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HSCI Reports Full Year 2012 RAS Results

Moscow – 2 April 2013  The Human Stem Cells Institute (“HSCI”, MICEX: ISKJ), one of Russia’s leading biotech companies specializing in cell-based, gene and post-genome technologies, today announced its audited unconsolidated results for 2012 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the full year 2012 amounted to RUB 285.6 million, which represents a 42% increase from 2011; new products and services (SPRS-therapy, Gemascreen, Neovasculgen®, distribution of medical equipment produced by Cytori) accounted for a 12.5% share of total revenues.
  • Gross profit rose 37% year on year to RUB 97.2 million and the gross profit margin was 34%.
  • OIBDA1 for 2012 amounted to RUB 6.3 million while operating profit amounted to RUB 0.5 million rubles.

HSCI’s General Director Artur Isaev commented on the key trends of 2012 and the Company’s future plans:

“The year 2012 was full of intense and challenging work for HSCI. The Company prepared for market several innovative products and services simultaneously: the drug Neovasculgen®, services in the realm of genetic medicine, services provided through the Reprobank project, and distribution of cell-processing equipment manufactured by Cytori. Moreover, in 2012 we built our new laboratory and production complex.

Last year required a maximum concentration of our efforts and resources, both human and financial. In 2012 the Company’s free cash flow was fully put toward development, and borrowed funds were also used for this purpose.

Despite the challenges of this period, we succeeded in achieving revenue growth – in 2012 HSCI’s revenues increased by 42% year on year, with the launch of a number of new products and services contributing to this growth.

Not everything was implemented on schedule, but the majority of tasks were completed. Now, in 2013, the laboratory and production complex will be launched, and using this facility we will begin to implement all of the projects now in the pipeline.

In 2013 and 2014, after bringing to market all of the planned products and services, our work will be focused on developing their markets. At the same time, substantial attention will be paid to raising the profitability of the Company’s business.

We continue to adhere to our strategy of creating through our own innovations new brands and new market niches where HSCI has a great opportunity to start out in leading positions and grow together with promising markets.”

HSCI revenues and income generated by specific projects

In 2012 HSCI’s revenues increased 41.8% year on year to RUB 285.558 million.

The Company’s main source of revenues came from the isolation, cryopreservation and storage of umbilical cord blood stem cells – 79.8%.

Revenues from this service in 2012 grew 22.8% year on year to RUB 227.8 million.

In 2012 HSCI signed 3,717 contracts on the banking/storage of cord blood stem cells, which exceeds by 15.7% the results of 2011 (3,213 contracts), when part of the year saw stagnation in the services market due to post-crisis structural changes in consumer demand. As a result, at the start of 2013 more than 17,000 personal cord blood stem cell samples were held in storage by Gemabank.

In 4Q 2012 the number of contracts signed declined 10.7% from the previous quarter (850 compared to 952), which can be explained by the temporary impact of a rise in the cost of the service on the demand in the regions. Starting September 15, 2012, the price of a basic contract for the isolation and cryopreservation of cord blood stem cells was raised by 9%, while the price of storage services was not changed. The rise in price was connected to HSCI’s new marketing strategy for 2013-2017.

Ukraine’s largest cord blood bank Hemafund, in which HSCI holds a 50% stake, signed 1,601 contracts for cord blood banking/storage during 2012, which represents a 24.4% increase year on year. Thus, the total number of personal cord blood stem cell samples held by Hemafund exceeded 6,000.

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

Revenues from SPRS-therapy and Gemascreen services as well as the sale of the drug Neovasculgen® accounted for 11.2% of HSCI’s revenues in 2012.

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.

In 2012 revenues from SPRS-therapy, including the cryogenic storage of skin fibroblast cultures, increased by 70.7% from 2011 and totaled RUB 16.771 million or 5.9% of the HSCI’s total revenue. More than 205 patients had used this service as of the end of the reporting period (187 patients fully completed their treatment, a number of which have returned for second and/or additional skin treatments in other affected areas).

This service is primarily offered through the leading dermatology and cosmetics clinics of Moscow; however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions.

The Company plans to launch a separate Skin Passport service, which consists of a personal cell diagnostics service allowing for assessment of the regenerative and proliferative potential of the population of fibroblasts in the patient’s skin and also the long-term cryopreservation of autofibroblasts. This service is intended to create a patient-specific program for correction of skin damage and slowing of the effects of aging as well as to act as a form of bio-insurance.

