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HSCI Reports Results for First Quarter of 2015 under RAS

Moscow – 19 May 2015 OJSC HSCI – The Human Stem Cells Institute (“HSCI”, MOEX: ISKJ), one of Russia’s leading biotech companies, today announced its unaudited unconsolidated results for the first quarter of 2015 in accordance with the Russian Accounting Standards (RAS):

  • HSCI’s revenue in Q1 2015 amounted to RUB 61.9 million compared to RUB 105.7 million in the same period of the previous year.
  • Gross profit amounted to RUB 2.1 million for a gross profit margin of 3.4%.
  • Operating loss was RUB 15.3 million, as opposed to operating profit of RUB 3.3 million in the same period of the previous year.
  • Net profit for Q1 2015 amounted to RUB 74.0 million, an increase of 36.9% compared to Q1 2014.

General Director of HSCI Artur Isaev commented:

“The company finished this quarter satisfactorily overall, despite modest indicators under Russian accounting standards, and taking into account the difficult situation in the Russian economy. The Genetico Centers of Genetic and Reproductive Medicine showed positive growth over the quarter: we have taken leading positions in the Russian Federation in the segments of preimplantation genetic diagnosis and donor sperm bank. Gemabank® has kept its previous level, despite decreased demand in many market segments. We expect Gemabank® to show positive revenue growth by the end of 2015. SPRS-therapy demonstrated healthy revenue growth and greater interest from clinics and patients. We haven’t managed to achieve significant results yet on the key question of state reimbursement of Neovasculgen® gene-therapy drug. We have prepared and submitted a case file for Neovasculgen® to be included in the list of Vital and Essential Medicines for 2016, and we know we will achieve a positive result sooner or later, since there are no other alternatives to Neovasculgen® at present for treating lower limb ischemia. We are also focused on expanding the indications and increasing the market potential of Neovasculgen®.

HSCI has currently discontinued all long-term investment projects until Russian capital markets stabilize. Our present short-term strategy calls for bringing our currently released products to market and increasing sales of these products. We have already invested significant resources and effort in these products. We also aim to license Neovasculgen® on new markets outside of Russia – the markets that have larger sales volumes and a more well-developed and effective system of state drug reimbursement. We’ve seen strong interest in our product on the part of pharmaceutical companies on developing markets which we’ve contacted regarding licensing questions in recent months. We’re currently choosing partners for the co-development of our innovative drug in the United States and China.”

HSCI’s revenue and income generated by key products and services

Revenue, generated by OJSC HSCI (hereafter – “HSCI”, “the Company”) in the first quarter of 2015 amounted to RUB 61.856 million – a year on year decrease of 41.5%.

The decrease is primarily attributable to the absence of revenues from the sales of Neovasculgen® in the reporting period, while in Q1 2014 revenues from the sale of this drug to distributors amounted to RUB 41.8 million.

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) and state drug reimbursement programs. This strongly constrains the accessibility of Neovasculgen® for all patients suffering from PAD. However, in the VED list for 2015 approved in December 2014 Neovasculgen® was not included. In the end of March, 2015 the Company submitted a new application to the Ministry of Healthcare for the inclusion of Neovasculgen® in the VED list which will be formulated for 2016.

In late December 2014, the expert panel of the Agency for Strategic Initiatives (the autonomous non-profit organization established by the Government of Russia in order to implement set of measures in economic and social spheres) has reviewed and approved HSCI’s program “The production and marketing of the innovative pharmaceutical drug Neovasculgen®”. According to decision of the expert panel the program was recognized as critical and important and the Agency for Strategic Initiatives will widely promote the project providing administrative and methodological support on federal and regional levels with the aim to confront PAD problem employing this innovative Russian drug.

Peripheral Arterial Disease (PAD) is a serious, incapacitating disease, which is exceeded in frequency (amongst cardiovascular diseases) only by ischemic heart disease (IHD) and brain stroke. 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 only 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. The drug’s 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 clinical trial protocols in order to expand the range of indications for applying the drug. HSCI starts to work in the therapy of IHD (Ischemic Heart Disease), Diabetic Foot Syndrome and treatment of trauma-induced peripheral nerve damage. Also, the R&D is in progress for the creation of tissue-engineered products based on Neovasculgen®. 

In addition to the Russian market, HSCI intends to make Neovasculgen® available on other markets as well. At the moment the Company is negotiating with potential co-development partners as well as working on attracting required funds from Russian / international investors, and also grants for the process of development, FDA clearance and launch of Neovasculgen® in the United States and China. In addition, the talks to potential partners and reviewing of opportunities to license the drug manufacturing and marketing on other foreign markets are underway.

In March, 2015 the first publication about Neovasculgen® was issued in English. The article authored by the Russian group of physicians dedicated to results of the drug’s clinical application as well as prolonged patient’s monitoring has been released in Journal of Cardiovascular Pharmacology and Therapeutics. JCPT (“J Cardiovascular Pharmacology and Therapeutics”): “pCMV-vegf165 intramuscular gene transfer is an effective method of treatment for patients with chronic lower limb ischemia” (DOI: 10.1177/1074248415574336).

