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HSCI Reports RAS Financial and Operating Results for First Half of 2013

Moscow, 16 August 2013 – OJSC HSCI – 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 unaudited unconsolidated results for the first half of 2013 in accordance with the Russian Accounting Standards (RAS):

  • Revenue for the first half of 2013 amounted to RUB 219.1 million, increasing by 60% year on year; new products (SPRS-therapy, Gemascreen, Neovasculgen®) accounted for 45.5% of total revenue.
  • Gross profit rose by 2.4-fold in comparison to the first half of 2012 to RUB 127.8 million;operating profit increased by 10 times to RUB 77.1 million.
  • OIBDA1 amounted to RUB 84.0 million compared to RUB 10.2 million in the first half of 2012; first half 2013 OIBDA margin amounted to 38.4%.
  • Net profit in the first half of 2013 amounted to RUB 19.8 million compared to RUB 2.7 million in the first half of 2012.

HSCI’s General Director Artur Isaev commented on the results of the first half of 2013 and also the Company’s plans for the future:

“One of the most significant events of the reporting period was the opening of HSCI’s new laboratory and production complex for the creation of new products and the provision of services in the fields of regenerative medicine and medical genetics. The opening ceremony was held on June 11.

During the second quarter of this year we also launched the network of Genetico medical genetics centers, which offer genetic diagnostics and consultations, including Ethnogene using our proprietary DNA array, as well as range of services related to preimplantation genetic diagnosis (PGD). One of our top priorities for the second half of the year is the implementation of our program to promote the services of Genetico centers, including the opening of such centers in six cities in Russia.

Using the new laboratory and production complex, we are also beginning to offer Reprobank services, namely the storage of reproductive cells and tissues. In the near future we will be offering personal sperm storage services for the purpose of bio-insurance, and our sperm donor bank will also soon begin to operate.

During the first half of this year the structure of HSCI’s revenue has changed. The company is seeing the positive effects of the sales of Neovasculgen®, which has increased both revenue and margins. We are working to expand the market for this drug – both in Russia and Ukraine, where the first deliveries have been made.

I would also note that for the purpose of taking advantage of tax breaks and to facilitate HSCI’s business related to the provision of medical service, HSCI founded the fully owned subsidiary Regenerative and Genetic Medical Center of the Human Stem Cells Institute (RGMC HSCI LLC). Thus, the revenue generated from the provision of medical genetics consultation services (since the second quarter of 2013) as well as from Reprobank (starting in the third and fourth quarters of this year) are reflected in the financial results of this subsidiary. For this reason HSCI strives to regularly publish its financial results according to IFRS. In 2013 we are publishing, in addition to our annual financial statements, half year results under IFRS (which is now a statutory requirement), and starting in 2014 investors will be able to receive information about the company’s business from quarterly reporting under IFRS.”

HSCI’s revenue and income by project

HSCI’s revenue in the first half of 2013 increased by 59.7% in comparison to the same period of the previous year and reached RUB 219.144 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® in the first half of 2013 amounted to RUB 90.1 million (41.1% of the Company’s revenues).

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 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.

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. In 2013 the drug was included in the National Recommendations for treating patients with Peripheral Arterial Disease. The new version of the recommendations was approved in June 2013 by a conference of vascular surgeons in Novosibirsk. The next phase is to include Neovasculgen® in the Federal Treatment Standards as well as in regional subsidy programs aimed at treating patients with PAD, which would provide an opportunity to boost sales to hospitals.

According to HSCI’s forecasts, by 2017 the market volume for Neovasculgen® in Russia could exceed 1.5 billion rubles.

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 this year and the revenue received is reflected in the half-year financial statements.

Work is also underway to develop strategies for entering the US market as well as the markets of other BRIC countries (namely, China and India). The process of receiving marketing authorizations in these countries may begin in 2014.

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, including cardiovascular diseases).


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

In the first half of 2013 revenues from this service amounted to RUB 104.3 million (47.6% of the Company’s total revenues).

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: the number of contracts signed for cord blood stem cells banking totaled 1,458. Thus the total number of personal cord blood stem cell samples held in storage at Gemabank at the end of the first half of 2013 exceeded 18,400.

