Osmetech plc ('Osmetech' or the 'Company')

US$ 44.9 million disposal of Critical Care Division to IDEXX and trading update

Osmetech, the fast developing international diagnostics business serving the high growth near patient testing market, targeting small to medium sized hospitals, today announces:

• The disposal of the Critical Care Division to IDEXX for a consideration of US$44.9 million (before expenses) to be satisfied in cash on completion.
   
• The Critical Care Division was acquired from Roche Diagnostics Inc in 2003 for US$2.7 million, before costs of £0.1 million.
   
• The Disposal represents a substantial return for the Company on its original investment and demonstrates the value of the Directors' ability to acquire businesses as a successful means of creating significant value for Shareholders and the Company.
   
• With the proceeds from the Disposal, together with existing resources (cash balances as at 30 November 2006 were £7,985,000), the Board plans to accelerate the expansion and development of the Molecular Diagnostic Division.  As part of this strategy, inter alia, the Board intends to:
  
  
• progress with the development and commercialisation of the Group's existing product pipeline including the second generation eSensor™ instrument
   
• secure licensing agreements that will add assay content, and therefore revenues, for the Group's instrument platforms
   
• continue to explore selective acquisition opportunities which will strengthen and expand the Group’s presence in the molecular diagnostics market
   
• negotiate licensing agreements and enter into strategic partnerships in non-healthcare markets, thereby leveraging the strength of the Group’s instrument platforms, technology and intellectual property.

Under the AIM Rules, the Disposal is deemed to result in a fundamental change of business for the Company and accordingly is conditional, inter alia, upon the approval of Shareholders. A Circular regarding the proposed Disposal and also details of a proposed grant of Long Term Incentive Awards will be sent to Shareholders today convening an Extraordinary General Meeting of the Company, which will be held at the offices of Ashurst, Broadwalk House, 5 Appold Street, London EC2A 2HA. At the meeting, resolutions will be proposed to approve of the Disposal and the grant of the Long Term Incentive Awards. The Extraordinary General Meeting will commence at 11.00 a.m. on 9 January 2007.James White, Chief Executive, Osmetech plc, said:“We are delighted with the substantial return we have made on our original investment in the Critical Care Division. Following its disposal we can now focus on accelerating the development of our Molecular Diagnostic Division.”“Molecular diagnostics is the fastest growing sector of the global diagnostics market. Osmetech is in an excellent position with two devices launched together with FDA approved tests for Cystic Fibrosis. Good progress is being made with our CYP 450 test which targets the personalised medicine market, a growth area for molecular diagnostics.” “Our increasing product portfolio, backed up by a strengthened balance sheet, gives Osmetech the opportunity of being a significant player in one of the most exciting segments of diagnostics.”

Osmetech plc                                          +44 (0)207 849 6027
J ames White, Chief Executive Officer
David Sandilands, Chief Financial Officer

Hoare Govett Limited                              +44 (0) 207 678 8000
Andrew Foster / Bertie Whitehead (Corporate Broking)
Justin Jones (Corporate Finance)

Madano partnership                                +44 (0) 207 593 4000
Matthew Moth/Mark Way

Definitions used within this Announcement are set out at the end of this Announcement.

Background
Osmetech is a fast developing international diagnostics business serving the high growth near patient testing market, targeting small to medium sized hospitals. Osmetech's current operations comprise two US based divisions: the Critical Care Division based in Atlanta and the Molecular Diagnostics Division located in Boston and Pasadena. The Group’s business model of selling instruments leading to ongoing consumable sales has resulted in excellent growth for the Critical Care Division.  The Molecular Diagnostics Division is also making good progress in developing a pipeline of products and has now started to generate revenues based upon a similar business model of instrument sales leading to ongoing proprietary consumable sales.

Critical Care Division
Since the acquisition of this business in 2003, the Group has launched a number of new instruments and has established a new and significant presence in the veterinary market through the Group’s partner IDEXX, the proposed purchaser of the Division.  During the Company’s period of ownership, the Board has turned the Division from loss making to a profitable business and has, at the same time, significantly increased the level of sales.  The Critical Care Division mainly comprises the OPTI™ product line of blood gas and electrolyte instruments and proprietary consumables.  Since the acquisition of the business from Roche, the business has been developed further through a strong international network of distributors, new product launches and the establishment of a commercial relationship with IDEXX.

