Osmetech plc, the international healthcare diagnostics group, announces its interim results for the 6 months ended to 30 June 2006.

The Group comprises two divisions: Critical Care focused on blood gas analysis and Molecular Diagnostics, the identification of and pre-disposition to disease.

• Sales increase by 36% to £4,832,000 (2005 - £3,542,000)
• Loss after tax of £6,275,000 (2005 – loss of £1,164,000) reflects significant investment in Molecular Diagnostics including the first full reporting period of Clinical Micro Sensors Inc., following acquisition in July 2005
• Critical Care Division
• Profitable operation with increasing improvement in performance
• Sales increase by 34% to $8,630,000 (2005 - $6,439,000) with strong growth in Vetstat instruments
• Launch of new OPTI R and OPTI LION instruments to contribute to record sales performance in the second half
• Molecular Diagnostics Division
• FDA clearance for eSensor Cystic Fibrosis screening test
• Launch of first three molecular diagnostics products and commencement of sales
• Initial customer consumable usage rates of c.$75,000 per annum, significantly higher than Critical Care customers and expected to grow further
• Good development progress with new product pipeline
• July 2006 share placing raises £12.8m before expenses

James White, Chief Executive Officer, Osmetech said:

“Osmetech continues to grow its complementary businesses within its respective markets.

“The Critical Care Division is well established and profitable with excellent prospects.

“Following FDA approval for its Cystic Fibrosis screening test, the Molecular Diagnostics Division is already showing the exciting growth rates anticipated and strong interest is being shown by customers. We expect to see further sales and are confident of high consumable usage levels going forward."

“We are very encouraged by the progress of both divisions in driving the Group towards profitability.”

For further information:

Osmetech plc                          +44 207 593 4000
James White, CEO
David Sandlilands, CFO

Madano                                  +44 207 593 4000
Matthew Moth
Mark Way

Introduction

In 2003 Osmetech acquired the OPTI blood gas and electrolyte analyser business from Roche Diagnostics. Over the past three years, we have successfully launched three new instruments and are establishing a significant presence in the veterinary market through our partner, IDEXX Laboratories, Inc. This profitable business has been transformed from a non-core, loss making division such that by the end of 2006, we expect to have more than doubled the level of Critical Care sales during the period of our ownership.

Osmetech established its Molecular Division with the acquisition of undervalued and non-core assets in 2004 and 2005. Within a year we gained FDA approval for a major instrument and consumable system and have now launched our first three Molecular Diagnostics products with the capability of generating considerable revenues from a single customer site. We expect to be able to achieve further commercial progress by adopting the same proven business model successfully followed by the Critical Care Division.

Both of our operating divisions, Critical Care and Molecular Diagnostics, continue to make significant progress. The Critical Care Division’s product range of instruments and consumables continues to grow strongly. Following the 64% sales growth in 2005, further growth of 34% has now been achieved during the first half of 2006 compared to the corresponding period last year.

The Molecular Diagnostics Division received 510(k) clearance from the US Food & Drug Administration (‘FDA’) for its Cystic Fibrosis (‘CF’) carrier detection test and its eSensor™4800 DNA Detection instrument platform. This FDA approval was a first for a combined instrument and consumable CF assay. We have followed this up by securing a number of customers for the eSensor system with initial consumable usage rates of approximately $75,000 per annum. Our discussions with these customers indicate that they intend to rapidly increase the number of tests they perform thereby generating significantly higher consumable revenues.

Both of these businesses are expected to report further growth in the second half of the year.

Critical Care Division

The division’s OPTI and VetStat product ranges have achieved substantial further growth during the six months to 30 June 2006. Total sales of $8,630,000 represent a 34% increase over the first half of 2005.

New instrument sales were particularly strong in the veterinary market through our distribution partner, IDEXX, as they roll out the VetStat product worldwide and rapidly establish a significant installed base of instruments.

We are also in the process of launching worldwide two new instruments that use similar technology and produce comparable performance to our highly reliable core CCA instrument:

• OPTI LION - a low cost electrolyte only analyser
• OPTI R - targets the higher usage customer through a cost-effective reusable consumable.

We anticipate minimal competition with our existing and well-established CCA instrument and are confident that these product launches, initially in the human market, will lead to incremental sales and further growth in our overall installed base of instruments.

OPTI and VetStat instrument sales were high in the period, representing 47% of overall sales. This expansion in the installed base of instruments will provide the platform for increased, highly reliable repeat consumable sales for a number of years to come.

We are currently focussing our development activities on broadening the test menu targeting existing and future customers alike. We have identified key new critical care parameters that should in the short to medium term result in increased consumable revenues per instrument together with higher profit margins.

