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RMG - HSCI: New Drug, New Stimulus, Jun 27, 2013.

Investment Summary

We visited a new laboratory and production complex at the innovative Russian medical company HSCI and met with the CEO. The company showed excellent financials in 1Q thanks to a new drug and expects strong growth up to 2017. High debt is a concern, but planned capex to 2017 is only $25m and an SPO is planned. We view the stock as an appealing speculative play.

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New drug gave financial breakthrough in 1Q13

1Q sales of the innovative Russian medical company, Human Stem Cell Institute (HSCI), doubled y-o-y to R121m ($4m), gross profit rose by 3.3x to R78m ($2.4m), while OIBDA increased by 10x to R54m ($1.7m), and net profit also jumped by 10x. OIBDA margin reached 45%. The market rewarded the stock with 7% price increase on the day of publication, and HSCI has now rallied by 42% since April lows.

Financials were driven by the launch of Neovaskulgen, a pioneering gene-therapy drug for treating peripheral arterial disease, including critical limb ischemia. The new drug, launched in 4Q12 generated 50% of 1Q13 sales ($2m). HSCI has signed a three-year agreement for supplies of Neovaskulgen to Sotex (part of Protek Group) and first-year deliveries will total R212m ($7m). The total market for Neovaskulgen is forecast at R1.5b ($50m) by 2017. The previous mainstay of HSCI's business, Gemabank (the largest cord-blood stem-cell bank in Russia), generated 45% of company revenue in 1Q13.

Strategy and forecasts

HSCI says that it will continue to diversify its sales structure, acting as a first-mover. New projects are already being implemented: a national network of genetic diagnostics and consulting centers services for inherited disorders; pre-implantation genetic diagnosis (PGD) services and banking of reproductive cells and tissues (personal storage, donation); and SPRS-therapy, which is a premium innovative cell technology for aesthetic medicine (price per client up to $20,000).

The CEO says that weak FY12 results were due to R&D for new projects, and expects the diversification strategy to give 7x increase of revenues in the next four years to R3.5b (>$100m). By 2017, Neovaskulgen should generate 54% of sales, new services should contribute 28%, and the share of Gemabank should decline to 18%. The company is targeting 25x increase of OIBDA by 2017, based on 60% benchmark margin for bio-tech companies. This seems realistic, since HSCI is entering new markets with original drugs, which offer high margins. HSCI is focused on premium markets, but does not overrule expansion to the mass-market with new pricing of existing services or totally new products. Gemabank is a powerful cash-

generating asset, which provides a hedge against any revenue contraction.

Debt levels, possible equity sale

Net debt/OIBDA ratio of 8x is a cause for concern ($5m total debt and over $1m net debt) and HSCI is considering sale of a 10% stake, consisting of treasury shares acquired in a buyback and a minority stake, to a strategic investor, preferably a financial institution rather than a pharma company. Company management said that it will not need more external financing, as there are no major capex plans. The investment program for 2013-2017 is only R772m ($25m).

Conclusions and recommendation

We see HSCI as an interesting speculative play, as the share price is highly sensitive to company news and a rally is possible after expected strong 2Q reporting. However, we note that HSCI is traded at EV/OIBDA (2013E) of 15.6x, while median EV/EBITDA (2013E) for global peers is 9.0x. The premium may be justified by HSCI's position on new markets (most peers are operating on established markets), but we find that the stock merits a Speculative BUY recommendation, also taking account of uncertain future success of its innovative products.


Rye, Man & Gor Securities

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Publication:Russian Banks and Brokers Reports
Date:Jun 30, 2013
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