The Division reported substantial growth in calendar year 2005 with sales of $14.8m, up by 64 per cent. in constant currency terms compared to the calendar year 2004. Further sales growth of 34 per cent. was achieved during the six months ended 30 June 2006 compared to the corresponding period in 2005, with sales reaching $8.6m. The gross assets of the Critical Care Division as at 30 June 2006 were £4.8 million (excluding inter-company receivables and cash balances).

Molecular Diagnostics Division
Osmetech’s Molecular Diagnostics Division was created following the acquisitions of Molecular Sensing plc in October 2004 and Clinical Micro Sensors, Inc., a non-core subsidiary of Motorola in July 2005.

Molecular diagnostics is the fastest growing sector of the global diagnostics market and continues to develop rapidly. Following completion of the Human Genome Project, scientific research is regularly discovering new information linking disease with genetic markers. In turn, this is fuelling the demand for increased genetic diagnostic testing and intervention therapies in order to improve disease management, improve healthcare and manage costs.   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.  Innovative technology, such as that being developed by Osmetech, is expected to continue to facilitate cost effective and simpler testing to enable wider adoption by healthcare professionals.

Against this exciting market backdrop, Osmetech ’s Molecular Diagnostics Division is focused on decentralised testing by providing practical, cost effective molecular diagnostic technologies and tools that enable a broader range of hospitals and laboratories to offer molecular diagnostic services for improved patient care. The Group’s strategy has been to design low cost products specifically for the diagnostics market to run specific tests rather than adapt complicated high cost research products which are designed for a number of different applications.

Recent product launches
Osmetech has recently launched three products in the field of molecular diagnostics as set out below:
CMS eSensor™

The eSensor™ system is primarily suited to undertaking relatively complex molecular tests which require the analysis of a multiplicity of genetic information. Combining universal platform design and a patented advanced electrochemical detection technology, the eSensor™ system can detect and identify many different targets at once. The technology is protected by strong international intellectual property, including 70 patents in the US alone, which had benefited from an investment of approximately $100 million by Motorola during its period of ownership.

Earlier this year Osmetech received 510(k) clearance from the US FDA for its Cystic Fibrosis carrier detection test and its eSensor™ 4800 DNA Detection instrument platform. This FDA approval is a first for a combined instrument and consumable Cystic Fibrosis assay. The system assesses whether an individual carries the Cystic Fibrosis gene and is used by adult couples contemplating pregnancy.

The instrument platform and microarray consumable forming part of this approval will also be used for testing other conditions.
OPTI TUBE™

The OPTI TUBE™ product line consists of plastic tubes and ergonomically designed sealing caps and carousel for use in the Roche LightCycler (a market leading instrument used in PCR analysis), as a replacement for the Roche glass capillaries, sealing cap and carousel. OPTI TUBE™ is a cost effective, robust alternative solution that eliminates the dangers of glass breakage and minimises the risk of laboratory personnel being exposed to potentially dangerous samples and glass shards. The same plastic technology has been incorporated into consumables to be supplied for use with Osmetech’s OPTI GENE™ instrument.
Osmetech has also granted a worldwide non-exclusive license to Roche for the manufacture and sale of plastic consumable vials using this proprietary plastic tube technology, in respect of which the Company has recently been granted its first patent.
OPTI GENE™

The OPTI GENE™ is a fast and flexible system for the detection of DNA and RNA targets using technologically proven PCR based assays suitable for simple molecular tests. It is a compact, self-contained instrument that employs a graphics driven touch-screen user interface and a conveniently packaged OPTI TUBE™ consumable. The system provides independent thermal controls for each sample position, as well as random access for each of the three 4-sample cassettes. Osmetech has initially launched this instrument with thrombophilia assays and in time expects that the instrument platform and proprietary consumable will be used for testing a wide range of conditions.

The combination of the OPTI GENE™ and eSensor™ products should enable both simple and more complex molecular diagnostic tests to be performed accurately by hospitals in a cost effective and easy to use format. Unlike many competing products, the OPTI GENE™ and eSensor™ products combine both an instrument platform and proprietary assay-specific consumables.  New tests launched will use the same instrument platform and consumable format thereby increasing sales revenues for each instrument in use.

Future products
The next Osmetech molecular tests targeted for FDA submission are the Group's Cytochrome P450 ("CYP 450") pharmacogenomics assays which are currently in development. The CYP450 family of enzymes provides relevant genetic information for drug metabolism, with the first FDA approved test having been launched by Roche at approximately $500 per test.
Pharmacogenomics, or 'personalised medicine', is a growth area for molecular diagnostics.  The Company's recently announced agreement with Epidauros Biotechnologie AG will allow Osmetech to gain access not only to novel biomarkers but also to pharmaceutical companion diagnostics, potentially providing Osmetech with an extensive pipeline of pharmacogenomic products beyond the three currently under development and outlined below for the Cytochrome P450 family of enzymes:
2C9/VKORC1:  These markers play a specific role in predicting a patient’s response to the anticoagulant Warfarin and to the commonly prescribed anti-epileptic drug Phenytoin.

