Osmetech is a fast developing, international diagnostics business, targeting the high growth, near patient testing sector serving small to medium sized hospitals.

• Sales of £5.83m (2004 - £6.18m) – increase of 4% on a constant currency basis
• Sales of $10.61m (2004 - $10.45m) for OPTI business – underlying increase of over 10% (excluding one off SARS related benefit of over $1m in prior year)
• Operating losses of £2.15m (2004 - £1.42m) before exceptional operating costs of £0.83m (2004 - £nil) – in line with projections
• Loss for the year after tax of £2.72m (2004 - £1.17m)
• Acquisition of Molecular Sensing plc for £2.73m before acquisition costs giving an entry point into the fast growing DNA based diagnostics sector.
• Strong product pipeline and excellent growth prospects in the small to medium sized hospital market
• VetStat successfully launched by our veterinary distribution partner, IDEXX Laboratories, Inc. – initial orders exceed expectations

Current period:

• Successful fund raising of £11.0m before costs
• Acquisition of Clinical Micro Sensors, Inc. from Motorola, Inc. strengthening the Group’s DNA diagnostics strategy
• Appointment of senior DNA diagnostic specialists to management team
• Launch of two new OPTI instruments

James White, Chief Executive, Osmetech plc said:

‘Osmetech’s growth is underpinned by the increasing demand for near patient testing products. Our OPTI business and commercial partnerships with healthcare and veterinary companies generate high quality revenues. This provides a solid commercial base for Osmetech.

‘The strong product combination resulting from our acquisitions of Molecular Sensing and Clinical Micro Sensors, together with our excellent management appointments, has moved Osmetech into an unrivalled position to capitalise on the fast growing DNA diagnostic sector.

‘Following the acquisitions Osmetech has become a very different company. With greatly enhanced prospects, we look forward to consolidating the company’s position as a fast growing, international diagnostic business.’

 For further information:
Osmetech plc
James White 020 7378 7033

madano partnership
Mark Way 020 7378 7033

Chairman’s statement

Osmetech has continued to make significant progress with its strategy to develop a diagnostics business in the fast growing near patient testing market serving small to medium sized hospitals.

The two recent acquisitions of OFEX-listed Molecular Sensing plc and Clinical Micro Sensors, Inc (“CMS”) from Motorola, Inc. have created a strong and unrivalled product combination. OPTI GENE will target simple test applications such as sexually transmitted diseases, where there is often a demand for fast results. The CMS eSensor™ product is suitable for more complex tests, such as Cystic Fibrosis, where the analysis of multiple gene targets is required. As the Human Genome Project continues to provide the genetic information necessary for new tests, these products create a strategically strong position for Osmetech in the fast growing market segment of genetic diagnostics.

The OPTI business has again performed well in the year. It provides us with an excellent platform from which we can develop new product opportunities within the Group. This proven operational infrastructure will be very valuable in the process of bringing the OPTI GENE and eSensor™ products through to market. We anticipate being able to successfully leverage our skills in instrument manufacturing as well as benefiting from our strong international distribution network that currently sell to a similar customer base of small to medium sized hospitals.

I am delighted to welcome Bruce Huebner and Geoff McKinley to the management team, both of whom have considerable experience in the field of genetic diagnostics. Bruce joins the Group as President of CMS. He was previously Chief Operating Officer of Gen-Probe and President and Chief Operating Officer of Nanogen, two major international companies in the genetics and infectious diseases markets. Bruce has a strong Sales and Marketing background and oversaw Gen-Probe through a period of growth and commercial success in the diagnostics industry. Geoff McKinley is responsible for our OPTI GENE business. He was previously Sr. Director Business Development bioMérieux NA with responsibility for new technologies for this global Molecular biology business, successfully in-licensing technology from Gen-Probe and Affymetrix

In July 2005, Osmetech raised £10.2 million net of expenses by way of a placing of new shares in order to provide working capital for the Group through a very exciting stage in our development. We recognise the support and commitment of many of our long term shareholders and had originally proposed to provide all existing shareholders with the opportunity to participate in the fundraising through an offer of shares on a pre-emptive basis. However, particularly in view of the new European Prospectus Directive that became effective in July and the increased time and cost that would have been involved in preparing such an offer, we reluctantly concluded that to proceed on this basis would not be in the best interests of the Company.

