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Osmetech plc ('Osmetech' or the 'Company')
Osmetech plc preliminary results for the 12 months ended 31 December 2008
1 April 2009
Highlights
- Loss for the year of £15.5 million (2007 – loss of £12.0 million, from continuing operations)
- Revenue increases by 108% to £352,000 (2007 - £169,000)
- FDA clearance and launch of second generation instrument platform, eSensor XT-8, with Warfarin sensitivity test
- CYP4F2 biomarker provides unique position in rapidly developing Warfarin testing market
- Installed base of instruments growing and excellent customer feedback received on operational performance
- U.S. distribution agreement with Fisher Healthcare will accelerate revenue growth
- Strong pipeline of tests to expand product menu in 2009
- Development and supply agreement with QIAGEN for QIAplex-based respiratory viral molecular test
- December 2008 share placing raises £6.9 million before expenses; rationalization program implemented to reduce cost base
- Sufficient funding to support the business until July 2009
- Strategic options and further funding alternatives under review
James White, Chief Executive, Osmetech plc, said:
“With FDA 510k clearance for our eSensor XT-8 platform achieved in 2008 and excellent product performance in the field, our focus is now on growing revenues by increasing our installed base of instruments and expanding our menu of tests.
“The commercial roll out of our platform continues to gather pace with a growing number of hospitals now using our platform. We have a strong pipeline of customer leads and we expect to accelerate market penetration through the considerable sales and marketing muscle of our newly appointed U.S. distributor, Fisher Healthcare.
“We are also broadening our test menu and are now able to offer Cystic Fibrosis, Warfarin and 2C9 tests with additional tests planned for later in 2009, including a Respiratory Pathogen Test Panel and Factor II, Factor V and MTHFR Tests. All of these tests will run on our eSensor XT-8 platform and will improve both patient care and the profitability of our customers’ laboratories.”
Osmetech plc +44 (0)207 849 6027
James White, Chief Executive Officer
David Sandilands, Chief Financial Officer
Canaccord Adams Limited +44 (0)207 050 6500
Robert Finlay / Henry Fitzgerald O’Connor
Madano Partnership +44 (0) 207 593 4000
Mark Way / Matthew Moth
Chairman’s statement
At the start of 2009, Mark Lappe and I were appointed to the Osmetech board, and this represents my first opportunity to formally address shareholders. We represent Osmetech’s largest shareholder, Efficacy Capital, and have decided to increase our interests in the business as we believe that Osmetech has the strong potential to become a very successful player in the rapidly growing molecular diagnostics market. The Company is well placed to take advantage of what we believe will be one of the next major shifts in healthcare: personalized medicine, using genetic information to tailor treatment to the individual. We believe that the rewards of success for Osmetech significantly outweigh the risks involved.
We are particularly excited about the prospects for the development of the Warfarin sensitivity testing market and the clear alignment of benefits for the patient, the practicing physician, the hospital and the insurance company. There is considerable evidence in support of routine Warfarin testing and we believe that this market is approaching an inflection point where testing could begin to accelerate to the point of becoming widespread and standard of care. Osmetech is in an excellent position to capitalize on this with an FDA-cleared Warfarin Sensitivity Test and a new extended version of the test, which includes the important new biomarker, 4F2, unique to the Company.
Following FDA clearance and launch in July 2008, our eSensor XT-8 has performed extremely well in the field, providing our customers with an excellent user experience. Our easy-to-use and cost effective system now enables our customers to perform molecular testing in-house. As a consequence, patient care is improved by producing faster test results, and the hospital benefits financially by claiming profitable reimbursement for running the test.
Many of the risks that an organization such as Osmetech faces at this stage in its development have been largely overcome. Our electrochemical detection technology is proven and robust and is protected by a very strong patent portfolio. We have developed a reliable and repeatable, regulated manufacturing process and have created a commercial infrastructure capable of supporting the growth of our business. We have an established method for creating new tests and have a product development team with the skills to deliver these.
We firmly believe that we have a superior instrument platform and have a strong pipeline of tests to satisfy the requirements of the market. Our key operational challenge is now executing on our business plan to expand the use of our eSensor platform by increasing the installed base of instruments and providing a growing menu of tests. We have accelerated this strategy by signing agreements with industry leaders, Qiagen and Fisher Healthcare, for a respiratory pathogen test and U.S. distribution rights respectively.
We believe that Osmetech is an intrinsically strong company but remains under-capitalized. In order to fully execute our strategy we require further funding. The Board continues to consider all strategic options to maximize shareholder value, including attracting further funding into the business, either through investors or commercial partners, a merger of the business with a complementary third party business, or the sale of the Company. I look forward to updating you in due course.
Jon Faiz Kayyem
Chairman
1 April 2009
Chief Executive Officer’s Review
Introduction
The FDA clearance and launch of our second generation instrument platform, the eSensor XT-8, in 2008 marked a significant step towards our aim of commercialising our proprietary electrochemical detection technology to provide a low cost, easy to use technology for molecular diagnostics testing.
At the same time as the FDA clearance for the eSensor XT-8, we also received clearance for our eSensor Warfarin Sensitivity Test which represents a significant market opportunity for Osmetech.
Warfarin market opportunity
Warfarin decreases the blood’s clotting ability and is the most widely prescribed oral anticoagulant in North America and Europe. Individuals metabolize Warfarin differently, and if its administration is not managed carefully, life threatening side effects may occur. In the U.S. alone there are an estimated 2 million new Warfarin patients each year and it is the second most likely drug, after insulin, to send Americans to the Emergency Room, resulting in an estimated 43,000 visits a year and many hospitalizations.