2D6:   Markers from 2D6 are involved in the metabolism of 25% of the most commonly prescribed drugs to date, including anti-depressants, anti-psychotics and Tamoxifen.

2C19:  Markers from 2C19 are involved in the metabolism of many drugs, including methadone, anti-depressants, NSAIDs, and HIV anti-virals.

Details of the Disposal
Pursuant to a conditional sale and purchase agreement dated 15 December 2006, between Osmetech, other members of the Group, and IDEXX,  IDEXX has agreed to acquire the business and assets (save for cash, intercompany receivables between Group companies, and various other assets) of the Critical Care Division for a consideration of $44.9 million payable in cash on Completion.  IDEXX will not assume any liabilities of the Division except for trade creditors, other creditors, accruals and provisions in so far as these are recorded in the statement of net assets at Completion.  All remaining liabilities will remain with the Group, including contingent liabilities of the Division and breach of contract claims (if any) arising from the Group's conduct of the business prior to Completion.  The consideration payable is subject to a post-Completion adjustment, either up or down on a $ for $ basis, if the net asset value of the Division at Completion, as determined by a statement of net assets to be agreed between the parties, is more or less than $5.85 million (being a benchmark level of the estimated book value of the net assets of the Critical Care Division at Completion, excluding cash, debt and inter-company balances).

The Acquisition Agreement contains warranties given by the Sellers to IDEXX in connection with the business of the Critical Care Division and an indemnity from Osmetech in favour of IDEXX in relation to all pre-Completion liabilities of the Division and various other matters.

The Disposal is conditional, inter alia, upon the approval of Shareholders at the EGM.  In the event that, inter alia, the Board changes its recommendation of the Disposal pursuant to this document, IDEXX Sciences has the right to terminate the Acquisition Agreement.  Were IDEXX to exercise this right, Osmetech has agreed to pay to IDEXX a break fee of $1 million.
As certain of the administration functions of the Group are being disposed of with the Critical Care Division, IDEXX will, on Completion, enter into a transitional services agreement with members of the Group pursuant to which IDEXX will agree to provide the Group with certain administrative services, including payroll administration, IT and telecommunications, for a period of up to nine months from Completion at cost.

As Alfred Marek, a Director, is the President of the Division, he will, along with approximately 80 other employees, transfer with the Division on Completion to IDEXX and will step down from the Board at this time.  The Company's 2003 US Equity Compensation Plan does not provide satisfactory rights for the employees of the Division who are participants under the Plan in the circumstances of the Disposal as the sale of the Division is structured as a sale of the assets and business rather than the sale of shares in a corporate entity.  Accordingly, the Board has exercised its power of amendment under the Plan to allow those relevant participants who will leave the Group in connection with the Disposal an opportunity to exercise their otherwise unvested options under the Plan ("Accelerated Options").  The Accelerated Options, representing approximately 3.47 per cent. of the existing issued share capital of the Company, will vest three months after Completion.  All options held by the departing employees under the Plan will lapse on 31 December 2007, unless they have either been exercised or have otherwise lapsed.
Assuming all conditions have been satisfied, Completion is expected to take place on 31 January 2007, although the parties have until 31 March 2007 for all conditions to be satisfied.

Reasons for the Disposal and Use of Proceeds from the Disposal  
Following Completion, the Board intends to focus the Group's strategy on accelerating the development and expansion of the Molecular Diagnostics Division, both organically and by selective acquisitions.  The Directors believe that there are significant commercial opportunities to grow the business in this rapidly evolving and potentially lucrative market sector, and that the proceeds from the Disposal will facilitate delivery of this strategy.  The Board also believes that the Group's prospects should benefit from the management team concentrating its efforts fully on the Molecular Diagnostics Division.

The Board considers that selective acquisitions in the molecular diagnostic market will be a key driver to the Board's growth strategy.  The Disposal demonstrates the value of the Directors' ability to acquire businesses as a successful means of creating significant value for Shareholders and the Company is currently analysing a number of acquisition opportunities in the molecular diagnostics sector. Furthermore, the Disposal is an opportunity for the Company to realise much of the future value in the Critical Care business now, as well as strengthen the balance sheet of the Group and remove shareholder concerns over the Group’s future funding requirements.

