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HSCI Reports RAS Financial and Operating Results for the First Nine Months of 2013

Moscow – 14 November 2013 OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: 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 nine months of 2013 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the first nine months of 2013 amounted to RUB 333.1 million, increasing by 59% year on year; new products (Neovasculgen®, SPRS-therapy, genetic diagnostics and consulting) accounted for 48.1% of total revenue.
  • Gross profit rose by 2.2-fold in comparison to the same period of 2012 to RUB 166.1 million; operating profit increased by 15.3 times year on year to RUB 90.1 million.
  • OIBDA1 amounted to RUB 101.7 million compared to RUB 9.9 million in the first nine months of 2012; OIBDA margin amounted to 38.4% for the reporting period.
  • Net profit in the first nine months of 2013 amounted to RUB 34.0 million compared to a net loss of RUB 5.2 million in the same period of 2012.


General Director of HSCI Artur Isaev commented:

“In the third quarter of this year at HSCI’s new laboratory and production we saw the launch of the molecular genetics laboratory as well as the opening of Reprobank – a reproductive cell and tissue bank. The license for provision of these kinds of medical services under the new regulations of the Russian Ministry of Healthcare was received by RGMC HSCI in September 2013.

Thus the Company began providing the full spectrum of services in the field of genetic diagnostics and consulting, including PGD, and also launched its Reprobank services, such as personal sperm cell storage as a form of bio-insurance and the provision of donor sperm.

One of the key tasks for the immediate future is the development of sales and marketing for products which have already been introduced to the market among both end users and the relevant medical communities.

In order to increase sales and the coverage new target audiences, we have plans in place to expand the scope of medical genetics consulting services. We also plan to finalize our business plans and evaluate the timeframes and prospects for introducing Neovasculgen® to the markets of the United States, India and China.

I would once again emphasize that due to the fact that genetic diagnostics and consulting services along with Reprobank services are provided by RGMC HSCI LLC, a 100% subsidiary of HSCI, income from such services are reflected in the Company’s consolidated revenue disclosed in reporting prepared according to IFRS. Consequently, the first sales results will be presented in the Company’s consolidated annual financial statements for 2013.”

HSCI’s revenue and income by project

HSCI’s revenue in the first nine months of 2013 increased by 58.5% in comparison to the same period of the previous year and reached RUB 333.075 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 nine months of 2013 amounted to RUB 145.3 million (43.6% of the Company’s total revenue).

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. The agreement covers three commercial years.

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 programs aimed at treating patients with PAD, which would provide an opportunity to boost sales to hospitals.

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.

Work is also underway to develop strategies and business-plans 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 – 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 Neovasculgen® (other nosologies in addition to PAD, including cardiovascular diseases).

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

In the first nine months of 2013 revenues from this service amounted to RUB 154.5 million (46.4% of the Company’s total revenue).

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 2,119. Thus the total number of personal cord blood stem cell samples held in storage at Gemabank® at the end of the third quarter of 2013 exceeded 19,000.

Ukraine’s largest cord blood bank Hemafund, in which HSCI holds a 50% stake, as of the end of the third quarter of 2013 held more than 6,800 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 nine months of 2013 totaled RUB 14.1 million (4.2% of the Company’s total revenue).

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; 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 nine months of 2013 was 320 people (245 patients fully completed their treatment). А third of patients have returned for second and/or additional skin treatments in other affected areas besides the face.

In the reporting period 2013, revenues from the provision of SPRS-therapy increased by 6% in comparison with the first nine months of 2012.

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 (a fully owned subsidiary of HSCI) 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.

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 service for newborns reflected in HSCI revenues amounted to RUB 0.8 million in the first nine months of 2013 (0.3% of the Company’s revenues). At the same time it should be noted that starting in the second quarter of 2013 the provision of Gemascreen service was transferred to RGMC HSCI LLC, a fully owned subsidiary of HSCI. Therefore, in total, revenues from this service in the first nine months of 2013 amounted for RUB 1.6 million (under RAS). Starting in the fourth quarter of 2013 the provision of Gemascreen service has been halted in connection with the launch of a broader service using HSCI’s proprietary DNA array (see below).

The revenues received from the provision of Ethnogene service as well as PGD (Preimplantation Genetic Diagnosis) are reflected in the results of RGMC HSCI and are thus considered part of the Company’s consolidate revenues. Consolidated revenues from all types of genetic diagnostics and consulting services were presented for the first time in HSCI’s interim IFRS statements for the first half of 2013 (published on August 29, 2013). The figures for the annual revenues from these services will be presented in the consolidated financial results of HSCI for 2013 under IFRS (to be published in late April 2014).

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 (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.

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 included DNA screening and consulting services on the six most widespread inherited disorders in Russia and congenital features. DNA screening was mainly carried out using cord blood of the newborn. Through follow-up consultations with a genetic doctor the parents received 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 parallel during 2012 substantial progress was also made on the creation of a proprietary DNA array which makes it possible to test for a large number of 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 February 2013, HSCI completed the technical validation of the array and in April completed its clinical validation. Genetic screening using this DNA array of HSCI, which has been called Ethnogene, allows to simultaneously test for the presence or carrier status of more than 60 monogenic inherited diseases and also predisposition to the development of several prevalent multifactorial disorders.