Current clinical practice involves a ‘trial and error’ process for the physician to determine the appropriate dosing level for the drug on a patient-by-patient basis. There is now rapidly growing awareness of the influence of genetic factors in establishing correct dosing levels, supported by scientific and medical research. Furthermore there is now an increasing weight of compelling economic data to support such testing, demonstrating that not only can patient care be improved but testing can save costs.
We believe that the market is now at a tipping point where Warfarin sensitivity testing will become a standard of care, resulting in widespread genetic testing for the substantial number of new Warfarin patients.
In August 2007, the FDA updated the label for Warfarin to note that people with variations of the genes CYP2C9 and VKORC1 may respond differently to the drug. This has now been followed up by the American Medical Association (AMA) sending literature to U.S. physicians promoting the use of genetic testing as best practice when establishing Warfarin dosing for patients. The Joint Commission, strong influencers and monitors of hospital laboratory practice, have identified anticoagulation therapy, including Warfarin dosing, under their main guidelines for improving patient safety in 2008 and 2009.
In January 2009, results of the largest prospective study yet performed supported the use of genetic testing for Warfarin patients. The study conducted by the Department of Medical Sciences, Clinical Pharmacology, Uppsala University Hospital, Uppsala, Sweden, commenced in 2001 and monitored 1,496 new Warfarin patients, assessing the impact of the three main genetic markers that are known to play a critical role in metabolism of, and sensitivity to, Warfarin. It concluded: “We have shown that in a large prospective study, VKORC1 and CYP2C9 predict Warfarin dose and individuals predisposed to unstable anticoagulation during initiation of therapy. We anticipate that adequately sized clinical trials of patients randomized to pharmacogenetic versus conventional dosing will demonstrate that Warfarin dose prediction improves the safety and cost effectiveness of oral anticoagulant treatment.”
In February 2009, a paper published in the New England Journal of Medicine by The International Warfarin Pharmacogenetics Consortium described how clinical and genetic data from 4,043 patients were used to create a dosing algorithm that was based on clinical variables only and an algorithm in which genetic information was added to the clinical variables. The algorithms were validated on a group of 1,009 patients and the study, which is by far the largest and most inclusive of its kind to date, concluded that the use of a pharmacogenetic algorithm for estimating the appropriate initial dose of Warfarin produces recommendations that are significantly closer to the required stable therapeutic dose than those derived from a clinical algorithm or a fixed-dose approach. In an accompanying editorial, two senior FDA representatives supported the findings, noting that a high proportion of the population (46%) were outliers and required higher or lower doses than the ‘average’ patient.
The National Heart, Lung, and Blood Institute (NHLBI) is now in the process of launching the largest prospective, multi-center, randomized clinical trial in the United States to test whether a gene-based strategy for prescribing the initial Warfarin dose will improve patient outcomes. The clinical trial will use a dosing strategy similar to that developed in the international study and will enroll 1,200 participants of diverse backgrounds and ethnicities at twelve clinical sites.
In addition to the improved standard of care for patients, there are a number of key organizations who are also driving this change from an economic perspective, excited by the costs that can be saved in healthcare budgets. The organizations include Medco, a leading U.S. pharmacy benefit manager (PBM), with the nation's largest mail order pharmacy operations and 60,000 retail pharmacies.
Warfarin - Osmetech’s unique position
Osmetech’s FDA-cleared Warfarin Sensitivity Test provides genetic information relating to the three principal biomarkers for the metabolism of the drug. In addition, our Extended Warfarin Sensitivity Test incorporates additional markers, including the exclusively-licensed CYP450-4F2 biomarker, unique to Osmetech. The results of recent independent clinical studies support the significance of CYP4F2. A 2008 publication in Blood (Journal of the American Society of Hematology) concluded that the CYP4F2 marker significantly improves genetic data for Warfarin dosing. Other studies including recent 2009 publications from researchers in Spain and another group from Italy have confirmed and strengthened the importance of the 4F2 variant.
They concluded that CYP4F2 increases the reliability of the Warfarin pharmacogenetic test. When CYP4F2 is included with CYP2C9 and VKORC1 genetic variants, age and weight an additional 7% of the interpatient variability in Warfarin dose response is explained. Further independent studies are in progress.
Additionally, the significance of our unique CYP4F2 biomarker has been recognized by WarfarinDosing.org. This is a free Web site dedicated to helping doctors and clinicians estimate the most appropriate therapeutic dose for patients already prescribed Warfarin initiating Warfarin therapy by integrating genetic, phenotypic and therapeutic information. The adddtion of CYP4F2 to the WarfarinDosing.org dosing algorithm uniquely positions this algorithm as the leading comprehensive clinical utility tool.
We believe that the combination of ‘best platform’ and ‘best test’ should position Osmetech as a leader in this market, which we believe is poised for significant growth.
Molecular Diagnostics Market
According to Frost & Sullivan, a market research firm, the 2007 worldwide in-vitro diagnostics, or IVD, market was estimated to be $35 billion, and is anticipated to reach $43 billion by 2010. Its fastest growing segment, the molecular diagnostics market, was $2.5 billion in 2007 and is anticipated to reach $3.7 billion in 2010. This new and expanding part of the IVD market emerged in response to a need for more rapid, sensitive and specific diagnostic tests than were available using only traditional techniques, such as growth-based tests, biochemical tests or immunoassays.
We believe several factors contribute to the growth of this market, including:
- Decentralization of genetic testing;
- Conversion from “home-brew” tests to FDA-cleared molecular testing methods;
- Expansion of genetic testing for disease predisposition;
- Advances in pharmacogenomics and personalised medicine; and
- Growth of the infectious disease diagnostic market.
Osmetech’s Solution
Traditionally, the market for molecular diagnostics testing has been dominated by testing methods that rely on optical or fluorescence technologies and complex research based instruments adapted to meet the very different demands of the clinical environment. These technologies are expensive to operate and require specialised facilities and highly-trained personnel. In addition, the devices that utilise these technologies are sensitive to dust, debris and movement and require specialised care and maintenance.