At the forthcoming Annual General Meeting to be held on 30 September 2005, a resolution will be proposed to consolidate every 10 ordinary shares of 0.01p each into 1 ordinary share of 0.10p each.

We expect to launch both the OPTI GENE and eSensor™ products in the coming months and with Osmetech underpinned by the strength of the OPTI business, I believe that we are very well placed to build a successful and fast growing international diagnostics business.

Gordon Hall
Chairman

Chief Executive Officer’s review

Introduction
We are now building upon the highly reliable revenue platform that OPTI has provided. The completion of two acquisitions, Molecular Sensing plc (“MS”) and Clinical Micro Sensors, Inc (“CMS”), in the fastest growth sector of the global diagnostics market, genetic diagnostics, should provide a powerful product combination. This should allow us to perform both simple tests through OPTI GENE and more complex tests with the CMS eSensor™ instrument, yielding exciting international opportunities for the further growth of the Group.

As with the acquisition of OPTI from Roche in 2003, these acquisitions were completed on favourable terms for Osmetech shareholders and we expect to be able to extract considerable value from these investments in due course.

OPTI

The recent investment in new OPTI products is starting to pay off, with the updated CCA with touchscreen having been successfully launched. The reusable OPTI R instrument targeting higher usage customers and the OPTI Lion electrolyte only analyser exhibited at the recent American Association of Clinical Chemists Conference (AACC) meeting in the US were very well received by both customers and international distributors. Both of these products are scheduled for worldwide launch later this calendar year.

The OPTI product line of near point of care arterial blood gas analysis instruments and consumables continues to show good underlying sales growth as the market continues to migrate from traditional central hospital laboratory settings. Sales revenues for the year increased marginally in constant currency terms and there was underlying growth in excess of 10% after accounting for the one-off benefit of SARS-related sales to China and initial distributor pipeline filling during the prior year.

The VetStat product, an OPTI CCA analyser adapted for the veterinary market, has now been launched by our distribution partner, IDEXX Laboratories, Inc. (“IDEXX”), producing most encouraging early results, with orders exceeding expectations. IDEXX is a worldwide leader in the development and commercialisation of animal health diagnostic products and we are confident of future growth resulting from their extensive sales and marketing campaigns.

Good progress has also been made with the development contract with IDEXX to create a new platform for measuring critical care parameters based on Osmetech’s proprietary optical fluorescence technology. We expect product sales to commence on schedule in the short to medium term.

We opened a sales office in Germany in April with exclusive distribution rights to OPTI products in this important market where we have an existing customer base regularly ordering consumables. We should be able to successfully leverage this operation further as we introduce new OPTI products and complementary third party products. We will also have an established operation through which to launch the Group’s genetic diagnostics products allowing us to service the customer base directly.

OPTI is well placed to grow steadily and, as the installed base expands, produce a high quality and reliable income stream for the Group.

Genetic diagnostics market

Genetic diagnostics is the fastest growing segment of the global diagnostics market and, in the US is forecast to grow at approximately 20% per year during the next 5 years. The growth of this sector and the prospect of high profit margins is becoming of increasing interest across the wider diagnostics industry. Roche have recently made a strategic investment in Affymetrix which has a bio-chip for DNA detection.

The genetic diagnostics market has not been dominated by the major companies. Most testing is currently performed by large hospitals and reference laboratories operating expensive instruments and running specialised tests, which rely on high volume testing in order to manage costs.

The growth in these highly accurate diagnostic tests is expected to be driven by technological advances providing simpler and more cost effective assays to enable small to medium sized hospitals to perform testing themselves in addition to the expansion of the Human Genome Project resulting in new tests to reduce healthcare system costs and to improve patient care. This fits well with Osmetech’s existing distributor network and customer base.

