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Despite Reliable Cash Flow, Osmetech Divests Blood Gas Biz to Chase Array-Based Dx Market

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In an effort to focus squarely on molecular diagnostics, Osmetech last month decided to sell its profitable critical care blood gas and electrolyte instrument business to IDEXX Laboratories for $44.9 million in cash.
 
The sale, scheduled to be completed this month upon agreement by both firms’ shareholders, is expected to provide Osmetech’s molecular diagnostics division with enough funding to finish developing several new diagnostic assays based on its eSensor microarray platform. The proceeds are also expected to expand its sales and marketing and R&D resources with an eye on future acquisitions.
 
Since Osmetech acquired the critical care division in 2003 from Roche for $2.7 million, the London-based company has centered its business on the Atlanta-based unit and built up a reliable revenue stream based on new product launches and sales of consumables.
 
As Osmetech noted in a statement on Dec. 18, 2006, the critical care division generated $8.6 million in sales in the first six months of 2006 out of total sales of $9.5 million. Meantime, the company said that initial customer consumable usage rates in the molecular diagnostic business should amount to approximately $75,000 per year. Osmetech admitted that the molecular diagnostics division’s revenues were not significant, but said that the preliminary usage rates were “significantly higher than Critical Care customers and expected to grow further.”
 
Bruce Huebner, president of Osmetech’s Pasadena, Calif.-based molecular diagnostics division, said that although the unit has yet to demonstrate its viability, the company is convinced that diagnostics will bear more long-term fruit than the blood gas analysis business was capable of providing.
 
“The critical care business was generating a lot of top-line growth, but not a lot of bottom line,” Huebner told BioArray News last month.
 
“Now we have just one business to focus on. It sends a much clearer message to our investors that we are going to focus on larger growth and a future market,” he said. “This sale will generate a significant amount of cash that will allow us to expand our molecular line and to look for other opportunities and potential acquisitions,” Huebner added.
 
Osmetech’s molecular diagnostics business is centered on its eSensor 4800 DNA detection instrument, which the company acquired through its purchase of Motorola’s Clinical Micro Sensors subsidiary in July 2005 (see BAN 8/10/2005).
 
Last March, the company won 510(k) clearance from the US Food and Drug Administration for a cystic fibrosis carrier-detection assay that runs on the eSensor platform, and since then the firm has been grooming other assays for inclusion with the system.
 
According to Osmetech’s Dec. 18 statement, the company is also developing a suite of cytochrome P450 drug metabolism assays. Markers that will be targeted include 2C9, which plays a role in metabolizing the anti-coagulant drug warfarin, 2D6, which is involved in metabolizing cancer drugs like tamoxifen; and 2C19, which is involved in metabolizing drug classes like HIV antivirals.
 
While developing its product pipeline has been a priority, Osmetech has also been concentrating on building a sales and marketing team, as well as putting technical support in place as it begins placing its first eSensor platforms with customers. The company launched the system in the US in 2006, and plans a 2007 launch in Europe. To finance these operations the company raised $20 million in a private stock placement with institutional investors in the UK last July (see BAN 7/18/2006).
 
Now, with an additional $45 million in its coffers from the sale of the clinical care division, Osmetech will heavily invest in R&D. Huebner said the company is looking to add “one or two scientific teams” to its US R&D group. In-licensing and potential acquisitions are also under consideration.
 

“Now we have just one business to focus on. It sends a much clearer message to our investors that we are going to focus on larger growth and a future market.”

“With the new funding we will invest in new IP that will allow us to play in this space,” Huebner explained, pointing out that the company is considering licensing agreements to secure new content for eSensor diagnostic assays as well as to mitigate any risks associated with the business.
 
Huebner declined to disclose what kind of IP the company needs to protect its business, but it is possible future licensing partners could include Affymetrix. The array maker spent 2006 concluding licensing agreements with a number of large life sciences companies, including Applied Biosystems, Abbott Laboratories, and, most recently, Invitrogen (see BAN 6/27/2006). Oxford Gene Technology has also inked numerous licensing deals with array companies in recent months, including a string of agreements in Japan (see BAN 8/15/2006).
 
According to Osmetech’s Dec. 18 statement, the company will also seek to secure licensing agreements that will “add assay content” to its platforms and will also explore “selective acquisition opportunities which will strengthen and expand the group’s presence in the molecular diagnostics market.”
 
In addition to eSensor, the company also sells the OptiTube, a patented plastic designed to work in Roche Light Cyclers, and a PCR-based Factor V/ Factor II Prothrombin ASR, which was launched in September.
 
The company also plans to launch OptiGene, a random access thermocycler, later this year.
 
Since the CMS buy, product proliferation has been at the heart of Osmetech’s molecular diagnostics strategy. "Obviously one product is not enough to fund the molecular diagnostics business," Huebner told BioArray News in July.
 
The company has not discussed what kinds of products it would like to add to the portfolio. However, by divesting the critical care division, Osmetech said it has narrowed its focus to becoming a “significant player” in the molecular diagnostics market.