By contrast our eSensor platform is a simple, ‘clinical lab ready’ system designed specifically for the molecular diagnostics market and fits perfectly into routine workflows. The platform is based on electrochemical technology that uses chemical reactions to detect the presence of molecules, which in turn produce characteristic electrical currents. This technology, which is unique in the molecular diagnostics field, has been proven in other clinical applications (such as blood glucose home testing for diabetics) to deliver accurate and reproducible results in small, robust and affordable formats. Osmetech has strong intellectual property supporting the use of this technology for the detection of DNA, RNA and proteins.
Our unique eSensor platform permits multiplexing, or simultaneously running multiple tests on individual samples, and random access testing, or the ability to initiate tests while other tests are in progress. It is a compact bench-top workstation with an integrated touch screen computer and disposable test cartridges that can process up to 3,000 tests a week. It provides a definitive result within 30 minutes with limited operator involvement and requires little or no maintenance.
Our business model
We are principally targeting those reference laboratories and hospitals that already possess molecular testing skills but currently do not have a solution for our particular tests. Our target customers will typically be sending their testing out to larger institutions but would prefer to retain testing in-house in order to provide faster results for the patient and to improve the profitability of their laboratories. Osmetech is one of a small number of companies with the capability of meeting the needs of this decentralizing and growing market.
Our business model is currently to provide customers with an instrument under a reagent rental agreement earning Osmetech revenues from the sale of tests. The customer incurs no upfront capital expenditure and has minimal labour costs and dedicates only a small amount of laboratory space for running the test. With attractive reimbursement levels in place, molecular diagnostic testing instantly becomes profitable for our customers.
The combination of growing the installed base of instruments and broadening our test menu by launching new assays has a multiplier effect which should allow Osmetech to build a fast growing, high quality revenue stream.
Commercial progress
At the end of December 2008 we had grown our installed base of instruments with customers to 34, comprising 13 evaluation and 21 contract units. We have increased this total to 49 during the first three months of 2009 and have seen a continuation of the excellent conversion rate from evaluation to contract. We have yet to lose an evaluation to a competitor and the XT-8 has been rated ahead of competitor products by two recent independent studies. This success has been driven by an excellent user experience, with a reported 100% system performance, which compares very favourably to competing products that often report high ‘no-call’ rates requiring the re-processing of a sample.
Distribution partner
We have a relatively small in-house sales force and in order to capitalize on the significant market interest for our products and the growing number of customer leads, we have entered into a five-year U.S. distribution agreement with Fisher Healthcare, a division of Thermo Fisher Scientific Inc. (Fisher).
Fisher has a significant presence in the U.S. diagnostics market with 6 molecular sales specialists and over 150 generalist healthcare sales representatives.
Test menu and pipeline
We intend to develop and market a broad range of DNA tests in the fields of genetic testing, pharmacogenomics, infectious diseases and cancer. Having the ‘best platform’ has enabled us to secure exclusive rights to the important new genetic marker for Warfarin, the CYP450 4F2 biomarker and to enter into an agreement with QIAGEN to adapt their QIAplex-based respiratory viral test, which is already a commercially successful product, for use on our eSensor XT-8 System.
The current menu of tests commercially available for use on our eSensor XT-8 System comprises:
- Warfarin Sensitivity Test for the three most relevant CYP2C9/ VKOR biomarkers associated with Warfarin metabolism. FDA 510(k) clearance obtained in July 2007.
- 2C9 Drug Metabolism Test for CYP2C9 biomarkers associated with metabolism of phenytoin and most non-steroidal anti-inflammatory drugs. Launched as a research use only product in November 2008.
- Cystic Fibrosis Test for pre-conception screening of cystic fibrosis gene carriers for use with the eSensor XT-8 System. Launched as a research use only product and an application for 510(k) clearance submitted to the FDA in March 2009.
We are currently developing additional tests to expand our test menu for the eSensor XT-8 System, in each case focussing on validated content where external research has already identified the relevant biomarkers. These tests include the following:
- Extended Warfarin Sensitivity Test based on the eSensor Warfarin Sensitivity Test, this test incorporates a number of additional markers, including the exclusively-licensed CYP450-4F2 biomarker. An application for FDA 510(k) clearance was filed in December 2008.
- Respiratory Pathogen Test Panel to detect major respiratory viruses and aid in the identification of bacterial and viral infections. This test will adapt QIAGEN’s QIAplex-based respiratory viral test for use on the eSensor XT‑8 System and is currently in development. We expect to launch as a research use only product in 2009 and will also consider an application for FDA 510(k) clearance.
- Factor II, Factor V and MTHFR Test venous thrombosis test for the most common mutations associated with increased risk of blood clots, which can lead to stroke and pulmonary embolism. This test is currently in development and we expect to launch as a research use only product in 2009 and will also consider an application for FDA 510(k) clearance.
- 2D6 Drug Metabolism Test for CYP2D6 biomarkers associated with metabolism of a variety of prescription drugs including antipsychotics, anti-depressants and anti-thrombolytics. This test is currently in development and we expect to submit an application for FDA 510(k) clearance if and when development is completed.
- Tamoxifen Sensitivity Test for metabolism of the breast cancer drug Tamoxifen. This test is currently in development and we expect to submit an application for FDA 510(k) clearance if and when development is completed.
- 2C19 Plavix Test for metabolism of the anti-platelet drug Plavix (Clopidogrel). This test is currently in development and we expect to submit an application for FDA 510(k) clearance if and when development is completed.
- We anticipate adding further tests to our development pipeline during the course of the coming year, particularly in the fields of personalised medicine and cancer, where the market opportunities are highly attractive.
