,

y-o-y

Revenue

169,194

219,144

-22.8%

Cost of goods sold (COS)

(113,918)

(91,378)

24.7%

Gross profit

55,276

127,766

-56.7%

Gross margin

32.7%

58.3%

n/a

SG&A

(56,024)

(50,685)

10.5%

Total operating expenses, incl.

(169,942)

(142,063)

19.6%

Depreciation & amortization

(8,536)

(6,964)

22.6%

OIBDA

7,788

84,045

-90.7%

OIBDA margin

4.6%

38.4%

n/a

Operating profit / (loss)

(748)

77,081

n/a

Operating margin

n/a

35.2%

n/a

Other gains & losses – net, incl.

46,198

(50,495)

n/a

Interest income/(loss), net

(3,811)

(7,528)

-49.4%

Other income / (loss) – net, incl.

50,009

(42,967)

n/a

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

55,025 

(5,894)

n/a

Profit before tax

45,450

26,586

71.0%

Profit tax

-

(3,943)

n/a

Deferred tax liabilities

(10,445)

116

n/a

Deferred tax assets

(2,293)

(2,940)

-22.0%

Net profit

32,712

19,819

65.1%

Net margin

19.3%

9.0%

n/a

Human Stem Cells Institute OJSC (HSCI, www.eng.hsci.ru) is a Russian public biotech company founded in 2003.

HSCI engages in R&D as well as commercialization and marketing of innovative proprietary products and services in the field of  regenerative medicine, bio-insurance, medical genetics including reproductive genetics, gene therapy and biopharmaceutics (within the international SynBio project).

The Company aims to foster a new culture of medical care – developing new health care opportunities in such areas as personalized and preventive medicine. 

HSCI owns the largest family cord blood stem cell bank in Russia – Gemabank, as well as the reproductive cell and tissue bank Reprobank (personal storage and donation).

The Company launched Neovasculgen®, the first-in-class gene-therapy drug for treating Peripheral Arterial Disease, including Critical Limb Ischemia, and also introduced the innovative cell technology SPRS-therapy, which entails the use of autologous dermal fibroblasts to repair skin damage due to aging and other structural changes.

HSCI is implementing a socially significant project to create its own Russia-wide network of Genetico medical genetics centers to provide genetic diagnostic and consulting services with the aim of early identification, prediction and prophylactic treatment of genetic disorders (Ethnogene, PGD, Prenetix and other services).

The Company actively promotes its products on the Russian market and intends to open new markets throughout the world. 

HSCI is a co-investor in SynBio – a long-term multilateral project to create new unique medicines (first-in-class and BioBetters) for the Russian and international markets. The SynBio project, supported by an investment from RUSNANO, unites top Russian and international companies engaged in biotech/biopharm R&D.

HSCI is listed on the Innovation & Investment Market (iIM) of the Moscow Exchange (ticker: ISKJ). The Company conducted its IPO in December 2009, becoming the first Russian biotech company to go public.

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)


18 August 2014