The following three sub-segments account for over 75% of the US genetic diagnostics market. The genetics and pharmacogenomics market in the US alone is expected to increase from $120m to $950m over the period 2003-2010. Over the same period the US infectious diseases market is expected to grow from $675m to $1.8bn.

Human Genetics

Human genetics focuses on enabling the physician to test individuals for diseases for which they have a genetic predisposition, for example: cystic fibrosis, thrombosis, Alzheimer’s or certain cancers. This is achieved through the detection of “mistakes” in an individual’s DNA which may cause mutations associated with a particular disease.

Pharmacogenomics

Pharmacogenomics is the process of developing drug therapies tailored to an individual patient’s needs through genetic testing. This enables physicians to ensure that treatments are both safe and effective, reducing drug wastage and reducing the possibility of patients experiencing adverse drug reactions. This is an area in which we anticipate rapid growth and perhaps for the first time in the healthcare diagnostics industry we will see pharmaceutical margins, but without the associated development costs and timescales.

The FDA has recently approved a new product from Roche/Affymetrix for the CYP450 family of enzymes which will provide relevant genetic information for drug metabolism, and has now been launched at more than $500 per test. CMS also has a product currently under development for CYP450 which is planned to be launched later in 2006.

Infectious Diseases

Healthcare physicians rely on tests which are able to identify the DNA of the bacteria responsible for sexually transmitted diseases (e.g., HIV, Chlamydia, gonorrhoea) and other infectious diseases such as MRSA. This is the largest sector of the genetic diagnostics market today and is concentrated in central laboratories which batch and test high volumes of samples. Osmetech’s aim through its OPTI GENE instrument is to improve the turn around time of testing in this area sufficiently to justify a shift in testing away from the central laboratory to near point of care. An easy to perform test which can provide a result within 45 minutes, whilst the patient is still at the hospital or clinic presents a significant opportunity to control the spread of disease both in the hospital and in the general population. These attributes are also expected to be useful for the effective diagnosis for emerging contagious diseases such as Bird Flu.

Osmetech’s genetic diagnostics strategy

Strategically, the progression into genetic diagnostics was a logical move for Osmetech, with strong growth anticipated from the small to medium sized hospital market - our core customer base. We had been evaluating a number of potential tests and technologies to combine with our own FDA approved bacterial vaginosis test within a device capable of diagnosing and differentiating between the most prevalent and clinically important vaginal infections. During this process we reviewed and assessed the collaborative work that LGC Limited (“LGC”) and MS had been performing including a successful study of clinical samples at the Royal Free Hospital in London to evaluate the LGC HyBeacon Chlamydia detection assay run on the prototype OPTI GENE instrument. We now intend to develop and market the OPTI GENE device as a priority to address the most critical requirements of the vaginal infection and sexually transmitted diseases market.

We believe that the OPTTI GENE and eSensor™ products have the attributes necessary to meet the requirements of the hospital market. For new genetic tests that emerge from the expansion of the Human Genome Project that only require the analysis of a limited amount of genetic information, the rapid OPTI GENE product is well suited. The eSensor™ device is designed for more complex tests.

Both of these products facilitate accurate testing in a cost effective, easy to use format and are well protected by strong IP positions. Unlike much of the competition, both products combine both an instrument platform and proprietary assay-specific consumables.

Acquisition of Molecular Sensing plc

The all share offer for Molecular Sensing plc was completed on 12 October 2004. The offer of 47 Osmetech shares for every 2 MS shares resulted in a total of 83,992,581 new Osmetech shares being issued. With an average mid-market price of 3.245 pence per share this valued MS at approximately £2.7m. At the date of acquisition, the fair value of the net assets of MS was £1.8m, including cash of £1.9m.

OPTI GENE

OPTI GENE is a rapid and easy to use device for DNA and RNA analysis for relatively simple tests that require limited genetic information such as thrombophilia and infectious diseases including sexually transmitted diseases.