Fund raising
The global molecular diagnostics market and the knowledge and understanding of healthcare technology companies are heavily centred on the US. A significant number of emerging healthcare technology companies trade on NASDAQ. In September 2008 we announced proposals to undertake an issue of American Depositary Shares (ADS) and obtain a listing of such shares on the NASDAQ Global Market. With market conditions proving very difficult and deteriorating further, we concluded that there was insufficient interest to proceed with the ADS Issue and the NASDAQ Listing at that time. Given the Company’s further funding requirements, in December 2008 we raised £6,662,609, net of expenses, through the placing of new shares to institutional shareholders, which should provide sufficient funds to support the business until July 2009. We are currently evaluating options to provide further funding for the Group.
Financial review
Loss
The loss from continuing operations increased by 28% from £12,030,624 in 2007 to £15,451,979 in 2008 and the net loss per share from continuing operations increased by 17% from 5.93 pence in 2007 to 6.93 pence in 2008. The operating loss for the period increased 20%, primarily resulting from £1,195,536 costs incurred in connection with the withdrawal of a proposed issue and ADS listing on NASDAQ in the U.S. and currency exchange rate differences between the two periods amounting to 8%.
Revenue
Revenue increased from £169,273 in 2007 to £352,069 in 2008. The increase of £182,796, or 108%, was principally a result of the growth in sales of our eSensor Cystic Fibrosis Carrier Detection Test, although currency exchange rate differences accounted for 19% of the increase. Product sales were £116,288 and £305,163 (an increase of 162%) and license revenues were £52,985 and £46,906 (a decrease of 11%) in 2007 and 2008, respectively.
Changes in inventories of finished goods and work in progress
Changes in inventories of finished goods and work in progress increased from £92,818 in 2007 to £312,106 in 2008. The increase of £219,288, or 236%, was principally as a result of manufacturing additional eSensor Cystic Fibrosis Carrier Detection Tests in 2008, following the growth in our installed base of eSensor 4800 instruments. Gross profit for product sales (defined as product sales less changes in inventories of finished goods and work in progress and royalties on product sales) decreased from a profit of £23,470 in 2007 to a loss of £6,943 in 2008 representing 20% and (2)% of product sales in 2007 and 2008, respectively.
We expect the gross profit on product sales to improve significantly in 2009 as we increase our sales of eSensor XT-8 test cartridges. These have a much lower cost of goods than our first generation test cartridges for the eSensor 4800 System. Furthermore, we have identified further cost reductions and manufacturing efficiencies for XT-8 cartridges which we expect to progressively achieve in the coming year.
Employee benefits
Employee benefits costs increased from £6,413,616 in 2007 to £6,882,569 in 2008. The increase of £468,953, or 7%, includes a reduction in the level of share compensation charges from £450,317 for 2007 to a credit of £314,881 for 2008 primarily due to a revision of expectations for achieving performance targets for management long-term incentive plans. The base level of payroll costs was higher in 2008 reflecting the higher average number of employees in the year for continuing operations, which increased by 17% from 94 in 2007 to 110 in 2008, although this cost increase was partially offset by a substantial reduction in bonus payments. In December 2008 we undertook a rationalisation program and have reduced staffing levels to approximately 60 employees which will significantly reduce employee benefits costs in 2009. The cost of this program in respect of one-off employee benefits costs in 2008 was £421,785.
Research and development costs
Research and development costs increased from £2,595,179 in 2007 to £2,667,855 in 2008, an increase of £72,676, or 3%. Excluding currency exchange rate differences between the two periods amounting to approximately 8%, costs decreased by 5% in 2008 reflecting lower systems development costs, as the development of the eSensor XT‑8 System was completed during the year. This reduction was partially offset by an increase in costs related to the development of new tests during the period.
Depreciation and amortization
Depreciation and amortization expense increased from £589,611 in 2007 to £714,637 in 2008. The increase of £125,026, or 21%, resulted from both an increase in the amortization of license costs and increased depreciation in respect of plant, machinery and laboratory instruments.
Other expenses
In total, other expenses increased from £3,526,449 in 2007 to £5,383,198 in 2008. This increase of £1,856,749, or 53%, principally reflects £1,195,536 (2007 - £NIL) costs incurred in connection with the withdrawal of a proposed ADS issue and listing on the NASDAQ Global Market in the U.S.
Interest on bank balances and term deposits
Interest on bank balances and term deposits decreased from £864,143 in 2007 to £213,259 in 2008. The decrease of £650,884, or 75%, resulted primarily from a reduction in average cash balances during the year, due to the ongoing operating expenses of the business.
Taxation
There have been no UK activities during 2008 that would qualify for research and development tax credits as compared to 2007 during which we qualified for net tax credits of £153,633. The tax charge in 2008 of £122,572 primarily reflects a reduction in the estimated credits available in respect of 2007.
Liquidity and Capital Resources
Cash and cash equivalents decreased from £13,910,710 at 31 December 2007 to £6,034,926 at 31 December 2008, a decrease of £7,875,784, or 57%. The decrease of cash and cash equivalents was principally due to the use of £14,305,945 in operating activities, offset by the net proceeds from the issue of shares in 2008 amounting to £6,662,609. Cash and cash equivalents at 28 February 2009 were £3,842,861.
Net cash used in operating activities increased from £14,121,176 in 2007 to £14,305,945 in 2008, an increase of £184,769, or 1%, and a decrease of approximately 7% excluding the impact of currency exchange rate differences between the two periods. The movement was primarily due to two factors: an increase in operating cash outflows before movements in working capital of £2,739,237 mainly resulting from an increase in the loss from continuing operations, offset by a reduction in net working capital of £615,836 in 2008 compared to an increase of £1,542,334 in 2007. The decrease in net working capital in 2008 is principally due to an increase in creditors in 2008 reflecting the agreed payment deferral of certain professional costs associated with the cancellation of the proposed ADS issue and listing of such shares on NASDAQ in 2008.
