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HSCI Reports Results for First Quarter of 2013 under RAS

Moscow – 16 May 2013. The Human Stem Cells Institute (“HSCI”, MICEX: ISKJ), one of Russia’s leading biotech companies, today announced its results for the first quarter of 2013 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue for the first quarter of 2013 amounted to RUB 120.6 million, which represents an increase of 95% from the first quarter of 2012; new products and services (SPRS-therapy, Gemascreen, Neovasculgen®) accounted for 53% of total revenues.
  • Gross profit for the first quarter of 2013 increased by 3.3 times year on year to RUB 78.0 million; operating profit increased to RUB 51.4 million (compared to RUB 4.0 million in the first quarter of 2012).
  • OIBDA1 in the first quarter of 2013 totaled RUB 53.7 million compared to RUB 5.3 million in the same period of the previous year; OIBDA margin for the reporting period was 44.5%.
  • HSCI’s net profit for the first quarter of 2013 increased to RUB 21.1 million compared to RUB 2.7 million in the first quarter of 2012.

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

“In the first quarter of the year the Company demonstrated strong results from the sale of Neovasculgen®, which positively impacted revenues and margins. As I said earlier, it makes sense to wait until the full year results are in before making additional analysis and new projections of the market potential of this innovative drug in Russia. Right now we continue working on the promotion of this drug on both the Russian and the Ukrainian market. During the first quarter we received marketing authorization for the drug in Ukraine and plan to begin sales in the second or third quarter of 2013.

In addition to the expansion of the market for Neovasculgen®, one of the key tasks for the second quarter is the launch of a network of advanced medical genetics centers under the Genetico brand, where a broad spectrum of genetic diagnostics and consulting services will be offered, including Ethnogene service using our proprietary DNA array, as well as the range of services related to preimplantation genetic diagnosis (PGD).

HSCI’s new laboratory and production complex, which will open in May-June of this year, will be put to use in the creation of new products and the provision of services in the fields of regenerative medicine and medical genetics.

We will also be starting to use this complex for the provision of Reprobank services, namely, the storage of reproductive cells and tissues. In the upcoming quarters we plan to begin providing personal sperm/oocyte storage services as a form of bio-insurance.”

HSCI revenues and income generated by specific projects

HSCI’s revenue for the first quarter of 2013 increased by 94.7% compared to the first quarter of 2012 and reached RUB 120.592 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 quarter of 2013 accounted for 49.6% of the Company’s revenues (RUB 59.8 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 the fourth quarter of 2012 Neovasculgen® sales generated RUB 9 million in revenues.

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 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 for Neovasculgen® was received in Ukraine: sales of the drug will begin there in the second or third quarter of this year. Work is also underway to obtain authorization for the drug in a number of other neighboring countries.

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 quarter of 2013 revenues from this service accounted for 45.0% of the Company’s total revenues (RUB 54.3 million), declining by 1% compared to the first quarter of 2012.

During the reporting period HSCI signed 746 contracts on the banking/storage of cord blood stem cells, which is 12.2% less than in the previous quarter and 18.9% less than in the first quarter of 2012. Thus the total number of personal cord blood stem cell samples held in storage at Gemabank in the end of the first quarter of 2013 exceeded 17,800.

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 22.7% fewer contracts for cord blood banking/storage during the first quarter of 2013 than in the first quarter of 2012. The total number of samples stored by Hemafund exceeds 6,000 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-term storage of autologous skin fibroblasts, in the first quarter of 2013 accounted for 2.7% of the Company’s revenues (RUB 3.3 million).

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 quarter of 2013 was 255 people (210 patients fully completed their treatment, a number of which have returned for second and/or additional skin treatments in other affected areas. Repeat clients account for approximately one-third of current clients).

During the reporting period there was no growth in revenues for this service due in part to seasonal factors (a lower number of patients during the fourth quarter of 2012, particularly in December). The situation is such that revenues from SPRS-therapy are recognized at the moment of the provision of this service, i.e. when the resulting fibroblast culture is provided to the patient with proper acceptance. Due to the fact that the time of preparation of the culture is on average one and a half months, there is a certain gap between a patient’s first visit and the date when the service and be considered as provided.