Gemascreen – the first stage of a socially significant project of HSCI to create its own Russia-wide network of advanced medical genetics centers to provide genetic diagnostics and consulting services for monogenic inherited diseases and multifactorial disorders.

Throughout 2011 HSCI developed a project to promote the widespread use in Russia of medical genetics diagnostics and consultation through the creation of its own network of next-generation genetic medicine centers.
This project includes a large range of services for the diagnosis / identifying the  carrier status of monogenic inherited diseases commonly found among the peoples of the Russian Federation as well as determining genetic predisposition to widespread multifactorial disorders. The subsequent consultations with a personal genetic doctor provide information on prophylactic treatment of complications if a disease is discovered or on how to prevent of the propagation of the disease to future generations. These services are designed for various age groups: newborns, couples planning children and all who are interested in finding out about their genetic features for prophylactic purposes.

The main aim 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.

In January 2012 the Company began to implement the first test phase of the project, launching the Russia-wide Gemascreen program for newborns. This service includes DNA screening and consulting services on the six most widespread inherited disorders in Russia and congenital features. DNA screening can be carried out using both cord blood and peripheral blood. Through follow-up consultations with a genetic doctor the parents receive information on prophylactic treatment of complications and prevention of the development of clinical symptoms of a disease (if discovered) or advice on approaches to planning the health of the child’s progeny (in the case that carrier status is identified).

In 2012 the provision of Gemascreen services generated RUB 5.725 million for the Company or 2.0% of HSCI’s revenues.

In developing this project, over the course of the year the Company focused on optimizing the portfolio of services to be offered and also paid significant attention to the positioning of this initiative in order to engender a broad understanding of its social significance and the practical value of genetic screening.

At the same time, in 2012 substantial progress was made on the creation of a proprietary DNA array which makes it possible to diagnose the status of more than 80 inherited diseases (monogenic) and predisposition to more than 10 multifactorial disorders (thrombosis, arteriosclerosis, IHD, osteoporosis and others). The array will also make it possible to identify personal genetic features which influence drug tolerance (pharmacogenetics). One of the exceptional features of this DNA array is its practical application: it reflects the spectrum of inherited diseases characteristic of residents of Russia and the CIS.

In February 2013, HSCI completed the technical validation of the array and in April plans to complete its clinical validation, after which it will begin to be used in practice. With this DNA array medical genetics consultation services will be offered to the public across various age groups: those planning for pregnancy (preconception screening), children and adults (identification of genetic peculiarities and determination of genetic load for the purpose of forecasting and evaluating risks).

Over the course of the next five years HSCI plans to open medical genetics centers in 19 of Russia’s largest cities.

Neovasculgen® – the first-in-class 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 (registration decision RU № LP-000671 dated September 28, 2011).

Throughout the course 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. In late-September 2012 after certification of the drug’s first batches Neovasculgen® went on sale in Russia in the form of a ready-to-use drug (a lyophilisate to prepare an injection solution; the treatment course comprising 2 sequential injections /i.e. 2 vials/) offered through distributors.
Revenues from the sale of Neovasculgen® in 2012 totaled RUB 9.450 million, which was lower than anticipated, as sale began only in the fourth quarter rather than the second quarter as initially planned. The reason for this was the longer than expected process of launching industrial production of the first batches of the drug and also its lengthy certification process as an innovative medicine.

HSCI plans to focus on the comprehensive development of the market for this drug, including efforts to include Neovasculgen® in federal and regional public medicine subsidy programs. Following successful promotional activities, Neovasculgen® sales should account for a substantial portion of HSCI’s revenues. According to HSCI’s forecasts, by 2017 the market volume for Neovasculgen® in Russia could exceed 1.5 billion rubles.

To this end, in March 2013 HSCI signed a sales agreement with Sotex Pharm Firm, which is part of Protek Group and has extensive experience in bringing innovative medicines to market. The agreement covers three commercial years and first-year deliveries have been agreed for a total of RUB 211.75 million.

In addition to the Russian market, HSCI intends to make Neovasculgen® available on other markets as well. In February 2013 marketing authorization was received for Neovasculgen® in Ukraine (the dossier was submitted to the Ukraine Ministry of Healthcare in March 2012) and work is already underway to obtain authorization for the drug in a number of countries in the near abroad.