Net cash used in investing activities from continuing operations increased from £156,830 for 2007 to £760,989 in 2008, representing an increase of £604,159. The increase is primarily explained by the reduction of interest received on bank balances and term deposits.
Net cash generated from/(used in) financing activities increased from (£559,228) in 2007 to £6,662,609 in 2008, an increase of £7,221,837. The increase primarily reflects the net proceeds from the issue of shares in 2008 amounting to £6,662,609 and the payment of £480,845 made to redeem share warrants in 2007.
Going concern
Osmetech had cash and cash equivalents of £6.0m as at 31 December 2008 and incurred a loss of £15.5m for the twelve months ended 31 December 2008. The Group’s directors have prepared a detailed cash flow forecast for the period ending 31 December 2010 (“the forecast”) which includes a number of assumptions regarding income, expenditure, cash flows and the availability of future finance for the Group.
In preparing the forecast, the directors have taken into account the recent trading activity of the Group, notably the increased trading that will result from the FDA approval of the XT-8 instrument in July 2008. The directors have also reviewed the number and value of instruments currently out in the field under an evaluation contract, taking into account the historical conversion rate of evaluation into revenue generating consumable contracts, the cost base and capital required to deliver on the income forecast, the availability and timing of finance required in July 2009, and the assumptions relating to the timing of the Group’s cash flows.
However, given the nature of the Group’s business, typified by the fact that the Group’s products are at an early stage in their market development and the time required to negotiate instrument placements and finalisation of contracts, in conjunction with the current global economic climate, it is inherently difficult to accurately forecast the timing of contract signatures and the associated subsequent cash flows. In this regard the directors have made reasonable assumptions regarding the placement of instruments under contract and ultimately conversion to cash inflows.
In addition the Group’s forecasts indicate the need for additional financing within the next 12 months. Based on current information available to them and the historical availability of financing options the directors believe that they will be successful in raising further funding. This assumption is based on the recent successful issue of share capital and the directors’ confidence in the potential of the business. The directors therefore consider it reasonable to assume they will be successful in raising sufficient funds in the time period required in their assessment of the going concern basis of preparation of the financial statements.
The factors set out above highlight there are material uncertainties in providing an accurate forecast for the Group, being the difficulty in accurately forecasting the timings of contract signatures and the subsequent cash receipts, and the requirement to raise additional finance. This therefore may cast doubt about the Group’s and Company’s ability to continue as a going concern for the foreseeable future and as a result it may be unable to realise its assets and discharge its liabilities in the normal course of business. Notwithstanding, the directors believe that they have a reasonable expectation that the Group and Company will be able to raise sufficient funds to enable the Group to continue as a going concern for the foreseeable future.
Outlook
The past year has been one of significant development for the Company with the successful launch of our second generation instrument platform, the eSensor XT-8, together with our Warfarin Sensitivity Test, following FDA clearance.
However with difficult conditions in the financial markets we have rationalised the business and reduced our workforce. We have accomplished this without negatively effecting operational activity and cost savings have been realised. The excellent operational performance of the eSensor XT-8 in the field is a testament to the skill and dedication of our employees, past and present, who have worked tirelessly to bring the product to market and help create the basis of the strong business we have today. However, financial markets remain challenging and consequently we continue to examine all strategic options for Osmetech to ensure that we have adequate funds for our future requirements.
We will continue to execute on our strategy of commercialising our pipeline of tests and increasing our installed base of instruments in the field. We are focussing on tests with validated biomarkers where there is an established market need. The attraction of our instrument platform is illustrated by the agreement with industry leader, Qiagen, to adapt their existing and widely used respiratory test for use on our eSensor XT-8.
We already have a growing number of strong customer leads and expect to accelerate our commercial expansion further through the distribution agreement recently signed with Fisher in the U.S. We will benefit from Fisher’s considerable sales and marketing strength and established relationship with key customer accounts. This agreement further validates our products and technology.
The roll out of the eSensor XT-8 system has been successful and continues to gather pace. We are establishing the eSensor XT-8 as strong product platform with an expanding test menu in a fast growing market, which allows our customers to improve both patient care and the profitability of their laboratories.
