Date: 19 March 2010

 

Contact details:

 

Osmetech plc
Jon Faiz Kayyem (Chief Executive Officer)	+1 626 463 2000
David Sandilands	+44 207 849 6027
Canaccord Adams
Henry Fitzgerald-O'Connor / Robert Finlay	+44 207 050 6500

 

 

 

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

 

Osmetech plc preliminary results for the 12 months ended 31 December 2009

 

 

 

Chairman's statement

We have today announced a proposal to be put before Osmetech Shareholders to change the domicile of Osmetech to the United States, by reorganising the Osmetech Group such that, pursuant to a Scheme of Arrangement, Osmetech becomes a wholly owned subsidiary of GenMark Diagnostics, Inc., ('GenMark') a new company incorporated in the United States, and former Osmetech Shareholders become shareholders of GenMark.  It is proposed that GenMark will be traded on NASDAQ, that Osmetech's AIM trading facility will be cancelled and that GenMark will implement an equity fundraising of up to $40 million through an initial US public offer on NASDAQ. 

 

We believe that the proposal to move to a US listing on NASDAQ is in the best interests of Osmetech shareholders. This is the natural next step in the evolution of the Company's shareholder base which has seen a steady growth in US ownership since 2006, including a significant increase over the last two years with approximately 57 per cent. of Osmetech's ordinary shares now being beneficially owned by US residents. The proposal will align the place of listing with the business activities of the Osmetech Group, which are entirely based in the US, and where the Board expects the majority of the Osmetech Group's future growth to take place. Currently over 95 per cent. of the Osmetech Group's sales and net assets are in the US. The Board considers there to be a potentially larger pool of investors in the US than in the UK who are more familiar with the Osmetech Group's business model and have a better understanding of the molecular diagnostics industry. The Board also believes that there is a general reluctance on the part of US investors to invest in UK companies of the size and profile of Osmetech unless they have a trading facility in the US.  Furthermore, a significant number of emerging healthcare technology companies trade on NASDAQ and the Directors believe that there is a greater knowledge and understanding of those companies in that market.

 

The Board believes that a NASDAQ listing would raise the profile of the Group amongst the investor community in the US and with potential strategic partners and customers.  We also believe that a trading facility on NASDAQ may also ultimately provide greater liquidity for Osmetech Shareholders and the Group would benefit from its listing being amongst a more appropriate public company peer group.

 

Further details can be found in the proposals announcements and in the Circular to be sent to shareholders shortly.

 

As part of the reorganization of the Group, David Sandilands is today standing down as Chief Financial Officer but will continue as a non-executive director of the Company until the date on which the Scheme becomes effective. We would like to thank David for his significant contribution to the development of the Group over many years and his considerable commitment to ensuring an effective transition. Steven Kemper has today been appointed Chief Financial Officer of the Company.  Since November 2009, Steven Kemper has served as senior vice president finance of Osmetech Technology Inc, a wholly owned subsidiary of the Company.

 

We are very excited about the proposals to re-position Osmetech. The business has a proven technology capable of meeting the needs of a fast-growth market and an attractive business model already exhibiting the potential of providing repeatable, high margin revenue streams. We have restructured operations, reducing the cost base and strengthening the sales and marketing and management teams to enable us to effectively execute our commercial strategy. We now believe that we have an excellent opportunity to establish a strong presence in the US investment community and properly capitalise the business. This should provide a strong platform from which to deliver superior future returns for shareholders.

 

Christopher Gleeson

Chairman

19 March 2010

 

 

Chief Executive Officer's Review

 

Commercial progress

 

Our principal commercial objective is to achieve revenue growth through the sale of test consumables, both through increasing the installed base of XT-8 Systems at customers and by broadening the menu through the launch of new tests.

