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HSCI Reports RAS Financial and Operating Results for the First Nine Months of 2014

Moscow, 18 November 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 nine months of 2014 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the first nine months of 2014 amounted to RUB 234.4 million, compared to RUB 333.1 million in the same period of the previous year.
  • Gross profit amounted to RUB 84.8 million representing gross margin of 36.2%; operating loss amounted to RUB 0.2 million.
  • OIBDA1 amounted to RUB 11.8 million; OIBDA margin was 5.0%.
  • Net profit for the first nine months of 2014 amounted to RUB 17.9 million. Net profit margin was 7.7%.


General Director of HSCI Artur Isaev commented:

“Our Company is working very actively, and despite the signs of economic crisis on consumer and capital markets, we hope to maintain development dynamics and drive the Company’s growth. Recently, we have reacted to the upcoming economic crisis by several changes and took restructuring initiatives in in the Company. We cut costs, including by reducing the size of the office premises we rent, the number of administrative personnel and saving the overall staff costs. We also conducted an internal division of our projects by business units. Some of our employees who are focused on research and development are being transferred to HSCI’s subsidiary companies who are residents of the Skolkovo Innovation Center. We are creating a separate company which will operate on a cord blood banking market. This will give us the opportunity to use those tax and other incentives that the government provides for companies which conduct medical and R&D activities making it possible for us to fulfill our plans more effectively.

We continue to focus on developing our products and services on new markets, and on expanding the indications for the application of Neovasculgen® - our innovative drug. We’re working actively at gaining access to the markets and promoting our services. The Company’s projects offer investors a good chance investment opportunity. We have positive outlook for the future of our products and services, and we are very active in working with investors as we see growth prospects despite the current difficult situation on capital markets.”


HSCI revenue and income generated by key products and services

Revenue generated by OJSC HSCI (hereafter – “HSCI”, “The Company”) in the first nine months of 2014 amounted to RUB 234.387 million, which is down 29.6% compared to the same period of the previous year.

The decrease is primarily attributable to lower revenues received from the sales of Neovasculgen®. In 9mo 2013 revenues from the sale of the drug to distributors amounted to RUB 143.5 million (as reflected in corresponding press release), while in the reported period they decreased to RUB 42.4 million. However it should be noted that in accordance with the restatements made for the Full Year 2013, the revenue from the sales of the Neovasculgen® for the first 9 months of 2013 due to be retrospectively restated to RUB 125.4 million (for the amount of credit note, as it is reflected in Other expenses).

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), 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® - via state drug subsidy programs - for all patients suffering from PAD – serious, incapacitating disease, which is exceeded by abundance (amongst cardiovascular diseases) only by ischemic heart disease (IHD) and brain attack.

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 treatment, allowing the opportunity to evade amputation as well as to significantly improve the quality of live.

According to the published data the therapeutic effect following a treatment course of Neovasculgen® continues for up to 3 years. It is suggested that the drug's mechanism of action can provide an even longer effect – observation of patients participated in clinical trials and received the treatment will continue.

According to a pharmacoeconomics research study issued in July 2014, the cumulative cost-saving effect for Russia’s Healthcare Budget from the application of Neovasculgen® will amount to nearly RUB 4 million per patient. The cost-saving aggregate gain of RUB 3.93 million (calculated from analysis of the drug’s cost-effectiveness data) per patient includes gains from lower cost of treatment with Neovasculgen® as well as benefits from quality-of-life improvements. The researchers concluded that a wide application of the drug in a public hospital delivers clinical and economic advantages.

It should be noted, that compared to 9 months of 2013, in the reporting period the Company’s total revenue does not include as follows: revenues from rent of property, plant and equipment, which in correlation with restatements made, starting from the Full Year 2013 results, are included in Other Revenue (corresponding reclassification with respect to the previous comparable period is to be reflected in FY 2014 results); revenues from the provision of genetic diagnostic 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 genetic diagnostic and consultation services as well as Reprobank services), HSCI RAS results 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 5).

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 the first nine months of 2014 accounted for 18.1% of the Company’s total revenue (i.e. RUB 42.4 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. Therefore, 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 Q2 2014 the Company submitted application for the inclusion of Neovasculgen® in the Vital and Essential Drugs list to be formulated for 2015. If this new list is confirmed by the government, it will possibly be published before the year end.