James White
Chief Executive Officer
1 April 2009
Consolidated income statement for the year ended 31 December 2008
|
|
(Unaudited) |
(Unaudited) |
|
Note |
|
Year ended |
Year ended |
|
Continuing operations |
|
|
£ |
£ |
Revenue |
|
|
352,069 |
169,273 |
|
|
|
|
|
Changes in inventories of finished goods and work in progress |
|
|
(312,106) |
(92,818) |
Employee benefits |
|
|
(6,882,569) |
(6,413,616) |
Research and development costs |
|
|
(2,667,855) |
(2,595,179) |
Depreciation and amortisation |
|
|
(714,637) |
(589,611) |
Other expenses |
|
|
(5,383,198) |
(3,526,449) |
|
|
|
|
|
|
|
|
(15,960,365) |
(13,217,673) |
|
|
|
|
|
Operating loss |
3 |
|
(15,608,296) |
(13,048,400) |
Interest on bank balances and term deposits |
|
|
213,259 |
864,143 |
Gains on financial instruments |
|
|
65,630 |
- |
|
|
|
|
|
Loss before taxation |
|
|
(15,329,407) |
(12,184,257) |
|
|
|
|
|
Taxation |
|
|
(122,572) |
153,633 |
|
|
|
|
_________ |
Loss for the year from continuing operations |
|
|
(15,451,979) |
(12,030,624) |
|
|
|
|
|
Discontinued operations |
|
|
- |
- |
|
|
|
|
|
Profit for the year from discontinued operations net of tax |
|
|
- |
16,014,425 |
|
|
|
|
_________ |
(Loss) / profit for the year |
|
|
(15,451,979) |
3,983,801 |
|
|
|
__________ |
__________ |
(Loss) / earnings per share: |
|
|
|
|
|
|
|
|
|
From continuing and discontinued operations |
|
|
|
|
Basic and diluted |
4 |
|
(6.93p) |
1.96p |
|
|
|
|
|
From continuing operations |
|
|
|
|
Basic and diluted |
4 |
|
(6.93p) |
(5.93p) |
|
|
|
|
|
|
|
|
|
|
*The results for the year ended 31 December 2007 have been restated. The effects of these restatements are disclosed in note 5
Consolidated statement of total recognised income and expense for the year ended 31 December 2008 |
||
|
(Unaudited) |
(Unaudited) |
|
Year ended |
Year ended |
|
£ |
£ |
Exchange gain / (loss) on translation of foreign operations |
1,039,827 |
(383,633) |
Realisation of merger reserve on discontinued operations |
- |
1,885,533 |
|
|
|
Transfers: |
|
|
Cumulative translation adjustment on disposal of discontinued operations |
- |
(713,901) |
|
|
|
|
1,039,827 |
787,999 |
(Loss) / profit for the year |
(15,541,979) |
3,983,801 |
|
|
|
Total recognised (expense) / income for the year |
(14,502,152) |
4,771,800 |
|
_________ |
__________ |
Osmetech plc
Consolidated balance sheet at 31 December 2008
|
|
(Unaudited) |
(Unaudited) |
||
|
|
2008 |
2007 |
||
|
|
£ |
£ |
£ |
£ |
Assets |
|
|
|
|
|
Non current assets |
|
|
|
|
|
Other intangible assets |
|
|
1,379,009 |
|
1,162,747 |
Property, plant and equipment |
|
|
1,603,602 |
|
976,220 |
|
|
|
|
|
|
Current assets |
|
|
2,982,611 |
|
2,138,967 |
Inventories |
|
1,109,008 |
|
445,806 |
|
Trade and other receivables |
|
812,261 |
|
367,328 |
|
Current tax assets |
|
153,793 |
|
465,220 |
|
Cash and cash equivalents |
|
6,034,926 |
|
13,910,710 |
|
|
|
|
|
|
|
|
|
|
8,109,988 |
|
15,189,064 |
|
|
|
|
|
|
Total assets |
|
|
11,092,599 |
|
17,328,031 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Trade and other payables |
|
(3,047,844) |
|
(1,273,428) |
|
Current tax liabilities |
|
(8,937) |
|
(8,478) |
|
|
|
|
|
|
|
|
|
|
(3,056,781) |
|
(1,281,906) |
Non-current liabilities |
|
|
|
|
|
Provisions |
|
|
(225,212) |
|
(171,095) |
|
|
|
|
|
|
Total liabilities |
|
|
(3,281,993) |
|
(1,453,001) |
|
|
|
|
|
|
Net assets |
|
|
7,810,606 |
|
15,875,030 |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Called up share capital |
|
|
7,717,443 |
|
7,028,892 |
Share premium account |
|
|
57,730,310 |
|
51,756,252 |
Other reserves |
|
|
1,823,925 |
|
2,138,806 |
Cumulative exchange reserve |
|
|
466,910 |
|
(572,917) |
Accumulated deficit |
|
|
(59,927,982) |
|
(44,476,003) |
|
|
|
|
|
|
Total equity |
|
|
7,810,606 |
|
15,875,030 |
|
|
|
|
|
|
Osmetech plc
Cash flow statements for the year ended 31 December 2008
|
Note |
|
(Unaudited) |
(Unaudited) |
|
|
|
|
|
Net cash used in operating activities |
(a) |
|
(14,305,945) |
(14,121,176) |
|
|
|
|
|
Net cash (used in)/ generated from investing activities |
(c) |
|
(760,989) |
21,864,855 |
|
|
|
|
|
Net cash generated from / (used in) financing activities |
(c) |
|
6,662,609 |
(559,228) |
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalents |
|
|
(8,404,325) |
7,184,451 |
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
13,910,710 |
7,089,106 |
|
|
|
|
|
Effect of foreign exchange rate changes |
|
|
528,543 |
(362,847) |
|
|
|
|
|
Cash and cash equivalents at end of year |
|
|
6,034,928 |
13,910,710 |
|
|
|
|
|
Notes to the Cash Flow Statements
______________________________________________________________________________________________
(a) Reconciliation of (loss) / profit for the year to net cash outflow from operating activities
|
|
(Unaudited) |
(Unaudited) |
|
|
|
|
(Loss)/profit for the year |
|
(15,451,979) |
3,983,801 |
|
|
|
|
Adjustments for: |
|
|
|
Depreciation of property, plant and equipment |
|
584,795 |
479,611 |
Amortisation of other intangible assets |
|
129,842 |
110,000 |
Loss on disposal of property, plant and equipment |
|
20,591 |
18,779 |
Impairment losses |
|
- |
1,057,832 |
Share compensation (credit)/charge |
|
(314,881) |
614,772 |
Interest on bank balances and term deposits |
|
(213,259) |
(864,143) |
Income tax |
|
122,572 |
(153,633) |
Gain on disposal of discontinued operations net of tax |
|
- |
(17,648,646) |
Increase in provisions |
|
54,117 |
2,185 |
Movement in fair value of financial instruments |
|
(65,630) |
- |
|
|
|
|
Operating cash outflow before movements in working capital |
|
(15,133,832) |
(12,399,442) |
|
|
|
|
(Increase) /decrease in inventories |
|
(503,530) |
64,032 |
(Increase) / decrease in receivables |
|
(235,783) |
134,927 |
Increase /(decrease) in payables |
|
1,355,149 |
(1,741,293) |
|
|
|
|
Cash used in operations |
|
(14,517,996) |
(13,941,776) |
|
|
|
|
Income taxes received /(paid) |
|
212,051 |
(179,400) |
|
|
|
|
Net cash used in operating activities |
|
(14,305,945) |
(14,121,176) |
|
|
|
|
Net cash used in continuing operations |
|
(14,305,945) |
(12,611,140) |
Net cash used in discontinued operations |
|
- |
(1,510,036) |
|
|
|
|
|
|
|
|
.