 

We have now developed four diagnostic tests for use with our XT-8 System and expect to expand this test menu by targeting two to four new tests annually.  Our Cystic Fibrosis Genotyping Test, which detects pre-conception risks of cystic fibrosis, and our Warfarin Sensitivity Test, which determines an individual's ability to metabolize the oral anticoagulant warfarin, have received FDA clearance.  Our eSensor technology has demonstrated 100% accuracy in our clinical trials compared to DNA sequencing for our Cystic Fibrosis Genotyping Test and our Warfarin Sensitivity Test.  We have also developed a Respiratory Viral Panel Test, which detects the presence of major respiratory viruses, and a Thrombosis Risk Test, which detects an individual's increased risk of blood clots.  Both of these tests are labeled for investigation use only, or IUO.  We have submitted our Thrombosis Risk Test for FDA clearance, and we intend to seek FDA clearance for our Respiratory Viral Panel Test.  We also have a pipeline of eight potential products in different stages of development or design, including diagnostic tests for an individual's ability to metabolize Plavix, a commonly prescribed anti-coagulant, and for mutations in a gene known as K-ras, which is predictive of an individual's response rates to certain prescribed anti-cancer therapies.

 

We are also developing our next generation platform, the AD-8 System.  We are designing the AD-8 System to integrate DNA amplification with our eSensor detection technology so that technicians using the AD-8 System will be able to place a minimally prepared patient sample into our cartridge and obtain results without any additional steps.  We believe this sample-to-answer capability is possible as a result of the robust nature of our eSensor detection technology, which is able to detect target biomarkers despite sample impurities that we believe impair competing technologies.  We are designing our AD-8 System to further simplify workflow and provide powerful, cost-effective molecular diagnostics capability to a broad class of end users, including hospitals and laboratories that currently lack the technical or economic resources to perform such testing.

 

Market opportunity

 

The global market for molecular diagnostics was estimated to be $1.9 billion in 2009 and is anticipated to reach $3.6 billion in 2014 according to L.E.K., a market research firm.  Molecular diagnostics generally refers to the detection and measurement of biomarkers to diagnose disease and to optimize the treatment of patients.  We believe that the following factors, among others, are contributing to the growth of this market:

·      Expansion of Genetic Testing for Disease Predisposition.  Advances in the understanding of the relationship between an individual's genetics and disease have led to increased reliance on molecular diagnostic testing for inherited diseases such as cystic fibrosis and thrombosis.  We expect new molecular diagnostic tests will be required as researchers continue to discover new relationships between genetics and disease, new medical interventions are developed and as professional societies set guidelines regarding genetic disease and the role of genetic counseling in the interpretation of the results of these tests.

·      Adoption of FDA-Cleared Molecular Diagnostic Testing Methods.  The FDA recommends that laboratories and hospitals use FDA-cleared molecular diagnostic tests when these tests are available, rather than tests known as "home-brew tests" or laboratory developed tests, or LDTs, that are not submitted to the FDA for approval.  LDTs are broadly used by reference laboratories and research-based hospitals to perform molecular diagnostic tests and are subject to strict regulatory requirements.  As a result, we believe reference laboratories and research-based hospitals will look to replace their existing LDTs and non-FDA-cleared molecular diagnostic tests with FDA-cleared tests as they become available.

·      Advances in Cancer Therapy.  Tailoring treatments to an individual's tumor type and genetics is an important trend in cancer therapy.  The FDA has required or recommended that molecular diagnostic tests be performed before administration of certain drugs, such as Herceptin, Erbitux and Vectibix.  We believe many oncologists also independently request molecular diagnostic tests to aid in their selection of an optimal cancer therapy.  With an ever growing number of expensive and toxic cancer therapies, many of which have a relatively low probability of success depending on an individual's genetic make-up, molecular diagnostic testing to determine an individual's response to certain cancer therapies is economical and clinically beneficial.

·      Increased Demand for Infectious Disease Diagnostic Panels.  Different disease pathogens can produce similar symptoms, but with vastly distinct courses of disease progression and required medical treatment responses.  For example, pneumonia caused by Mycoplasma may resolve without treatment, while pneumonia caused by Legionella will generally require aggressive medication and hospitalization.  In order to improve patient care, physicians are increasingly requesting infectious disease diagnostic panels to be performed.  According to L.E.K., the market for molecular diagnostic testing of infectious diseases in the United States was estimated to be $1.1 billion in 2009.

·      Advances in Personalized Medicine.  Tailoring treatments to an individual's genetic profile-called personalized medicine or pharmacogenetics-is emerging as an important trend and will drive demand for molecular diagnostic testing.  Pharmaceutical companies, clinical researchers and pharmacy benefit managers are screening drugs for varied toxicity, dose response and efficacy among individuals with different genetic profiles.  Because these industry developments may improve clinical outcomes and reduce costs for third-party payors, we believe adoption of these tests will become more widespread in a managed care environment.

