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HSCI Reports First Quarter 2014 RAS Net Profit Growth of 156%

Moscow, 26 May 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 quarter of 2014 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the first quarter of 2014 amounted to RUB 105.7 million, compared to RUB 120.6 million in the same period of the previous year.
  • Gross profit amounted to RUB 35.0 million representing gross margin of 33.1%; operating profit amounted to RUB 3.3 million.
  • OIBDA1 amounted to RUB 8.4 million; OIBDA margin was 7.9%.
  • Net profit for the first quarter of 2014 increased by 156% year on year to RUB 54.0 million compared to RUB 21.1 million in the same period of 2013.

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.

General Director of HSCI Artur Isaev commented:

In the first quarter of 2014 the Investment agreement between HSCI and RVC Biofund was signed and approved by the EGM of HSCI. This agreement stipulates co-financing and development of a Russia-wide network of advanced medical genetics centers under the Genetico brand. We appreciate partnership with the investment fund managing state capital and focusing on the biotech sector, and we are confident that this partnership will serve for successful implementation of the strategic goals within the Genetico project.

After completion of the fine tuning of business processes in the course of the test sales last year, starting 2014 we have been focusing our work on further promotion of Genetico services on the Russian market which allows us to expect the planned revenue growth.

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, 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.

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.

I should also note that our current strategy embraces not only potential risks connected to the novelty of our products and services for the customers, but also those economic risks related to the consequences of the recent geopolitical crisis which can lead to a drop in economic activity and growth rates in the Russian Federation and, therefore, to a decline in consumer demand as well as state financing. One of our key tasks for the moment is to work on these risks reduction by diversification”.

HSCI revenue and income generated by specific projects

Revenue generated by OJSC HSCI (hereafter – “HSCI”, “The Company”) in Q1 2014 amounted to RUB 105.674 million, which is down 12.4% compared to Q1 2013.

The decrease is primarily attributable to lower revenues received from the sales of Neovasculgen® distributors (RUB 41.8 million compared to 59.8 million in the first quarter of 2013).

Also in contrast to Q1 2013 the reported total revenue does not include revenues from the provision of genetic diagnostics 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 genetics diagnostic and consultation services as well as Reprobank services), HSCI RAS results releases (starting the current one) will include revenues of RGMC HSCI LLC from aforementioned services for the period under review (see the Genetico section on Page 4).

In addition, revenue for the first quarter of 2014, unlike in the comparable period of the last year, does not include revenues from rent of property, plant and equipment, which in relation to restatements made are included in Other income beginning the full year 2013 results report. Corresponding reclassification for the previous comparable period will be reflected in full year 2014 results since according to Russian Accounting Standards it could not be applied to interim results reporting.

Cumulative effect of quoted items absence in Q1 2014 revenue amounts to over RUB 4 million.

 

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 Q1 2014 accounted for 39.5% 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. Thus 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 2014 the Company will submit another application for the inclusion of Neovasculgen® in the Vital and Essential Drugs list to be formulated for 2015.

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: the first deliveries of the drug to Ukraine were made in the second quarter of 2013.

In 2014 efforts will be undertaken to launch the process of receiving marketing authorization for 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 the 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. At the moment preclinical studies have been completed and based on their results the new target nosologies are to be selected. As reported in earlier releases, among others, cardiovascular diseases are considered the most, i.e. IHD.

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

In the first quarter of 2014 revenue from this service accounted for 48.4% of the Company’s total revenue (RUB 51.1 million) – a year-on-year decrease of 5.9%.

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 20,000.

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. However in the current year, the resumption of Gemabank’s sales growth on quarterly base will 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 Q1 2014 held over than 7,400 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 quarter of 2014 accounted for 5.4% of the Company’s total revenue (RUB 5.7 million) – a year-on-year increase of 75%.

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 20); however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions (covering 7 cities as of the end Q1 2014).

The total number of patients that had used this service as of the end of Q1 2014 was 387 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”, which provides the opportunity to protect the SPRS-therapy know-how in the United States.