(b) Major non-cash transactions
There were no major non cash transactions in the years ended 31 December 2008 or 31 December 2007.
Notes to the Cash Flow Statements (Continued)
______________________________________________________________________________________________
(c) Analysis of cash flows - Gross cash flows
|
|
(Unaudited) |
(Unaudited) |
Investing activities |
|
|
|
Interest received |
|
218,505 |
890,497 |
Purchases of property, plant and equipment |
|
(1,089,784) |
(658,577) |
Purchases of other intangible assets |
|
- |
(388,750) |
Receipts from the sale of intangible fixed assets |
|
102,606 |
- |
Receipts from the sale of tangible fixed assets |
|
7,684 |
- |
Loans to subsidiaries |
|
- |
- |
|
|
|
|
Net cash (used in) / generated from investing activities (continuing operations) |
|
(760,989) |
(156,830) |
|
|
|
|
Net cash generated from / (used in) investing activities (discontinued operations) |
|
- |
22,021,685 |
|
|
|
|
|
|
(760,989) |
21,864,855 |
|
|
|
|
Financing activities |
|
|
|
Proceeds on issues of shares |
|
6,662,609 |
52,759 |
Cash payments to redeem share warrants |
|
- |
(480,844) |
Cash settlements of repurchased share options |
|
- |
(131,143) |
|
|
|
|
Net cash generated from / (used in) financing activities (continuing operations) |
|
6,662,609 |
(559,228) |
|
|
|
|
|
|
|
|
1. Results
The financial information set out in the announcement does not constitute the company's statutory accounts for the years ended 31 December 2008 or 2007. The financial information for the year ended 31 December 2007 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors have reported on those accounts; their report was modified by the inclusion of an emphasis of matter paragraph which highlighted the existence of a material uncertainty that cast significant doubt on the Company’s and Group’s ability to continue as a going concern; their report was unqualified and did not contain a statement under s498(2) or (3) Companies Act 2006.
The statutory accounts for the year ended 31 December 2008 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. The auditors are yet to sign their report on the statutory accounts for the year ended 31 December 2008 but have indicated that their auditor’s report will be modified by the inclusion of an emphasis of matter paragraph which highlights the existence of a material uncertainty that casts significant doubt on the company’s and Group’s ability to continue as a going concern. Further information is disclosed in note 2.
2. Going Concern
Osmetech had cash and cash equivalents of £6.0m as at 31 December 2008 and incurred a loss of £15.5m for the twelve months ended 31 December 2008. The Group’s directors have prepared a detailed cash flow forecast for the period ending 31 December 2010 (“the forecast”) which includes a number of assumptions regarding income, expenditure, cash flows and the availability of future finance for the Group.
In preparing the forecast, the directors have taken into account the recent trading activity of the Group, notably the increased trading that will result from the FDA approval of the XT-8 instrument in July 2008. The directors have also reviewed the number and value of instruments currently out in the field under an evaluation contract, taking into account the historical conversion rate of evaluation into revenue generating consumable contracts, the cost base and capital required to deliver on the income forecast, the availability and timing of finance required in July 2009, and the assumptions relating to the timing of the Group’s cash flows.
However, given the nature of the Group’s business, typified by the fact that the Group’s products are at an early stage in their market development and the time required to negotiate time consuming process of instrument placements and finalisation of contracts, in conjunction with the current global economic climate, it is inherently difficult to accurately forecast the timing of contract signatures and the associated subsequent cash flows. In this regard the directors have made prudent assumptions regarding the placement of instruments under contract and ultimately conversion to cash inflows.
In addition the Group’s forecasts indicate the need for additional financing within the next 12 months. Based on current information available to them and the historical availability of financing options the directors believe that they will be successful in raising further funding. This assumption is based on the recent successful issue of share capital and the directors’ confidence in the potential of the business. The directors therefore consider it reasonable to assume they will be successful in raising sufficient funds in the time period required in their assessment of the going concern basis of preparation of the financial statements.
The factors set out above highlight there are material uncertainties in providing an accurate forecast for the Group, being the difficulty in accurately forecasting the timings of contract signatures and the subsequent cash receipts, and the requirement to raise additional finance. This therefore may cast doubt about the Group’s and Company’s ability to continue as a going concern for the foreseeable future and as a result it may be unable to realise its assets and discharge its liabilities in the normal course of business. Notwithstanding, the directors believe that they have a reasonable expectation that the Group will be able to operate within its available resources and there will be sufficient funds to enable the Group and Company to continue as a going concern for the foreseeable future.