We have signed an exclusive agreement with LGC to license its HyBeacons DNA probe technology for genetic testing applications in all world markets, excluding India. Assays utilising this technology are being developed at our facility in Boston, US.

The development programme for the completion of the OPTI GENE instrument has been fully integrated into Osmetech’s operations. We plan to exhibit the product at the Medica ( Europe) and AMP (US) trade shows in November this year, with product sales likely to commence in the first half of 2006.

OPTI GENE also has significant potential in other markets such as veterinary, forensics and research. We would seek to exploit these opportunities through strategic partnerships as we have achieved through the existing IDEXX relationship.

We have also signed a license with Roche Diagnostics for our proprietary plastic tube technology. The worldwide non-exclusive license will enable Roche to manufacture and sell plastic consumable vials for use on its large installed base of LightCycler instruments as a more cost-effective alternative to existing glass vials, whilst maintaining performance levels. The same technology has been incorporated into consumables to be supplied for use with Osmetech’s OPTI GENE instrument.

Acquisition of Clinical Micro Sensors, Inc.

CMS was acquired cash and debt free on 26 July 2005 for a consideration satisfied by an issue of warrants that entitle Motorola to subscribe for 78,114,287 ordinary shares at 1.75 pence per share. Under the terms of the acquisition, Motorola have also subscribed for 212,470,862 ordinary shares in Osmetech equating to an investment of £3.7m.

CMS

CMS was founded in 1994 as a spin off from The California Institute of Technology (“Caltech”) and was acquired by Motorola in June 2000 for a consideration of $280m. The business is based in Pasadena, California, US and employs approximately 60 people.Motorola has disposed of its non-core medical businesses including CMS. Osmetech identified this business as having excellent core technology with strong intellectual property protected by international patents, which had benefited from significant investment by Motorola during its period of ownership.

The core technology of CMS is electro-chemical detection for DNA analysis. CMS has been developing a low cost instrument and consumable for moderately complex genetic testing where the detection of multiple gene targets is required. The CMS eSensor™ instrument is a platform that allows a number of tests to be performed through the use of a common consumable configured for a specific test. We believe that both the instrument and consumable have significant cost advantages over competitor products.

CMS has developed a test for cystic fibrosis carrier screening where the presence of 25 genes is analysed from a single sample. Clinical trials have been conducted at two hospitals and one reference laboratory in the US to support a 510k submission to the FDA. One clinical laboratory, Oregon Health and Science University, recently presented a research poster, ‘Biochip Based Cystic Fibrosis Carrier Screening’ that discusses the clinical methods and results using the CMS eSensor™ DNA detection system. The paper notes that the CMS system produced accurate and timely results, was easy to use with straightforward sample preparation. It concluded that this biochip system would be useful for moderate volume testing. The paper is available on our website: www.osmetech.com.

We plan to exhibit the CMS eSensor™ cystic fibrosis product at the Medica (Europe) and AMP (US) trade shows in November this year, with product sales anticipated to commence in the first half of 2006.

CMS’s second product launch is likely to be for CYP450, an area that we expect to grow rapidly into a significant market. This product is anticipated for launch towards the end of 2006.

Fund raising

At the same time as the acquisition of CMS in July 2005, a placing of 628.6m ordinary shares raised £11.0m gross (£10.2m net of expenses) at a price of 1.75 pence per share. Following the completion of the placing there are 1,318,049,730 ordinary shares in issue. The placing was largely with new investors, including Motorola who subscribed for £3.7m. This will provide funds for the enlarged Group’s working capital requirements, particularly that which relates to the new CMS business.

We believe that net proceeds of the funding will be sufficient for the completion of development and the launch of both the OPTI GENE and CMS cystic fibrosis products. However, it is likely that Osmetech will require further funding in the future, but we expect to be able to achieve this from a position of strength as we build value within the Group.