Fund raising

During 2009 we raised a total of £14,836,579, net of expenses, through the placing of new shares to institutional shareholders.

 

Since the year end, we have secured a $4m (£2.5m) debt facility which comprises a $2m (£1.25m) line of credit facility linked to eligible receivables and $2m (£1.25m) to finance certain forecast capital expenditure that is available until 12 July 2011.

 

The directors have prepared forecasts for a period ending 31 March 2011 which includes a number of assumptions regarding income, expenditure and cashflows. They also take into account the new debt facility referred to above. Whilst there are uncertainties in preparing the forecasts, the directors have concluded 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 meet its liabilities as they fall due for at least 12 months from the date of approving this financial information.

 

Consistent with other companies in the sector, the Board are aware that they will need to secure additional funding at some point beyond the twelve month period referred to above to enable the Group to continue to operate in its current format. However, based on the success of the two fundraisings in the year and the proposed IPO, the Board has a reasonable expectation that it could secure additional funding if required.

 

Further information is included in note 2.

 

Financial review

Loss

The loss for the year decreased by 16% from £15,451,979 in 2008 to £13,032,359 in 2009 and the net loss per share decreased by 81% from 6.66 pence in 2008 to 1.25 pence in 2009, significantly impacted by the 349% increase in the weighted average number of shares in issue in 2009.  The operating loss for the period decreased by 18%, primarily due to a reduction in the overall cost base of the business and the impact of costs incurred in 2008 in connection with the withdrawal of a proposed ADS issue and listing on the NASDAQ Global Market in the U.S., offset by the adverse impact of currency exchange rate differences between the two periods amounting to 11%.

 

Revenue

Revenue increased from £352,069 in 2008 to £638,186 in 2009.  The increase of £286,117, or 81%, was principally due to the growth in sales of our Warfarin Sensitivity and Cystic Fibrosis Tests, although currency exchange rate differences accounted for 27% of the increase.  Product sales were £305,163 and £583,482 (an increase of 91%) and license revenues were £46,906 and £54,704 (an increase of 17%) in 2008 and 2009, respectively.

 

Changes in inventories of finished goods and work in progress

Changes in inventories of finished goods and work in progress increased from £312,106 in 2008 to £704,880 in 2009.  The increase of £392,774, or 126%, was principally as a result of manufacturing additional Warfarin Sensitivity and Cystic Fibrosis Tests in 2009, following the growth in our installed base of instruments.

 

Employee benefits

Employee benefits costs decreased from £6,882,569 in 2008 to £5,230,273.  The decrease of £1,652,296, or 24%, includes an increase in the level of share compensation charges from a credit of £314,881 for 2008 to a charge of £782,636 in 2009. The increase in the share compensation charge is principally due to the issue of warrants in the period giving rise to a charge of £566,423. The credit in 2008 was primarily due to a revision of expectations for achieving performance targets for management long-term incentive plans. Excluding share compensation charges, other employee benefits costs were £4,447,637 in 2009 (2008 - £7,197,450), a reduction of £ 2,749,813, or 38%, reflecting the lower average number of employees in the year, which decreased by 42% from 110 in 2008 to 64 in 2009.

 

Research and development costs

Research and development costs decreased from £2,667,855 in 2008 to £1,815,379 in 2009, a decrease of £852,476, or 32%. This reduction was primarily due to the completion of the development of the eSensor® XT‑8 System in 2008.

 

Depreciation, amortization and impairment losses

Depreciation, amortization and impairment losses increased from £714,637 in 2008 to £2,004,064 in 2009.  The increase of £1,289,427, or 180%, primarily resulted from impairment losses of £527,387 from a write down of eSensor® XT-8 instruments, following a review of cashflows expected to be generated from future revenues and impairment losses following a review of the future economic benefit expected to be derived from licenses. Depreciation in respect of eSensor® XT‑8 instruments also increased during the period, including an additional depreciation charge of £77,514 in the year due to a revision of the expected useful life of instruments provided to customers under reagent rental agreements from 5 to 3 years.