Neovasculgen® is an 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. HSCI plans to work in the therapy of IHD (Ischemic Heart Disease), and also reviews the opportunities for applying Neovasculgen® for Diabetic Foot Syndrome and for treatment of trauma-induced peripheral nerve damage. In addition, the R&D is in progress for the creation of tissue-engineered products based on Neovasculgen®. Currently, the clinical trial protocol for IHD is at finalization stage and before the end of the year an application to the Healthcare Ministry for commencing the clinical trials will be submitted. Development of clinical trial protocols for the two other nosologies aforementioned is planned to be completed in Q1 2015.

In February 2013 marketing authorization for Neovasculgen® was received in Ukraine, but HSCI cannot expect the planned sales because of political and economic situation in this country.

Taking into consideration the safety and efficacy data for Neovasculgen, received during clinical trials and after launch on the market (extended post- market authorization studies), HSCI has decided to start the process of development, FDA clearance and launch of 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 manufacturing 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 required funds from Russian / international investors.

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

In the first nine months of 2014 revenue from this services accounted for 64.5% of the Company’s total revenue (i.e. RUB 151.2 million) – a year-on-year decrease of 2.1%.

In 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 21,500.

During the period under review the significant progress has been made on the lawsuit “HSCI vs Russian Reporter and Expert Media Holding”.

“Russian Reporter” (well-known Russian weekly magazine) made a publication in its paper issue and on its website on January 24, 2013, entitled “Money Made on Children’s Blood”. The article contained false information about the Gemabank (largest family cord blood stem cell bank in Russia and CIS) belonging to the Human Stem Cell Institute and about cord blood banking in Russia in whole, discrediting HSCI’s business reputation. “Russian Reporter” magazine was established by CJSC Expert Media Holding.

HSCI demanded in its legal claim made to the Moscow Arbitration Court on June 25, 2013 that Expert Media Holding publish HSCI's response in “Russian Reporter” magazine (as complied with the Russian legislation). The Moscow Arbitration Court fully upheld HSCI’s claim and ordered Expert Media Holding to publish HSCI’s full response in the next issue of “Russian Reporter” magazine following the date when the court’s decision comes into force.

Expert Media Holding has continually deviated from fulfilling the court order to the present day. The false and defamatory information caused harm to HSCI’s business reputation and led to a significant reduction in the number of contracts signed for Gemabank’s services for cord blood banking from February, 2013. As compensation for the reputational harm and losses incurred, HSCI sued CJSC Expert Media Holding and CJSC Expert Group for 75,930,000 rubles, and also asked the court to oblige CJSC Expert Group to delete Internet pages with the published article on “Russian Reporter’s” website.

On October 28, 2014, the Moscow Arbitration Courtordered CJSC Expert Group and CJSC Expert Media Holding to pay a total of 44.4 million rubles (or about 1 million US dollars) as compensation for the losses incurred by HSCI, and for damage to the company’s reputation. The court also ordered Expert Group to remove its web pages with the published article.

By the date of this press-release HSCI has stated its readiness to settle with “Russian Reporter” and the defendants and to reach an amicable agreement, even at this stage (see the related press-release for details).

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. In Russia cord blood stem cell banking services are used for 0.3% 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 for Moscow – such level of market penetration is already reached there.

Recently HSCI had a unique clinical case, implementing a technology in Russia which had already been applied mainly in the USA and 2-3 other countries. This is a technology that combines preimplantation genetic diagnosis (PGD), IVF, and transplantation of cord blood stem cells. The patient was a girl with Shwachman-Diamond syndrome. Using PGD, we helped the family give birth to a healthy child, for which the embryo which was not only free of the genetic mutation causing the disease of the elder sister, but also 100% HLA-matched with a sick sibling, was chosen for implantation. Therefore, on the one hand, we helped the family to get a healthy child; while on the other hand, we collected cord blood stem cells at birth, which hematologists will use for treating the Shwachman-Diamond syndrome of the first (older) child. We’re planning to use the technology more widely and actively for the families who already have sick children. The method solves two problems: firstly, it helps a family to give birth to a healthy child, and secondly - it helps to get unique, fully compatible hematopoietic stem cells to cure the first child. And this is not limited to Shwachman-Diamond syndrome, but is also applicable to a wide range of oncological diseases, anaemia, immunodeficiency, serious inherited and other diseases.

However, speaking of the current situation, the resumption of Gemabank’s sales growth on quarterly base will directly depend not only on global market trends, the final results of “Russian Reporter” lawsuit 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 and Russia’s counter measures. As for the moment, the market demonstrates down trends, nevertheless the fully-weighted assessment of crisis impact should be done after the 2014 year end.

SPRS-therapy – a set of personalized diagnostic and treatment procedures for repairing skin damage due to aging or other structural changes.