Financial review

Sales revenues totalled $10,863,000 (£5,833,000) which represented a 4% increase over the previous year on a constant currency basis: $10,453,000 (£6,180,000). The 6% reduction in sales reported in sterling reflects the relative weakness of the US dollar during the period.

OPTI sales accounted for 98% of total revenues and as has already explained this business experienced underlying growth in excess of 10%. In product terms, the highly reliable repeat reagent sales accounted for 63% of total revenues.

As expected, gross profit margins reduced to 41.5% from the abnormally high levels achieved in the previous year following the successful utilisation of slow moving inventory acquired as part of the purchase of the OPTI business. A high proportion of OPTI’s cost of sales represents fixed manufacturing costs, the recovery of which will improve through additional production volumes from IDEXX and new product introductions. With minimal sales and marketing costs through the use of distributors for international and veterinary market sales, we expect to be able to improve the profitability of the business as revenues continue to grow.

Operating losses before exceptional items of £827,000 (2004 - £nil) increased to £2,152,000 (2004 - £1,418,000) largely as a result of the reduction in gross margins explained above. Other (non-exceptional) overheads of £4,574,000 (2004 - £4,864,000) represented a reduction of 6% compared to the prior year. Although much of this reduction was explained by currency movements, this year includes overheads relating to the MS / OPTI GENE business since its acquisition on 12 October 2004, together with costs associated with the due diligence process for the CMS acquisition.

We have recognised exceptional costs this year of £827,000, although only £67,000 represents ‘cash items’ and relates to the integration of the MS acquisition. Non-cash items comprise the write down of the carrying value of certain tangible and intangible assets, including £681,658 relating to electronic gas odour sensor technology following the Group’s change in strategy to focus its development resources primarily on genetic diagnostics.

Cash outflows before financing amounted to £1,227,000 (2004 - £2,104,000) although this included £1,691,000 net cash acquired from the acquisition of MS. Adjusting for this, the gross outflow of £2,918,000 was broadly similar to the reported loss for the year. The £760,000 non-cash elements of the exceptional costs were offset by a largely temporary increase of £553,000 in trade debtors due to the strong sales performance towards the end of the trading period.

In order to bring our reporting period and natural business cycle in line with that of our commercial partners, we intend to change our accounting period to a December year end. We will therefore report for an 8 month period ending 31 December 2005.

Outlook

Looking ahead for OPTI, we expect continued strong growth through the IDEXX trading relationship and an increased contribution from the launch later this year of the OPTI LION and OPTI R instruments.

We have a high quality operational infrastructure capable of supporting the continued growth of the business and have the skills, experience and knowledge of the market to exploit the significant opportunities that lie ahead, particularly in the field of genetic diagnostics. Within the genetic diagnostics sector, the small to medium sized hospital business is expected to grow most rapidly: this is Osmetech’s existing core international customer base.

We believe that the recent acquisitions of MS and CMS will provide Osmetech with a strong commercial presence in the fastest growing sector of the global diagnostics market. The OPTI GENE and the CMS eSensor™ products are both near to market, complementary and comprise both instrument and consumable. As an installed base of instruments is established we have an excellent opportunity to expand sales revenues by increasing the testing capability through offering new tests and benefiting from the relatively high margins that this sector is anticipated to yield.

Osmetech is well placed to continue to make significant progress with its strategy to develop a medical devices and diagnostics business in the fast growing near patient testing market principally serving small to medium sized hospitals. Our product portfolio continues to strengthen, combining the reliable, high quality revenues from OPTI with exciting growth opportunities in the field of genetic testing. We have a proven commercial infrastructure with existing distribution and customer base together with commercial partnerships with three leading world companies: Roche, Sysmex and IDEXX. We look forward to the future with confidence and the prospects of building significant value for shareholders.

James White
Chief Executive Officer

To see the Consolidated Profit and Loss Account, Consolidated Balance Sheet, and Consolidated Cash Flow Statement please down the PDF version of this document.

Preliminary Results for the 12 months to 30th April 2005 - [68.5KB]