 

Other expenses

In total, other expenses decreased from £5,383,198 in 2008 to £3,759,308 in 2009.  This decrease of £1,623,890, or 30%, principally reflects £1,195,536 costs incurred in 2008 in connection with the withdrawal of a proposed ADS issue and listing on the NASDAQ Global Market in the U.S. 2009.

 

Interest on bank balances and term deposits

Interest on bank balances and term deposits decreased from £213,259 in 2008 to £22,420 in 2009.  The decrease of £190,839, or 89%, resulted both from a reduction in average cash balances during the year and a significant reduction in average interest rates.

 

Liquidity and Capital Resources

Cash and cash equivalents increased from £6,034,926 at 31 December 2008 to £10,195,347 at 31 December 2009, an increase of £4,160,421, or 69%.  The increase of cash and cash equivalents was principally due to £14,836,579 net proceeds raised through the issue of equity, offset by net cash used in operating activities of £10,275,461. 

 

Net cash used in operating activities decreased from £14,305,945 in 2008 to £10,275,461, a decrease of £4,030,484, or 28%.  The movement was primarily due to a decrease in the operating loss of £2,732,578 and an increase of £2,386,943 in non-cash items: depreciation, amortisation, impairment losses and share compensation charges.

 

Net cash used in investing activities from continuing operations decreased from £760,989 in 2008 to £266,309 in 2009, representing a decrease of £494,680, or 65%.  The decrease is primarily explained by a reduction in purchases of plant and equipment.

 

Net cash generated from financing activities increased from £6,662,609 in 2008 to £14,836,579 in 2009, an increase of £8,173,970, or 123%.  The increase reflects the net proceeds from the issue of shares.

 

Jon Faiz Kayyem

Chief Executive Officer

19 March 2010

 

 

Consolidated income statement for the year ended 31 December 2009

 

	Note		(Audited) 31 December 2009	(Audited) 31 December 2008
Continuing operations			£	£
Revenue			638,186	352,069
Changes in inventories of finished goods and work in progress			(704,880)	(312,106)
Employee benefits			(5,230,273)	(6,882,569)
Research and development costs			(1,815,379)	(2,667,855)
Depreciation, amortisation and impairment losses			(2,004,064)	(714,637)
Other expenses			(3,759,308)	(5,383,198)
			(13,513,904)	(15,960,365)
Operating loss	3		(12,875,718)	(15,608,296)
Interest on bank balances and term deposits			22,420	213,259
Gains on financial instruments			-	65,630
Loss before taxation			(12,853,298)	(15,329,407)
Taxation			(179,061)	(122,572)
Loss for the year			(13,032,359)	(15,451,979)
				__________
Loss per share:
From continuing operations
Basic and diluted (restated)	4		(1.25p)	(6.66p)

 

Consolidated statement of comprehensive income for the year ended 31 December 2009

 

 

	(Audited) 31 December 2009	(Audited) 31 December 2008
	£	£
Loss for the year	(13,032,359)	(15,451,979)
Exchange differences on translation of foreign operations	(355,346)	1,039,827
Total comprehensive loss for the year	(13,387,705)	(14,412,152)
Attributable to:
Owners of the Company	(13,387,705)	(14,412,152)

 

 

Consolidated balance sheet at 31 December 2009

 

	(Audited) 2009		(Audited) 2008
	£	£	£	£
Assets
Non current assets
Other intangible assets	668,629		1,379,009
Property, plant and equipment	854,591		1,603,602
Current assets		1,523,220		2,982,611
Inventories	84,720		1,109,008
Trade and other receivables	592,831		812,261
Current tax assets	-		153,793
Cash and cash equivalents	10,195,347		6,034,926
		10,872,898		8,109,988
Total assets		12,396,118		11,092,599
Liabilities
Current liabilities
Trade and other payables	(1,980,315)		(3,047,844)
Current tax liabilities	(168,125)		(8,937)
		(2,148,440)		(3,056,781)
Non-current liabilities
Provisions		(205,563)		(225,212)
Total liabilities		(2,354,003)		(3,281,993)
Net assets		10,042,115		7,810,606
Equity
Called up share capital		8,459,279		7,717,443
Share premium account		71,825,053		57,730,310
Other reserves		2,606,560		1,823,925
Cumulative exchange reserve		111,564		466,910
Accumulated deficit		(72,960,341)		(59,927,982)
Total equity		10,042,115		7,810,606