It should be noted, that revenues from the provision of genetic diagnostic and consulting services as well as Reprobank services 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. Therefore, 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 press-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 3).

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

In Q1 2015 revenue from this service amounted to RUB 50.9 million (82.2% of the Company’s total revenue) – almost flat (-0.4%) compared to Q1 2014 – due to the growth in revenues from the storage of cord blood stem cells but the decrease in revenues from the isolation and cryopreservation of cord blood stem cells.

As of today, the total number of personal cord blood stem cell samples held in storage at Gemabank® exceeds 22.7 thousand.

In Q1 2015 Gemabank set in operation a new automated cryostorage facility which allows to store up to 40,000 cord blood samples with monitoring and controlling each bio-storage unit in the real time mode.

Research and assessment of the cord blood stem cell banking market in Russia conducted by the Company has shown that, according to 2014 year results, Gemabank® retained its leading positions. However, it should be noted that competitors have become more active and new players have emerged. Despite the noticeable consolidation of the market, the important fact for the future is that, as statistics shows, the Russian market for personalized cord blood stem cell banking has potential for growth. In Russia cord blood stem cell banking services are used for about 0.3% of 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.

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 and marketing efforts of the Company, but also on future economic situation in Russia. Russia’s engagement in political crisis in Ukraine along with the economic sanctions from Western countries and Russia’s counter measures negatively affect the country’s economy and therefore consumer demand as a result of customers’ negative expectations.

Up to the moment, the cord blood stem cell market has demonstrated down trends, however, according to results of Q1 2015, the market’s bottom is likely to have been already reached and the growth can be expected to resume.

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

Revenue from SPRS-therapy, including the long-tern storage of autologous skin fibroblasts, in Q1 2015 amounted to RUB 8.4 million (13.5% of the Company’s total revenue) – a year-on-year increase of 47.0%.

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.

The service is primarily offered through the leading dermatology and cosmetics clinics of Moscow (more than 30); however, in 2012 cooperation in providing this service began to extend to clinics in Russia’s regions (covering 13 cities as of March 31, 2015). The total number of patients that had used this service as of the reporting period was more than 500 people. More than 50% of patients have returned for second and/or additional skin treatments 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.

The age of patients undergoing SPRS-therapy ranges from 40 to 65. In the end of Q1 2015 a stand-alone SPRS-bank service was launched for the younger clients as the type of bio-insurance. The service allows them to cryostore autologous skin fibroblasts in order to use in future – for repairing skin damage due to aging in such areas as face, neck, décolleté or hands applying SPRS-therapy as well as for the treatment of skin after burn injury or other trauma-induced skin damage.

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 (including Social Media engagement).

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 the unique element of SPRS-therapy service, i.e. 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 (EU, Eurasia, USA, Brazil and Japan).

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).

Genetic diagnostics and consultation as well as Reprobank services at Genetico medical genetics centers

The revenues from genetic diagnostics and consulting services as well as Reprobank services reflected in revenues of RGMC HSCI LLC (a subsidiary of HSCI) in Q1 2015 amounted to RUB 12.1 million, which represents more than a half of respective revenues for the full year 2014 and a fourfold increase compared to Q1 2014.

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 1H 2015 IFRS results (which is to be distributed after the publication of the Company’s corresponding interim consolidated financial statements under IFRS in the end of August, 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 the global markets which are substantially larger than the Russian market and, therefore, definitely present greater opportunities.

Operating Expenses, OIBDA, Profits and Losses

In Q1 2015 HSCI’s operating expenses decreased by 24.7% year on year to RUB 77.131 million. The decrease in operating expenses is attributable to the reduction in cost of sales as well as in commercial and particularly administrative expenses.

Business costs optimization primarily include minimization of rental fees and overall staff costs (through optimization of 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).

However, with revenues decrease outpacing reduction of operating expenses, in Q1 2015 the Company did not demonstrate operating profit and margin (see Key Financial Results below).

OIBDA1 was negative (amounted to RUB -11.810 million) and Operating loss totaled RUB 15.275 million.

Other gains & losses in the reporting period amounted to a net gain of RUB 114.351 million. The growth of 69.9% year on year is mainly attributable to the increase in gain from revaluation of the Company’s financial instruments (purchased quoted securities) which comprised RUB 122.996 million in Q1 2015 compared to RUB 66.681million for Q1 2014.

The substantial positive result from other (mainly, non-operating) activities enable the Company to deliver Q1 2015 profit before tax of RUB 99.076 million (+40.3% to Q1 2014) and a net profit of RUB 73.131 million (+36.9 to Q1 2014).

Key Financial Results:

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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 (337 kb)

19 May 2015