Molecular Diagnostics Division

The molecular diagnostics market continues to grow and develop rapidly. There is increasing demand for both new and existing genetic tests to improve disease management. This demand is greatest among the increasing number of hospitals and laboratories who are now looking to perform this testing in-house for the first time.

Osmetech’s eSensor and OPTI GENE instruments are specifically designed to meet the requirements of the market to facilitate this decentralisation. The combination of these products should enable simple and more complex molecular diagnostic tests to be performed accurately in a cost effective and easy to use format. Unlike many competing products, both Osmetech products combine an instrument platform and proprietary assay-specific consumables.

FDA approval for the eSensor™4800 DNA Detection instrument platform and Cystic Fibrosis carrier detection test was secured earlier in the year. The product was launched on schedule in the first half of 2006 and has now been successfully evaluated by a number of customers who have subsequently contracted to use the system for their CF testing. For example, a customer has recently signed a two year contract with minimum consumable usage rates of approximately $75,000 per year and has a realistic expectation that its actual usage rates will soon be in the region of $250,000 per annum. This high revenue stream is unusual for the diagnostics industry and is many times higher than the consumable revenue streams from a typical Critical Care Division customer who orders approximately $2,500 of blood gas and electrolyte consumables each year.

The eSensor system’s reliability and customer satisfaction has been good which should enhance our marketing programme for this product and the strong pipeline of additional tests, including the important Cytochrome P450 pharmacogenomics assays.

As planned, we have also launched our OPTI GENE instrument and proprietary consumable system for the rapid detection of DNA and RNA targets, initially available with thrombophilia assays, and OPTI TUBE, a cost-effective and safe alternative to the glass capillaries for use in the Roche LightCycler instrument.

We are currently evaluating a number of opportunities to work with third parties with the objectives of either offering a wider range of tests for the healthcare diagnostics market or exploiting the significant potential in other markets, such as food, veterinary, environmental and forensics.

Fund raising

In July 2006 a placing of 71m new ordinary shares at 18 pence per share raised approximately £12.8m before expenses. Institutional shareholders now hold in excess of 60% of Osmetech’s issued shares.

This additional working capital will fund both the Group’s current operations and new product launches. In addition, the strong cash position should improve our ability to secure favourable arrangements with third parties for licensing deals and strategic partnerships, in particular for the Molecular Diagnostics Division.

Financial review

Group sales for the six month period ended 30 June 2006 of £4,832,000 were 36% ahead of the corresponding period in 2005, with the majority of sales relating to the Critical Care Division.

While gross profit increased in the period, the relatively high proportion of lower margin instrument sales and the growth in the IDEXX business was reflected in the gross profit margin of 35% (2005 – 43%). The sale of these instruments will lead to an increased level of higher margin consumable sales as the instruments are introduced into regular use. Instrument production has now increased to almost four times the level when the business was acquired in 2003. This has enabled us to re-engineer the cost of the product and also achieve more favourable component buying prices, which should be reflected in improved gross margins with effect from next year.

Administrative expenses of £7,577,000, excluding share compensation charges of £541,000, include the first full reporting period of Clinical Micro Sensors Inc., acquired in July 2005. We have also accelerated some of our development programs for the Molecular Diagnostics Division resulting in costs being incurred earlier than planned.

Share compensation charges of £541,000 have been recognised in accordance with "FRS 20 Share Based Payment" which requires the Group to recognise a charge in the Profit and Loss account and a credit in equity to reflect the fair value of outstanding share options, and other share-based incentives, issued to employees. Comparative periods have been restated to include a similar charge.

We anticipate that the loss for the Group in the second half of 2006 will reduce as further sales growth improves the profitability of the Critical Care Division and we gain a greater contribution from molecular diagnostics sales.

Outlook

We have created considerable value in the Critical Care Division since its acquisition. New products have been launched in the core human market and we are rapidly establishing a successful veterinary business. We are confident of further sales growth and continued improvements in profitability.
 
We are adopting a similar business model for molecular diagnostics which is a faster growing market with the prospect of superior profits and greater returns. Sales revenues will comprise both instruments and proprietary consumables sold directly in the US market and internationally by utilising much of our existing distribution network. Non-healthcare opportunities will be exploited through specialist partners.

The Molecular Diagnostics Division has successfully launched its first three products enhancing its growing reputation in this fast developing and important market. We are well positioned to create a significant presence in molecular diagnostics and build considerable value within the business.

We look forward to reporting on the Group’s further progress in due course.

Gordon Hall                             James White.
Chairman                                  Chief Executive Officer

13 September 2006

Impact of the adoption of FRS 20