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Moscow, 1 November 2012 – Human Stem Cells Institute OJSC (“HSCI”, MICEX: ISKJ), one of Russia’s leading biotech companies, today announced its unaudited results for the first nine months of 2012 in accordance with Russian Accounting Standards (RAS).

    • Revenue for the first nine months of 2012 increased by 58% year on year to RUB 210.2 million.
    • Gross profit rose 77% year on year to RUB 75.6 million; first nine months 2012 operating profit totaled RUB 5.9 – a nine-fold increase year on year.
    • OIBDA1 more than doubled year on year to RUB 9.9 million; first nine months 2012 OIBDA margin amounted to 4.7%.

HSCI’s General Director Artur Isaev commented on the key events of the first nine months of 2012 and the Company’s plans going forward:

“In 2012, as I have on multiple occasions emphasized, the main efforts of the Company are focused on the commercialization of the products and services which are ready to bring to the market and those which are among the new set of HSCI projects specified in the business plan for the next five years.

Working toward our goals, in the third quarter of this year we held the Russia-wide launch of sales of the innovative drug Neovasculgen® and also made substantial progress on the creation of HSCI’s new laboratory and production complex, which will play an important role in the implementation of our program for planned projects.

An important step in this direction was obtaining credit resources from Sberbank. In August we completed the signing of an agreement with the Moscow Bank of Sberbank on the partial financing of the construction and equipping of the complex, and we plan to finish work on this by the end of the year. Thus, starting in 2013, the Company can launch the services of such projects as Reproductive Technologies and Preimplantation Genetic Diagnosis as well as the medical genetic diagnostics and consulting services based on a proprietary DNA array for a wide range of consumers. 

HSCI’s new laboratory and production complex, which will undergo international certification, will be one of a kind in Russia. Its creation is a strategically important step not only for the Company but for the sector as a whole – in addition to HSCI’s drugs and services, the complex is intended to be used for the contract production of products of other Russian and international companies. The complex will include cleanroom laboratory and production premises totaling 360 square meters, and 200 square meters of space will be occupied by a modern automated cryogenic storage facility. The complex will consist of a molecular genetics laboratory, cell culture products laboratory, pharmaceutical block, cord blood stem cell bank and reproductive tissue bank.

In addition to the completion of work on the creation of the laboratory and production complex, through the end of this year the Company’s attention will be focused on the promotion of Neovasculgen® and also on the formation of a new concept of a project to create a Russia-wide network of next-generation medical genetics centers. The first results of Neovasculgen® sales will be included in the full-year financial statements, and for now I can just say that the anticipated sales of this drug through the end of 2012, as expressed in the presentation of our business plan in February of last year, have not been revised.” 

Revenue for the first nine months of 2012 increased by 57.9% year on year to RUB 210.149 million.

The Company’s main source of revenues came from the isolation, cryopreservation and storage of umbilical cord blood stem cells – 82%.

In the reporting period HSCI signed 2,864 contracts on the banking/storage of cord blood stem cells, which exceeds by 26.8% the results of the first nine months of 2011 (2,259 contracts) – a period which was largely characterized by stagnation in the services market due to post-crisis structural changes in consumer demand. 

In the third quarter the number of contracts signed was down 4.4% from the previous quarter (950 compared to 994), which can be explained by the seasonal factor (the period of summer vacations, scheduled shutdowns of maternity hospitals for sanitation). The general growth trend for cord blood stem cell banking continues.

An important event of the third quarter was a change in the price of Gemabank® services. Starting September 15, 2012, the cost of a basic contract for the isolation and cryopreservation of cord blood stem cells was raised by 9%. At the same time, the cost of storage services was not changed. This price increase is a result of higher costs related to the provision of this service and inflation – the previous price had been in place since 2008.