3. Operating loss
The following items are charged/(credited) in arriving at the Group’s operating loss from continuing operations and the operating income from discontinued operations.
|
2008 |
2007 |
2007 |
2007 |
|
Group |
Group |
Continuing |
Discontinued |
|
£ |
£ |
£ |
£ |
Amortisation of other intangible assets |
129,842 |
110,000 |
110,000 |
- |
Depreciation |
584,795 |
479,611 |
479,611 |
- |
Fees payable to the auditors for the statutory audit of the annual accounts |
|
|
|
|
- Osmetech plc |
40,921 |
40,921 |
40,921 |
- |
- Other group companies |
24,575 |
24,479 |
24,479 |
- |
Fees payable to the auditors for other services to the Group: |
|
|
||
- Tax services |
58,570 |
53,695 |
53,695 |
- |
- Other assurance |
273,000 |
47,483 |
42,322 |
5,161 |
Operating lease rentals – plant and machinery |
13,587 |
27,152 |
25,591 |
1,561 |
Impairment of goodwill, property plant and equipment and other intangible assets |
- |
1,057,832 |
- |
1,057,832 |
Research and development |
2,667,855 |
2,748,272 |
2,595,179 |
153,093 |
Loss on disposal of property, plant and equipment |
20,591 |
18,779 |
18,779 |
- |
Staff costs (see note 4) |
6,882,569 |
6,413,616 |
5,607,046 |
655,353 |
Net foreign exchange (gains)/losses |
(228,023) |
67,815 |
67,815 |
- |
Cost of inventories recognised as expense |
880,206 |
668,618 |
92,818 |
575,800 |
|
|
|
|
|
Included within the other operating costs are costs of £2,463,155 in respect of professional fees (2007 - £1,341,363). This includes £1,195,536 (2007 - £NIL) incurred in connection with the withdrawal of a proposed issue and listing of American Depositary Shares on the NASDAQ Global Market in the USA.
4. (Loss) / earnings per share
|
Year ended 31 December |
Year ended |
(Loss) / profit for the year attributable to equity holders of the company – continuing and discontinuing operations |
(15,451,979) |
3,983,801 |
Adjustment for profit from discontinued operations |
- |
(16,014,425) |
|
|
|
Loss for the year attributable to equity holders of the company – continuing operations |
(15,451,979) |
(12,030,624) |
|
|
|
|
2008 |
2007 |
|
Pence |
pence |
Earnings per share from continuing and discontinued operations |
|
|
Basic and diluted |
(6.93) |
1.96 |
|
|
|
Earning per share from continuing operations |
|
|
Basic and diluted |
(6.93) |
(5.93) |
|
|
|
Earnings per share from discontinued operations |
|
|
Basic and diluted |
- |
7.89 |
|
|
|
Basic earnings per share is calculated by dividing profit or loss for the financial year attributable to equity holders by 222,889,207 (2007 - 202,934,689), being the weighted average number of shares in issue during the year.
As the Group reported a loss for the year from continuing operations, all potential shares relating to share options are viewed as antidilutive. The number of potential dilutive ordinary shares as at 31 December 2008 was 24,975,790 (2007 - 30,498,838).
5 Restatements to previously reported financial statements
Subsequent to the issuance of the Group’s annual report for the year ended 31 December 2007 the Group filed a Registration Statement on Form F-1 with the US Securities and Exchange Commission. As a consequence of the registration process the directors revised the presentation on the face of the consolidated income statement to show share compensation charges as a component of employee benefits rather than separately disclosed and to reclassify health insurance costs from other expenses to employee benefits expense.
The impact of these restatements on the consolidated loss for the year ended 31 December 2007 is as follows:
|
As previously reported |
Reclassification of employee benefits |
As restated |
|
£ |
£ |
£ |
Continuing operations: |
|
|
|
Other expenses |
(3,882,702) |
356,253 |
(3,526,449) |
Share compensation charges |
(450,317) |
450,317 |
- |
Employee benefits |
(5,607,046) |
(806,570) |
(6,413,616) |
Operating loss |
(13,048,400) |
- |
(13,048,400) |
6 Shareholders’ equity
Group |
Share capital |
Share premium account |
Merger reserve |
Other reserve |
Cumulative exchange reserve |
Accumulated |
Total |
|
£ |
£ |
£ |
£ |
£ |
£ |
£ |
At 1 January 2007 |
7,028,640 |
51,703,745 |
1,885,533 |
2,136,021 |
(903,185) |
(50,345,337) |
11,505,417 |
Profit for the year |
- |
- |
- |
- |
- |
3,983,801 |
3,983,801 |
New share capital issued |
252 |
52,507 |
- |
- |
- |
- |
52,759 |
Credit to equity for equity- settled share-based payments |
- |
- |
- |
614,773 |
- |
- |
614,773 |
Repurchased equity options |
- |
- |
- |
(131,143) |
- |
- |
(131,143) |
Repurchased warrants |
- |
- |
- |
(480,845) |
- |
- |
(480,845) |
Exchange adjustments |
- |
- |
- |
- |
(383,633) |
- |
(383,633) |
Exchange adjustments taken to income statement for discontinued operations |
- |
- |
- |
- |
713,901 |
- |
713,901 |
Transfer of merger reserve to income statement |
- |
- |
(1,885,533) |
- |
- |
1,885,533 |
- |
|
|
|
|
|
|
|
|
At 31 December 2007 |
7,028,892 |
51,756,252 |
- |
2,138,806 |
(572,917) |
(44,476,003) |
15,875,030 |
Loss for the year |
- |
- |
- |
- |
- |
(15,451,979) |
(15,451,979) |
New share capital issued |
688,551 |
5,974,058 |
- |
- |
- |
- |
6,662,609 |
Debit to equity for equity- settled share-based payments |
- |
- |
- |
(314,881) |
- |
- |
(314,881) |
Exchange adjustments |
- |
- |
- |
- |
1,039,827 |
- |
1,039,827 |
|
|
|
|
|
|
|
|
At 31 December 2008 |
7,717,443 |
57,730,310 |
- |
1,823,925 |
466,910 |
(59,927,982) |
7,810,606 |
|
|
|
|
|
|
|
|