The main reason for the decline in sales was the impact of consumers’ reaction to a negative article on cord blood stem cell banking published in a well-known Russian magazine in the end of January 2013. The article contains false information which discredits this medical field on the whole and tarnishes the reputation of stem cell banks, including Gemabank. In response to this HSCI has engaged in an informational and public awareness campaign which is already producing positive results.

Ukraine’s largest cord blood bank Hemafund, in which HSCI holds a 50% stake, signed 26.5% more contracts for stem cells banking during the second quarter of 2013 than in the first quarter of 2013. The total number of samples stored by Hemafund exceeds 6,500 units.

 

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 2013 totaled RUB 8.9 million (4.0% of the Company’s total revenues).

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.

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 total number of patients that had used this service as of the end of the first half of 2013 was 293 people (230 patients fully completed their treatment, a third of which have returned for second and/or additional skin treatments in other affected areas besides face).

In the second quarter of 2013, due to growth in the number of patients (starting in the first quarter of this year), this service has demonstrated a dynamic growth trend: revenues increased 72% quarter on quarter.

In parallel with continued work with doctors and clinics specializing in aesthetic medicine, in the reporting period a new aspect of the marketing strategy has been developed and launched aimed at promoting SPRS-therapy services directly to consumers.

In the second quarter of 2013 HSCI announced the results of its two-year study of the application of SPRS-therapy and its effectiveness. The results of the research (published in the journal Clinical Dermatology and Venereology, Issue No.3, 2013) demonstrated that following the transplantation into the skin the autologous skin fibroblasts become fully integrated in the derma and their biosynthetic vitality continues for at least 12 months: the clinical effect thus cumulates over the course of 12 months and lasts no less than 2 years.

Among the projects in HSCI Group’s business plan for 2013-2017 is the launch of a separate Skin Passport service, which entails 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 for a broad array of consumers and is designed to both 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.

In September 2012, Vitacel LLC (a fully owned subsidiary of HSCI) applied for an international patent 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. The next phase is to apply at the national level and receive patents in each particular country. In July 2013 the international patent application for the “Diagnostic method for connective tissues and its application” moved to the national and regional phases in the United States, Ukraine and CIS countries.


Genetic diagnostics and consultation services at Genetico medical genetics centers – HSCI’s socially significant project aimed at promoting the widespread use in Russia of medical genetics diagnostics and consultation for the identification and prophylactic treatment of monogenic inherited diseases and multifactorial disorders.

Revenues from the provision of Gemascreen services for newborns reflected in HSCI revenues amounted to RUB 0.8 million in the first half of 2013 (0.4% of the Company’s revenues). Starting in the second quarter of 2013 the provision of Gemascreen services was transferred to RGMC HSCI LLC, a fully owned subsidiary of HSCI. Therefore, in total, revenues from this service in the first half of 2013 amounted for RUB 1.5 million.

The first revenues received from the provision of Ethogene services as well as PGD consultations are reflected in the results of RGMC HSCI and are considered part of the Company’s consolidate revenues (the consolidated financial results of HSCI under IFRS for the first half of 2013 will be published on August 29, 2013).

In 2011 HSCI developed a project to create its own a Russia-wide network of advanced medical genetics centers to provide genetic diagnostics and consulting services with a physician-geneticist.

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. 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 to maintain good health and also to prevent the coincidental birth in the family of children with serious inherited pathologies.

In January 2012 the Company began to implement the first test phase of the project, launching the Russia-wide Gemascreen for Newborns program. 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).

During 2012 substantial progress was also made on the creation of a proprietary DNA array which makes it possible to diagnose a large number of inherited diseases (monogenic) and predisposition to widespread multifactorial disorders (thrombophilia, ishemic stroke, osteoporosis and others). One of the exceptional features of this DNA array is its practical application: it reflects the spectrum of inherited diseases characteristic for residents of Russia and the CIS.

In February 2013, HSCI completed the technical validation of the array and in April completed its clinical validation. Using this DNA array HSCI can diagnose more than 60 monogenic inherited diseases and predisposition to about 10 multifactorial disorders.

Starting in the second half of April 2013 HSCI began using this array to provide its new Ethnogene services – medical genetics consultations for a broad range of consumers: for children and adults (identification of genetic peculiarities and determination of genetic load for the purpose of forecasting and evaluating risks), as well as a tool in pregnancy planning (preconception screening).