Ukraine’s largest cord blood bank Hemafund, in which HSCI holds a 50% stake, signed 1,153 contracts for cord blood banking/storage during the first half of 2012, which represents a 25.5% increase year on year. In the third quarter of 2012 the number of contracts signed reached 432, which was 14.9% more than in the previous quarter.

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

Revenues from SPRS-therapy and Gemascreen services in the first nine months of 2012 accounted for 8.5% of HSCI’s revenues.

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. SPRS-therapy is offered at the leading dermatology and cosmetics clinics of Moscow.

In the first nine months of 2012 revenues from SPRS-therapy totaled RUB 13.248 million or 6.3% of the HSCI’s total revenue. More than 180 patients had used this service as of the end of the reporting period (172 patients fully completed their treatment, a number of which have returned for second and/or additional skin treatments in other affected areas).

One of the Company’s goals for the near future is the launch of SPRS-diagnostics as a separately offered service (beginning in early 2013).

Gemascreen – the first stage of a socially significant project to provide genetic medicine consultation with the aim of early detection, treatment or prevention of inherited diseases.

Throughout 2011 HSCI developed a project to create a Russia-wide network of next-generation genetic medicine centers, where patients are provided genetic diagnostics (identification of carrier status of inherited diseases and predisposition to them) and consultation with a personal doctor specializing in genetics regarding prevention or early treatment measures in the case that susceptibility is discovered.
The main aim of this project is the identification and forecasting of risks facing clinically healthy people and their offspring. Gemascreen’s services can be used by various groups of customers: newborns, couples planning children and pregnant women, as well as all who express interest in discovering their specific genetic features for prophylactic purposes.

The Company began to implement the first phase of this project in the fourth quarter of 2011, launching in Moscow and a number of other regions pilot sales of Gemascreen services, namely presymptomatic identification of the six most common inherited diseases in the Russian Federation and their carrier status through DNA screening using umbilical cord blood of a newborn accompanied by follow-up consultation with geneticists on treatment/preventive measures (in the case a disease is identified) or on steps for the planning of healthy offspring (in the case that a carrier status is discovered).

This service was launched across Russia in January 2012 and during the first nine months of the year generated RUB 4.561 million in revenue or 2.2% of HSCI’s total revenue.

The next stage of this project is an broadening of the spectrum of services provided as well as the expansion of the group of target consumers through the use of a proprietary DNA array which substantially increases the number of diagnosable genetic conditions: 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).

The creation and technical validation of HSCI’s own array is planned for completion by the end of 2012, with clinical validation to be held in the first quarter of 2013. One of the exceptional features of the chip is its practical application: it reflects the spectrum of inherited diseases characteristic of residents of Russia and the CIS.

In 2012-2014 the Company plans to open its own next-generation genetic medicine centers in the largest cities of Russia.

In the third quarter this year work continued on the fine tuning of the positioning of this project with the aim of highlighting its social significance as well as the practical value of genetic diagnostics in general.
In the fourth quarter there are plans to expand the group of consumers of Gemascreen services through targeting of various age groups (in addition to newborns): genetic diagnostics of peripheral blood (couples planning for children, young children) and medical genetics consultation beyond the scope of gene testing. Work also continues on expanding awareness of this project among various types of doctors in Russia. 

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 (the decision to include the drug in the state registry of medicinal products for medical use in the Russian Federation was adopted by the Ministry of Health and Social Development on September 28, 2011 – RU № LP-000671).

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 the end of September 2012 Neovasculgen® went on sales in Russia after certification of the drug’s first batches had been completed. Neovasculgen® is sold in the form of lyophilisate to prepare an injection solution; the treatment course comprises 2 sequential injections /i.e. 2 vials/). The drug is being distributed by national distributors. The results of the first sales will be reflected in the annual financial statements for 2012.

Over the course of 2012-2013, HSCI will seek to include this new drug in federal and regional public medicine subsidy programs. Following successful promotional activities, Neovasculgen® sales should account for a substantial portion of HSCI’s revenues.

