Stem cells to the rescue

Tucked behind a gleaming glass-and-steel tower in southern Moscow is the headquarters of Gemabank, Russia's first cryogenic storage unit that keeps stem cells from newborn babies' umbilical cords on ice.

It may sound like science fiction, but this business practice is well established in the West. Gemabank offers Russians a kind of genetic insurance policy.

Western hospitals routinely offer to freeze these dynamic and versatile cells that can turn into anything the body needs and are easy to extract from the discarded umbilical cord. But the technology has only been available in Russia since 2003 and Gemabank's owner, Russia's commercial bio-tech company Human Stem Cells Institute (HSCI), has more or less created the market on its own.

Now the company is hoping to cash in on its early advantage and raise money to help build the industry. HSCI will launch Russia's first post-crisis Initial Public Offering (IPO) in November, breaking the fast that was imposed since Russia's stock market crashed just over a year ago, destroying well over three quarters of a billion dollars of wealth in the process. But is it too early for an IPO?

"Confidence is returning and we will have no competition to speak of," said the ebullient General Director Artur Isaev sitting in his modest office at the mini-campus of HSCI.

The IPO will be watched internationally: HSCI is the first to attempt to list on the Moscow International Currency Exchange (MICEX) since the crisis began, and it will also be the first Russian high-tech company to go public.

HSCI plays on a theme close to the Kremlin's heart: Russia's brain trust. Since 2006, Prime Minister Vladimir Putin has tried to harness Russia's intellectual talent.

Russia's universities may look a bit shabby, but they continue to churn out world-class scientists and engineers. The problem is that there has been so much money to be made from more mundane ventures such as building modern sausage factories that high technology has been simply ignored.

The Kremlin has attempted to boot up a venture capital sector from scratch by seeding funds with state-backed cash, distributed via the Russian Venture Company (RVC). The model draws heavily on the Israeli experiment in building up a high-tech sector using state-backed venture capital, which was a great success.

The RVC partners with private funds contributing 49 percent of the capital and leaving the management of the fund and its assets to professional investors. So far the company has set up seven venture funds worth about $630 million, which are co-owned by the company and private investors.

HSCI hopes to tap into this pool of capital, but it will appeal to regular investors too. Much of the Kremlin's money has already been disbursed, yet none of the projects have achieved any concrete results. The HSCI I.P.O. will be a litmus test for Russia's technological innovation.

HSCI does have an interesting story to sell. Gemabank already has some 7,500 clients, or about 0.2 percent of all Russian parents with newborns. The company is projected to earn about $5 million this year and is actively expanding into the Russian regions, as well as further afield with offices in Ukraine and Kazakhstan.

"It is a fast growing business and we are putting in 60 percent growth per year," said Isaev. "In more developed markets like Germany and the U.S.A., this type of service has been around five to ten years and provides the help to about 2-3 percent of new parents. So we are expecting a ten-fold growth in this business in the next five years."

The price range for the offering of about 20 percent of the company's stock was set at between nine and 11 rubles per share, which values the company at between 675 million rubles ($22 million) and 825 million rubles ($28 million). The offer price is about five times current revenues, which puts HSCI on a par with peers in the West.

Isaev points out that these companies are operating in saturated markets whereas HSCI is only just starting to develop a massive market.

Unlike many Western companies, HSCI also has a research arm that has been developing commercial products based on its stem cell research.

It has pioneered a technique that introduces DNA into the cells which brings an increased measure of predictability to the process.

The company is hoping one of its three products currently in development will score on the commercial market. The first one is designed to stimulate the development of the vascular system and is aimed at patients with blood circulation problems, especially at the extremities of their limbs, which is difficult to treat. Another stimulates the regeneration of tissue and will help people recovering from heart attacks. And finally, a skin rejuvenation treatment acting at cellular level: a beauty treatment. All three are in the clinical trial phase now and if any one of them works, it could send the company's revenues through the roof.

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