The provision of genetic diagnostic services and consultations with a physician-geneticist, including PGD (preimplantation genetic diagnostics), is being made possible by the launch of a Russia-wide network of advanced medical genetics centers under the Genetico brand. According to HSCI’s business plan over the next five years Genetico centers will be opened and operating in 19 major cities throughout Russia. By the end of 2013 HSCI’s medical centers will be operating in six cities in the Russian Federation.

Plans through the end of 2013 include the launch of a pilot program to promote Ethnogene services both within the medical community and among potential clients. The Company will begin to offer the full spectrum of PGD services – preimplantation genetic diagnosis of the embryo for monogenic inherited diseases and chromosome anomalies – in the third quarter of 2013 upon the signing of agreements with IVF clinics and the completion of the licensing process for the HSCI’s laboratory and production complex and the renewal of the medical licenses of RGMC HSCI following the issuance of the decree by the Russian Ministry of Healthcare with a new list of types of medical activities. At present clients have the opportunity to receive consultations on the planning of preimplantation genetic diagnosis.

Operating Expenses, OIBDA, Profits and Losses

HSCI’s operating expenses in the first half of 2013 amounted to RUB 142.063 million, increasing by 9.7% from the same period of the previous year.

The reason for the growth of comprehensive operating expenses was an increase in cost of sales and general and administrative expenses.

The cost of sales grew largely due to the expenses related to the launch of Neovasculgen and also growth in royalty payments for the use of the know-how of SPRS-therapy (the intellectual property rights to this technology are held by HSCI’s subsidiary Vitacel LLC, to which part of the staff which participated in the development of SPRS and other cell technologies has been transferred).

General and administrative expenses increased largely as a result of higher staff costs due to the formation in 2012 of highly professional teams for the mid-term perspective as well as higher rent expenses resulting from the expansion of office space.


Nonetheless, as revenue growth substantially exceeded growth in operating expenses (revenue grew by 60% (i.e. by RUB 82.0 million) while operating expenses grew by 10% (i.e. RUB 12.6 million)), the Company demonstrated higher profitability and margins – see Key Financial Results table below.

Consequently, OIBDA amounted to RUB 84.045 million, OIBDA margin – 38.4%, while operating profit totaled RUB 77,081 million.

Due to the use of long-term and short-term borrowing for investment in development, during the first half of 2013 net interest expense amounted to RUB 7.528 million compared to a net interest income of RUB 0.447 million in same period of the previous year.

Other losses (the difference between other expenses and other income in the Financial results statements) in the reporting period amounted to RUB 42.967 million compared to RUB 3.901 million in the first half of 2012. This increase can largely be attributed to the peculiarities of settlements with Ukrainian partners concerning the delivery of Neovasculgen® as well as the write-off in the first quarter 2013 of R&D expenses on projects which were discontinued following review of the research results.

However, despite the substantial negative results from non-operating activities, the operating profit for the reporting period was large enough to provide the Company with a net profit of RUB 19.819 million, which is 7.5 times more than in the same period of the previous year.

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

6mo2013

6mo2012

% change,

y-o-y

Revenue

219,144

137,180

59.7%

Cost of goods sold (COS)

(91,378)

(84,590)

8.0%

Gross profit

127,766

52,590

142.9%

Gross margin

58.3%

38.3%

n/a

SG&A

(50,685)

(44,918)

-11.4%

Total operating expenses, incl.

(142,063)

(129,508)

9.7%

Depreciation & amortization

6,964

2,529

175.4%

OIBDA

84,045

10,201

723.9%

OIBDA margin

38.4%

7.4%

n/a

Operating profit

77,081

7,672

by a factor of 10.0

Operating margin

35.2%

5.6%

n/a

Other gains & losses, incl.

(50,495)

(3,454)

by a factor of 14.6

Interest income/(loss), net

(7,528)

447

n/a

Other

(42,967)

(3,901)

by a factor of 11.0

Profit before tax

26,586

4,218

530.3%

Profit tax

(3,943)

(1,572)

150.8%

Deferred tax liabilities

116

-

n/a

Deferred tax assets

(2,940)

-

n/a

Net profit

19,819

2,646

649.0%

Net margin

9.0%

1.9%

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.



16 August 2013