In the second half of 2012 and early 2013 efforts will be made to expand the contract production of Neovasculgen®, in particular the certification of additional facilities for production of the drug.

In addition to Russia, future plans include bringing Neovasculgen® to other CIS markets as well as studying the possibility of introducing it in the European Union and United States. The process of obtaining marketing authorization for the drug in Ukraine began in March 2012 and could be concluded by yearend.

As Neovasculgen® is designed to treat PAD via stimulation of angiogenesis, the drug 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 Neovasculgen® (including in conjunction with surgical reconstruction and other nosologies).

HSCI’s revenues for the first nine months of 2012 also include the payment for two stages of work done under a contract between HSCI and SynBio (deal approved by AGSM on June 21, 2012; see press release), accounting for 8% of HSCI’s total revenues.

HSCI’s operating expenses for the first half of 2012 amounted to RUB 204.243 million, up by 54.2% year on year (the cost of sales increased 48.8% while commercial and marketing expenses were up 65.7%).
The primary driver behind this increase was planned expenditures on the development of new projects confirmed in the Company’s business plan for 2012-2016, which was primarily manifested in higher staff costs and lease of additional office premises due to staff increases and the formation of highly professional teams for each of the projects. 

The reporting period also included the peak of expenses on preparations to launch Neovasculgen® (production and marketing) as well as expenses on the construction of HSCI’s new laboratory and production complex.
With the aim of supporting the growing demand for cord blood banking services, during the reporting period expenditures increased on advertisement of Gemabank and on salary budget due to the increase in the number of regional representatives in comparison to the same period in 2011.
Furthermore, the cost of sales increased with higher expenses on the services of third-party medical organizations due to the increase in the number of cord blood stem cell samples accepted for storage by Gemabank and the provision of Gemascreen services. Expenditures on reagents and materials also increased thanks to the higher demand for SPRS-therapy.

However, with revenues gains outpacing increases in cost of sales and also total operating expenses, in the first nine months of 2012 the Company demonstrated growth in both gross profit (+77%: RUB 76.579 million compared to RUB 42.689 million) and in operating profit (up 9.2-fold: RUB 5.906 million compared to RUB .639 million) compared to the same period of the previous year, accordingly.
OIBDA for the first nine months of 2012 amounted to RUB 9.935 million compared to RUB 4.335 million in the first nine months of 2011.

The gross profit margin for the period was 36.0% and the OIBDA margin was 4.7%.

At the same time it should be noted that in the third quarter of this year, compared to the previous quarter, slightly lower revenues were reported due to the seasonal factor (-3.0%) while operating expenses, thanks to the work undertaken to commercialize planned projects, saw modest growth (+4.4%). This operating loss in the third quarter did not allow the Company to achieve operating results for the first nine months that would fully cover higher interest payments and other expenses, which was one of the reasons for the net loss for the reporting period (RUB 5.245 million).

Over the first nine months of 2012 interest payments (arising from loans and lines of credit acquired as well as the use of funds from short borrowing for development) substantial exceeded interest revenues, which lead to a net interest expense of RUB 1.265 million compared to a net interest income of RUB 4.492 million in the same period of the previous year.

Other losses (the difference between other expenses and other income) increased during the reporting period by 3.5-fold compared to the same period in 2011 (RUB 9.005 million compared to RUB 2.598 million).

In part, this increase in losses resulted from the Company’s sale of treasury shares at the market price, which at the time of sale in the term stipulated by law was lower than the purchase price of the said shares (the mandatory buyback of own shares by HSCI from shareholders not participating in the voting or voting against a major transaction approved by the EGSM on March 17, 2011). This transaction is reflected in profit and loss statement for January 1 to September 30, 2012, under “Other Non-operating Income” and “Other Non-operating Expenses”. 

Also contributing to the growth in other expenses during the reporting period were expenses arising from credit arrangements and also the recognition of expenses incurred in previous years.

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.

02 November 2012