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.

Gemascreen the first stage of a socially significant project of HSCI 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 accounted for 0.6% of the Company’s total revenues in the first quarter of 2013 (RUB 0.8 million).

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 personal genetic doctor.

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).

In developing this project, over the course of 2012 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 foster a broad understanding of its social significance and the practical value of genetic screening.

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, hypertension, ischemic 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 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 personal genetic doctor, 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.

In connection with the preparations for the launch of the entire line of genetic diagnostics and consultation services via the network of Genetico centers, during the reporting period the Company did not focus on the specific promotion of its Gemascreen for Newborns services. Gemascreen for Newborns will continue to be offered on the market until the end of 2013, when it is planned to launch the Ethnogene+ services based on an expanded version of the Ethnogene array, which will include diseases and genetic disorders which are currently diagnosed under the Gemascreen for Newborns program (via molecular genetics diagnostics using polymerase chain reaction (PCR) and automated sequencing methods).

Operating Expenses, OIBDA, Profits and Losses

HSCI’s operating expensesin the first quarter of 2013 amounted to RUB 69.225 million, increasing by 19.6% 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 Vitacell LLC, to which part of the staff which participated in the development of SPRS and other cell technologies has been transferred from HSCI).

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

However, revenue growth substantially exceeded growth in operating expenses year on year (revenue grew by 95% (i.e. by RUB 58.7 million) while operating expenses grew by 20% (i.e. RUB 11.3 million)), which provided for higher profitability and margins – see Key Financial Results below.

Consequently, OIBDA amounted to RUB 53.676 million, OIBDA margin – 44.5%, while operating profittotaled RUB 51.367 million.

The resulting operating profit allowed the Company, despite a substantial increase in interest expenses and also other expenses, to report growth in net profit, which reached RUB 21.110 million for the first quarter of 2013 compared to RUB 2.717 million in the first quarter of 2012.

Due to the use of long-term and short-term borrowing for investment in development, during the reporting quarter net interest expense amounted to RUB 3.747 million compared to a net interest income of RUB 0.313 million in same period of the previous year.

Other losses (the difference between other expenses and other income) during the reporting period amounted to RUB 20.114 million compared to RUB 0.909 million for the first quarter of 2012. This increase was largely a result of the write-off of R&D expenses on projects which were discontinued following review of the research results.

Key Financial Results:

Profit and Loss Statement,  ’000 RUB

3mo2013 3mo2012

% change,

y-o-y

Revenue

120,592 61,937

94.7%

Cost of goods sold (COS)

(42,604) (38,163)

11.6%

Gross profit

77,988 23,774

228.0%

Gross margin

64.7% 38.4%

n/a

SG&A

(26,621) (19,730)

34,9%

Total operating expenses, incl.

(69,225) (57,893)

19.6%

Depreciation & amortization

2,309 1,249

84.9%

OIBDA

53,676 5,293

914.1%

OIBDA margin

44,5% 8,5%

n/a

Operating profit

51,367 4,044

by a factor of 13

Operating margin

42.6% 6.5%

n/a

Other gains & losses, incl.

(23,861) (596)

by a factor of 40

Interest income/(loss), net

(3,747) 313

n/a

Other

(20,114) (909)

by a factor of 22

Profit before tax

27,506 3,448

697.7%

Profit tax

(3,642) (731)

398.2%

Deferred tax liabilities

18 -

n/a

Deferred tax assets

(2,772) -

n/a

Net profit

21,110 2,717

677.0%

Net margin

17.5% 4.4%

n/a


An online conference with HSCI General Director Artur Isaev for the investor and analyst community as well as journalists will be held on May 21, 2013 at 12:30 (Moscow Time) in Russian. To participate in the conference, at the abovementioned time go to the following conference webpage: http://my.comdi.com/event/119303/. This is an open event.



16 May 2013