Starting in the second half of April 2013 HSCI began using this array to provide its new Ethnogene service – medical genetics consultations for a broad range of consumers: for children and adults (determination of the genetic features and identification of risks for healthy individuals (including those concerning their future offspring) with the aim of preventing a combination of genetic factors which would allow for the expression of inherited disorders or to prevent the development of complications arising from already existing risks), as well as for couples in pregnancy planning (preconception screening to minimize the risks of giving birth to a sick child).

In November 2013 as a part of efforts to develop the Ethnogene offer for newborns, a new specialized version of this service is being promoted called Ethnogene Neo, which replaces Gemascreen service previously offered in Russia. Ethnogene Neo includes genetic screening using the HSCI’s DNA array as well as diagnosis of the presence of Gilbert's syndrome and congenital adrenal hyperplasia (via analysis of cord/peripheral blood of the newborn).

In the third quarter of 2013 the Company also began to provide the full spectrum of PGD services – preimplantation genetic diagnosis of an embryo for monogenic inherited diseases and chromosome anomalies during IVF procedures. 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 (for more information see: http://eng.hsci.ru/products/pgd).

The provision of the entire line of genetic diagnostics and consulting services with a physician-geneticist is being made possible by the launch of a Russia-wide network of advanced medical genetics centers under the Genetico brand. 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 should be operating in six cities in the Russian Federation.

Plans through the end of 2013 include the launch of a pilot program to promote medical genetics consulting services and also to expand the scope of the services offered.

Operating Expenses, OIBDA, Profits and Losses

HSCI’s operating expenses in the first nine months of 2013 amounted to RUB 242.955 million, increasing by 19.0% 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 production and sales of Neovasculgen® and also growth in royalty payments to HSCI’s subsidiaries for the use of the know-how of SPRS-therapy and Neovasculgen®. The intellectual property rights to SPRS-technology are held by HSCI’s subsidiary Vitacel LLC, which is engaged in the further development of SPRS and other cell technologies. The know-how of “the means for producing the drug Neovasculgen®” belongs to HSCI’s subsidiary NextGen LLC, which in part is focused on R&D in this area of gene therapy.

The cost of sales was also increased by amortization as the clean room premises of the new laboratory and production complex were commissioned.

General and administrative expenses increased largely as a result of higher staff costs due to the formation toward the beginning of this year 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 59% (i.e. by RUB 123.0 million) while operating expenses grew by 19% (i.e. RUB 38.7 million)), the Company demonstrated higher profitability and margins – see Key Financial Results table below.

Consequently, OIBDA amounted to RUB 101.737 million, OIBDA margin – 30.5%, while operating profit totaled RUB 90.120 million.

Due to the use of long-term and short-term borrowing for investment in development, during the first nine months of 2013 net interest expense amounted to RUB 10.945 million compared to a net interest expense of RUB 1.265 million in same period of the previous year, when the long-term loan agreements were initially signed.

Other losses (the difference between other expenses and other income in the Financial results statements) in the reporting period amounted to RUB 36,752 million compared to RUB 9.005 million in the first nine months of 2012. This increase can largely be attributed to the peculiarities of settlements with Ukrainian partners concerning the delivery of Neovasculgen® (a credit note was presented in the second quarter of 2013) as well as the write-off in the first quarter 2013 of R&D expenses.

The substantial negative results from non-operating activities during the reporting period was compensated by the volume of growth in operating profit, resulting in a net profit for HSCI of RUB 34.019 million (compared to a net loss of RUB 5.245 million for the first nine months of 2012).

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

9mo2013

9mo2012

% change,

y-o-y

Revenue

333,075

210,149

58.5%

Cost of goods sold (COS)

(167,003)

(134,570)

24.1%

Gross profit

166,072

75,579

119.7%

Gross margin

49.9%

36.0%

n/a

SG&A

(75,952)

(69,673)

9.0%

Total operating expenses, incl.

(242,955)

(204,243)

19.0%

Depreciation & amortization

11,617

4,029

188.3%

OIBDA

101,737

9,935

by a factor of 10.2

OIBDA margin

30.5%

4.7%

n/a

Operating profit

90,120

5,906

by a factor of 15.3

Operating margin

27.1%

2.8%

n/a

Other gains & losses, incl.

(47,697)

(10,270)

364.4%

Interest income/(loss), net

(10,945)

(1,265)

765.2%

Other

(36,752)

(9,005)

308.1%

Profit before tax

42,423

(4,364)

n/a

Profit tax

(5,500)

-

n/a

Deferred tax liabilities

214

(881)

n/a

Deferred tax assets

(3,118)

-

n/a

Net profit

34,019

(5,245)

n/a

Net margin

10.2%

n/a

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 (336 kb)

15 November 2013