Revenues from SPRS-therapy, including the long-term storage of autologous skin fibroblasts, in the first nine months of 2014 accounted for 6.6% of the Company’s total revenue (i.e. RUB 15.5 million) – a year-on-year increase of 10.0%.

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 (~ 30); however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions (covering 13 cities as of the September 30, 2014). The total number of patients that had used this service as of the end of the reporting period was 452 people. Approximately 40% 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 2013-2014 the international patent application moved to the national and regional phases (Eurasia /CIS/, USA, EU, Brazil).

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), which provides the opportunity to protect the SPRS-therapy know-how (including its unique diagnostic component) in the United States. For this purpose, in May 2014 the relevant application was made (which describes direct link between skin diagnosis results and SPRS-therapy treatment as well as frequency of treatment).

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 9mo 2014 RGMC HSCI LLC generated revenues from genetic diagnostics and consulting as well as Reprobank services in the amount of RUB 13.3 million which represents more than a double increase over the revenues demonstrated by RGMC HSCI LLC from these services for the full year 2013.

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 FY 2014 IFRS results, which is to be distributed after the publication of the Company’s FY 2014 consolidated financial statements under IFRS in the end April, 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 to the U.S., European and Chinese markets which are substantially larger than the Russian market and, therefore, definitely present greater opportunities.

Operating expenses, OIBDA, Profits and Losses

HSCI’s operating expenses in the first nine months of 2014 decreased by 3.4% year on year to RUB 234.602 million – mainly as a result of decline in costs of sales (COS), comprising 64% of total operating expenses in the period under review.

  • The decrease of expenses comprising COS become possible primarily due to management efforts to optimize business costs: rent expenses have been minimized; staff costs were cut by optimizing 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. In addition, due to the decrease in the number of cord blood stem cell samples accepted for storage by Gemabank, the expenses for Gemabank services provision dropped (supplies and reagents, medical services of third party organizations).

Nonetheless, as the revenue decrease substantially exceeded the reduction of operating expenses, in the period under review the Company demonstrated a drop in operating profitability and margins – compared to 9mo 2013 (see Key Financial Results below).

OIBDA amounted to RUB 11.805 million, OIBDA margin – 5.0%, while operating loss totaled RUB 0.215 million.

Other gains & losses for 9mo 2014 amounted to a net gain of RUB 28.786 million compared to a net loss of RUB 47.697 million in 9mo 2013. This gain is largely attributable to a revaluation of the Company’s financial investments (purchased quoted securities). In 9mo 2014 HSCI recorded a RUB 42.529 million net revaluation gain (compared to a RUB 3.379 net revaluation gain for 9mo 2013).

In addition, due to a decrease of the principal long-term debt, in the reporting period the interest expense decreased, which, along with the increase in interest income (from loans granted), led to a drop of net interest expense in 9mo 2014 compared to 9mo 2013 (RUB 4.604 million and RUB 10.945 respectively).

Substantial positive result from other (mainly, non-operating) activities during the reporting period contributed to HSCI’s 9mo 2014 profit before tax in the amount of RUB 28.571 million and the net profit which amounted to RUB 17.956 million.

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

9mo 2014

9mo 2013

% change,

y-o-y

Revenue

234,387

333,075

-29.6%

Cost of goods sold (COS)

(149,559)

(167,003)

-10.4%

Gross profit

84,828

166,072

-48.9%

Gross margin

36.2%

49.9%

n/a

SG&A

(85,043)

(75,952)

12.0%

Total operating expenses, incl.

(234,602)

(242,955)

-3.4%

Depreciation & amortization

(12,020)

(11,617)

3.5%

OIBDA

11,805

101,737

-88.4%

OIBDA margin

5.0%

30.5%

n/a

Operating profit / (loss)

(215)

90,120

n/a

Operating margin

n/a

27.1%

n/a

Other gains & losses – net, incl.

28,786

(47,697)

n/a

Interest income/(loss), net

(4,604)

(10,945)

-57.9%

Other income / (loss) – net, incl.

33,390

(36,752)

n/a

Gain from revaluation of financial instruments
(purchased quoted securities)

42,529

3,379

By a factor of 12.6

Profit before tax

28,571

42,423

-32.7%

Profit tax

(409)

(5,500)

-92.6%

Deferred tax liabilities

(7,799)

214

n/a

Deferred tax assets

(2,407)

(3,118)

-22.8%

Net profit

17,956

34,019

-47.2%

Net margin

7.7%

10.2%

n/a

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.

Full Version of the Press Release (339 kb)


19 November 2014