The Board expects that the capital expenditure and operating costs of the Group will continue to be significant for at least the next two years.  Prior to the Disposal, the Board had intended to fund the Group's operating costs and the development of the Molecular Diagnostics Division, at least in part, from the profits of the Critical Care Division.  If the Disposal is completed, the Board will now be able to fund these costs and accelerate the expansion and development of the Molecular Diagnostics Division from the proceeds of the Disposal and the Group's existing resources.  As part of this strategy, inter alia, the Board intends to:
progress with the development and commercialisation of the Group's existing product pipeline including the second generation eSensor™ instrument secure licensing agreements that will add assay content, and therefore revenues, for the Group's instrument platforms continue to explore selective acquisition opportunities which will strengthen and expand the Group’s presence in the molecular diagnostics market negotiate licensing agreements and enter into strategic partnerships in non-healthcare markets, thereby leveraging the strength of the Group’s instrument platforms, technology and intellectual property.

The Board believes that the development and expansion of the molecular diagnostics market will present acquisition and licensing opportunities that will enable Osmetech to further grow its molecular diagnostics business. The funds available to Osmetech following the Disposal will give Osmetech the necessary freedom and flexibility to properly pursue these opportunities.
After Completion, the Directors' current intention is that the net proceeds from the Disposal will be invested in short term securities while the Directors consider how best to utilise the funds in delivering the Group's strategy as set out above.  In the unlikely event that these funds are not required by the Group, the Directors will look to return surplus funds to Shareholders.  Any such return of capital may have adverse tax consequences for Shareholders.  In considering how any such funds might be returned to Shareholders, the Directors will take into account, amongst other things, the tax implications for Shareholders.

Proposed Long Term Incentive Awards
Osmetech also intends to grant Long Term Incentive Awards to a Director and certain senior employees of the Company over, in aggregate, 2.33 per cent. of the existing issued share capital of the Company.  Further details of the proposed grant of Long Term Incentive Awards are set out in the Circular.

Current Trading and Prospects
Critical Care Division
Sales in the current year for the Division’s OPTI™ range of blood gas analysis products have remained strong in both the human and veterinary markets.  The Board expects the strong levels of demand in the Critical Care Division to continue and therefore it to be another year of significant progress for the Division.
Molecular Diagnostics Division

Osmetech continues to make significant progress with the commercialisation of its molecular diagnostics products. The Group has been successful in securing a number of customers for the Group's FDA approved eSensor™ Cystic Fibrosis Carrier Detection test and eSensor™ 4800 DNA Detection instrument. For example, a customer has recently signed a two year contract with minimum consumable usage rates of approximately $75,000 per year and the Board believes that its actual usage rates may soon be in the region of $250,000 per annum.  The manufacturing scale-up process and product performance have been satisfactory throughout this critical initial sales period and the Directors are confident that the Group will be able to expand sales moving into next year as the installed base of instruments increases.

OPTI GENE™ sales are expected to commence early in 2007 and OPTI TUBE™ has generated much interest since its recent launch and a number of successful customer trials are yielding positive results that should lead to sales in the near future.
Outlook

If the Disposal is completed, the Directors anticipate that the Company should have sufficient funds to support the Group's operating costs and the current planned development and expansion of the Molecular Diagnostics Division.  The Board believes that there is considerable scope to create significant further value for Shareholders in the Group's Molecular Diagnostics Division, given that Osmetech has established a significant early presence in this fast growing market through a strong product and intellectual property portfolio.  The Board continues to view the Group’s prospects for its Molecular Diagnostics Division with optimism.

Effect of the Disposal
The Critical Care Division accounted for nearly all of the Group’s revenue during the two calendar years ended 31 December 2005.  Furthermore, the Division generated profit before tax of £45,000 and £89,000 for calendar year 2005 and the six months ended 30 June 2006 respectively, compared to the losses before tax of £6,556,000 and £6,346,000, for the same respective periods, for the Group as a whole.

Revenues from the Molecular Diagnostics Division in the financial year ending 31 December 2006 will not be significant.  The cash balances of the Group as at 30 November 2006 were £7,985,000.
The sale of the Critical Care Division will leave the Company with a strong cash position to fund the Group's operations and future growth of the Molecular Diagnostics Division.

Definitions
The following definitions apply throughout this announcement unless the context requires otherwise.

Full Circular - Proposed sale of Critical Care Division