The action mechanism of Neovasculgen® – therapeutic angiogenesis – has much potential for use in treating other ischemia-related conditions. HSCI is preparing new clinical trial protocols in order to expand the range of indications for applying this drug (other nosologies).

Distribution of innovative cell-processing equipment manufactured by Cytori Therapeutics, Inc. (USA)

In 2011 HSCI signed an exclusive distribution contract with the US-based Cytori Therapeutics for the distribution in Russia of innovative medical device technology for use in reconstructive and aesthetic medicine (lipofilling of the face and body /autologous fat transfer/)

This technology employs an “Auto and Fresh” approach, which allows a surgeon to use the patient’s own adipose-derived regenerative cells (ADRCs) with minimal manipulations: the liposuction procedure can be conducted, ADRCs isolated and lipofilling procedure completed all in the course of a single operation. This differs from the standard approach of extraction, transfer to laboratory, lengthy cultivation and storage, which entails more than one visit by the patient.

HSCI completed the registration procedure for the Cellution® 800/ CRS and its supplementary materials in late-May 2012 and starting in the fourth quarter began sales. Revenues from the sale of Cytori equipment in 2012 amounted to 3.818 million rubles or 1.3% of HSCI’s total revenues.

HSCI’s revenues for 2012 also reflect payment received for a portion of the work done via an agreement between HSCI and SynBio (approved by AGM on June 21, 2012) amounting to 5.9% of the Company’s total revenues.

Operating expenses, OIBDA, profits and losses

Expenses included in the cost of sales for 2012 increased by 44.3% year on year, slightly outpacing revenue growth that resulted in a minor decrease in the gross profit margin, which in 2012 amounted to 34.0% compared to 35.2% in 2011 (while gross profit grew 37.1% year on year to RUB 93.173 million).

Sales, general and administrative expenses increased in 2012 by 62.0% year on year (commercial expenses – up 124.5%, management expenses – up 39.4%).

Thus, the total operating expenses of HSCI in 2012 grew by 49.9% compared to 2011 and totaled RUB 285.105 million.

The main reason for the growth in operating expenses was planned expenditures on the development of new projects confirmed in the Company’s business plan, which was primarily manifested in higher staff costs stemming from the formation of highly professional teams for each of the projects and the Company as a whole. The creation of a strong management team for the mid-term perspective was one of the top priority tasks for 2012.

The reporting period also included expenses related to the launch of Neovasculgen® (batch certification, production, marketing) as well as expenses on the construction of HSCI’s new laboratory and production complex. In 2012, for the purpose of supporting the growing demand for HSCI’s products and services, advertising expenditures also rose.

Due to the quicker growth of operating expenses compared to revenue growth, the Company demonstrated lower operating profit, lower OBIDA and also lower margins. In 2012 operating profit amounted to RUB 0.453 million compared to RUB 11.209 million in 2011, OBIDA – RUB 6.337 million compared to RUB 16.233 million. The OBIDA margin was 2.2%.

The insignificant size of the operating profit was one of the reasons why the Company reported a net loss in 2012 (RUB 18.018 million), as it did not compensate for the substantially higher debt servicing costs and growth in other expenses.

As a result of investments in the realization of planned projects and also as a result of a credit agreement with Sberbank and opening of a credit line, along with the use of short borrowing for development, in 2012 the Company reported net interest expense of RUB 3.262 million in comparison to net interest income of RUB 5.421 million in the previous year.

Other losses (the difference between other expenses and other income) increased during the reporting period by 2.4-fold compared to the same period in 2011 (RUB 17.174 million compared to RUB 7.180 million).

This surge can largely be explained by the realization at a loss of treasury shares (HSCI’s shares repurchased from shareholders), including through the contribution of a part of these shares to the charter capital of the Company’s subsidiary NextGen. On the other hand, the surge in other losses also derived fromthe increase in bad debt provisions and losses from previous years (the write-off as an expense of investments in the clinical trials of Neovasculgen® following the beginning of the drug’s sales).

HSCI’s audited 2012 financial results according to RAS can be found on the Company’s corporate website (in Russian).

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 (318 kb)

03 April 2013