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 Q1 2014 RGMC HSCI LLC generated revenues from genetic diagnostics and consulting as well as Reprobank services in the amount of RUB 3.1 million which represents more than a half of revenues demonstrated by RGMC HSCI LLC from these services for the full year 2013.

The development of HSCI’s socially significant project to create its own Russia-wide network of advanced medical centers to provide genetic diagnostics and consulting with the aim of early identification, prediction and prophylactic treatment of genetic disorders was started in 2011.

The main focus of the project is to identify and forecast risks for clinically healthy individuals and their progeny, i.e. to foster and promote among the Russian public a new attitude towards one’s own health and the health of future generations. Genetic diagnostics and consulting services are intended to foster a preventative approach to healthcare, whereby every person has the opportunity to in a timely manner discover their genetic features and take the necessary measures (including with the help of new medical technologies) to maintain good health and the health of one’s children as well as to prevent the coincidental birth in the family of children with serious inherited pathologies.

Starting Q2 2013 HSCI began providing medical genetics consulting services for a broad range of consumers: for adults and children – using its proprietary Ethnogene DNA-array which makes it possible to test for over the 60 inherited diseases (monogenic) and predisposition to widespread multifactorial disorders. One of the key ideas behind the creation of this DNA array is its practical application: it reflects the spectrum of inherited diseases characteristic for residents of Russia and the CIS.

In Q3 2013 the Company also began to provide the spectrum of PGD services – preimplantation genetic diagnosis of developing embryos for monogenic inherited diseases and chromosome anomalies during an IVF cycle. 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.

The provision of the entire line of genetic diagnostics and consulting services with a physician-geneticist is being made possible by the development of a Russia-wide network of advanced medical genetics centers under the Genetico brand. In the course of five years Genetico centers will be opened and operating in 19 major cities throughout Russia. In 2014 Genetico centers have a presence in 6 cities in the Russian Federation.

Genetico clients have also access to the services offered by Reprobank (reproductive cells and tissues 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.

HSCI plans to expand the range of medical genetics consultation services offered by Genetico.

In 2013 substantial work was done to attract investment to finance further development of the Genetico project, and in Q1 2014 the RVC BioFund, a state investment fund, became the Company’s partner. The investment agreement signed by the parties was approved by HSCI’s EGM on March 27, 2014 and came 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).

Operating expenses, OIBDA, Profits and Losses

HSCI’s operating expenses in the first quarter of 2014 increased by 47.9% year on year to RUB 102.369 million – mainly as a result of growth in costs of sales (COS), comprising 69% 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 Q1 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).

The COS was also increased by depreciation as the clean room premises of the new laboratory and production complex were commissioned.

Due to substantial growth of operating expenses against moderate revenue decrease, in Q1 2014 the Company demonstrated a drop in operating profitability and margins – compared to Q1 2013 (see Key Financial Results below).

Consequently, OIBDA amounted to RUB 8.381 million, OIBDA margin – 7.9%, while operating profit totaled RUB 3.305 million.

Other gains & losses for Q1 2014 amounted to a net gain of RUB 67.321 million compared to a net loss of RUB 23,861 million in Q1 2013. This gain is largely attributable to a revaluation of the Company’s financial investments. In Q1 2014 HSCI recorded a RUB 66.861 million net revaluation gain compared to a RUB 3.924 net revaluation loss for Q1 2013.

Due to a decrease of the principal long-term debt, in Q1 2014 the interest expense also decreased, which, along with the increase in interest income (from loans granted) led to a drop of net interest expense in Q1 2014 compared to Q1 2013.

Substantial positive result from other (mainly, non-operating) activities during the reporting period contributed to HSCI’s Q1 2014 profit before tax in the amount of RUB 70.626 million and the net profit which amounted to RUB 54.046 million (comparing to RUB 27.506 million and RUB 21.110 million in Q1 2013 respectively).

Full Version of the Press Release (339 kb)


26 May 2014