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HSCI Reports First Half 2015 Operating and Financial Results under RAS

Moscow – 5 August 2015 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 2015 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for 1H 2015 amounted to RUB 125.5 million compared to RUB 169.2 million in the same period of the previous year.
  • Gross profit amounted to RUB 41.6 million representing gross profit margin of 33.2%.
  • Operating profit was RUB 4.6 million, as opposed to operating loss of RUB 0.7 million in the same period of the previous year.
  • OIBDA1 for 1H 2015 amounted to RUB 11.6 million for an OIBDA margin of 9.2%.

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

Revenue, generated by PJSC HSCI (hereafter – “HSCI”, “the Company”) in 1H 2015 amounted to RUB 125.533 million – a year on year decrease of 25.8%.

The decrease is primarily attributable to lower revenues from the sales of Neovasculgen®. In the reporting period they amounted to RUB 1.2 million, while in 1H 2014 revenues from the sale of this drug to distributors amounted to RUB 41.8 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. 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. The regulator’s decision is expected to be adopted in autumn.

In 1H 2015 HSCI continues to promote Neovasculgen® in the professional medical community:

- the Company took part in the 30th International conference of angiologists and vascular surgeons held in Sochi in June 2015; at the conference data on therapeutic effect during 4,5 years after a treatment course with Neovasculgen® were reported.

- active work is underway to actualize the problem of PAD therapy using new state-of-the-art ways of treatment – supported by the Agency for Strategic Initiatives (the autonomous non-profit organization established by the Government of Russia in order to implement the set of measures in economic and social spheres) as ASI promotes HSCI’s program of marketing Neovasculgen® innovative drug by providing administrative and methodological support on federal and regional levels.

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. 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.

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. For this reason HSCI is now preparing to implement new clinical trial protocols in order to expand the range of indications for applying the drug. HSCI starts to work in the therapy of IHD (Ischemic Heart Disease), Diabetic Foot Syndrome and 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 as well. 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 for the process of development, FDA clearance and launch of Neovasculgen® in the United States and China. In addition, the talks to potential partners and reviewing of opportunities to license the drug manufacturing and marketing on other foreign markets are underway.

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 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. Therefore, in order to present regular comparative information on Genetico project development (medical genetic diagnostic and consulting services as well as Reprobank® services), HSCI RAS results press-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 3).

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

In 1H 2015 revenues from this service amounted to RUB 101.9 million (81.2% of the Company’s total revenue) – almost flat compared to 1H 2014. A slight increase of 0.7% was 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. However, the positive quarter-to-quarter dynamics in the current year is worth mentioning.

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.

As of today, the total number of personal cord blood stem cell samples held in storage at Gemabank® has reached 23.3 thousand.

Before the year-end it is planned to start rendering Gemabank® services through IMCB LLC – HSCI’s 100% subsidiary.

IMCB (International Medical Center for Biomaterials Processing and Cryostorage) was set up in October, 2014 for the provision of hematopoetic stem cell banking services with the aim to use state tax allowance for medical companies. The Company obtained the corresponding license in July 2015.

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.

As of now, according to the trends demonstrated by the Russian cord blood stem cell market in Q1 and Q2 2015, it’s quite possible to speak that market’s bottom is likely to have been already reached and the growth can be expected to resume.

However, speaking on 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 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.

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 1H 2015 amounted to RUB 17.3 million (13.8% of the Company’s total revenue) – a year-on-year increase of 63.3%.

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 (covering 14 cities as of June 30, 2015). The total number of patients that had used this service, as of the end of the reporting period, reached 550 people. More than 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 a stand-alone SPRS-bank service was launched for the younger clients as the type of bio-insurance. The service allows them to cryostore autologous skin fibroblasts in order to use in future – for repairing skin damage due to aging in such areas as face, neck, décolleté or hands applying SPRS-therapy as well as for the treatment of 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 addition to the Russian market, the Company plans to launch SPRS-therapy and the Service of personalized skin diagnosis (“Skin Passport”) internationally.

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 diagnostic component of SPRS-therapy know-how, i.e. personalized skin diagnosis (“Skin Passport”). The PCT application was published on April 11, 2013 and in 2013-2014 moved to the national and regional phases (EU, Eurasia, USA, Brazil and 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 centers

The revenues from genetic diagnostic and consulting services as well as Reprobank® services reflected in revenues of RGMC HSCI LLC (a subsidiary of HSCI) in 1H 2015 amounted to RUB 26.7 million – more than for the full year 2014 and a 3.5-fold increase compared to 1H 2014.

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 1H 2015 IFRS results (which is to be distributed after the publication of the Company’s corresponding interim consolidated financial statements under IFRS in the end of August, 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 1H 2015 HSCI’s operating expenses decreased by 28.8% year on year to RUB 120.945 million. The decrease in operating expenses is attributable to the reduction in cost of sales as well as in administrative expenses.

Business costs optimization primarily include minimization of 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 in operating expenses outpaced the revenue decrease and the Company demonstrated a year-on-year increase in operating margins (see Key Financial Results below).

OIBDA amounted to RUB 11.559 million for an OIBDA margin of 9.2% (compared to RUB 7.788 million and 4.6% respectively for 1H 2014). Operating profit totaled RUB 4.588 million in 1H2015 – compared to operation loss of RUB 0.748 million for 1H 2014.

Other gains & losses in the reporting period – contrary to 1H 2014 – amounted to a net loss of RUB 9.452 million which is mainly attributable to the drop in gain from revaluation of the Company’s financial instruments (purchased quoted securities) which comprised RUB 16.888 million compared to RUB 55.025million in 1H 2014 (because of the decrease in their number and the current situation in the financial markets).

As the negative result from other (mainly, non-operating) activities exceeded operating profit, the Company delivered 1H 2015 loss before tax of RUB 4.864 million and a net loss of RUB 9.803 million.

Important remarks:

In the RAS financial statements for Q1 2015 it was an accounting mistake resulted in the wrong figures of Other gains & losses - net, Profit before tax and Net profit represented in the corresponding press-release. The revaluation gain for 1Q 2015 was incorrectly recorded (more than actual). The mistake was corrected in the current reporting period (1H 2015) in line with Russian accounting legislation requirements.

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

6mo 2015

6mo 2014

% change,

y-o-y

Revenue

125,533

169,194

-25.8%

Cost of goods sold (COS)

(83,892)

(113,918)

-26.4%

Gross profit

41,641

55,276

-24,7%

Gross margin

3.4%

32.7%

n/a

SG&A

(37,053)

(56,024)

-33.9%

Total operating expenses, incl.

(120,945)

(169,942)

-28.8%

Depreciation & amortization

(6,971)

(8,536)

-18.3%

OIBDA

11,559

7,788

48.4%

OIBDA margin

9.2%

4.6%

n/a

Operating profit/ (loss)

4,588

(748)

n/a

Operating margin

3.7%

n/a

n/a

Other gains & losses, net – including:

(9,452)

46,198

n/a

Interest loss, net

(300)

(3,811)

-92.1%

Other income / (loss), net, incl.

(9,152)

50,009

n/a

Gain from revaluation of financial instruments /purchased quoted securities/

16,888

55,025

-69.3%

Profit / (loss) before tax

(4,864)

45,450

n/a

Profit tax

(1,558)

-

n/a

Deferred tax liabilities

(3,083)

(10,445)

-70.5%

Deferred tax assets

(298)

(2,293)

-87.0%

Net profit / (loss)

(9,803)

32,712

n/a

Net margin

n/a

19.3%

n/a

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 (378 kb)


06 August 2015