24 July 2012

Omega Diagnostics is a research client of Edison Investment Research Limited

FY12 revenue, at £11.12m, was up 5% on a like-for-like basis, with an adjusted PBT

of £1.0m and reported profit after tax of £0.32m. Development of a 40-50 launch test

menu for allergy-iSYS is on track for a March 2013 launch. The Indian sales subsidiary

traded from July 2012 and adds up to £448k of additional revenue in FY13. New

Point of Care (PoC) tests for HIV monitoring and syphilis should be marketed from the

first half of FY14. These are ideal for developing world use and could gain rapid

government and NGO sales. There may be STD clinic use in developed markets.

Year end Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

03/11 7.9 0.74 1.7 0.0 9.6 N/A

03/12 11.1 1.00 1.2 0.0 13.5 N/A

03/13e 12.94 1.33 1.4 0.0 11.6 N/A

03/14e 16.08 1.91 1.9 0.0 8.6 N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.

Allergy iSYS and new PoC tests by March 2013 Automation of Omega’s 600 clinical allergy assays using the licensed iSYS instrument

remains on track for March 2013 launch with an initial menu of 40-50 tests. This is still

ambitious. Importantly, Omega lowered its investment sensitivity to iSYS by licensing

two PoC tests. These are manually read so are ideal for field use in developing

countries (a small reader is available for developed world healthcare IT systems). The

main PoC product is a test for CD4+ white cells; if the CD4+ cells are too low, anti-

retroviral therapy against HIV is required yet 65% of developing-world HIV patients are

not monitored. A syphilis test for screening in pregnancy is also important.

Sales outlook opportunities and uncertainties Historic FY12 sales showed a mixed performance, with sales of food intolerance tests

growing well, but manual allergy test sales flat and weak infectious disease sales. In

FY13, the Indian subsidiary captures full value from July, which should revitalise sales

growth, in addition to the re-launch of Food Detective. India could also be a key

allergy-iSYS market. German allergy sales look pressured, as doctor’s reimbursement

may fall in 2014. This should not affect FY14 lab-based iSYS revenues. On PoC, there

could be 34.2m tests annually at $5-8/test. The HIV potential is over £50m, at 50%

uptake at $5/test. PoC sales will probably be via government and NGOs supported by

the (originating) Burnet Institute, with its excellent connections.

Valuation: Allergy iSYS and PoC to drive value Indian sales will automatically move from £402k in FY12 to £700k in FY13 with growth

to perhaps £850k at better net margins. Allergy iSYS R&D investment will be about

£1.1m cash in FY13 with substantive sales assumed from FY14. The new PoC

products may have a rapid FY14 take up if sponsored by governments and major

NGOs; a nominal sales value of £250k has been used in FY14, but it is too early to be

clear on this. Edison’s model extends to FY15 using a 12-fold EPS multiple. We use a

50% probability of success for allergy-iSYS, indicating an NPV of 34p per share.

Omega Diagnostics Final results and new product

Building up the franchise

Price 16.25p

Market cap £14m

Shares in issue 85.2m

Free float 93%

Code ODX

Primary exchange AIM

Share price performance

% 1m 3m 12m

Abs 22.6 30.0 6.56

Rel (local) 22.1 33.2 14.5

52-week high/low 17.0p 9.8p

Business description

Omega is a UK-German company focused on developing and marketing in vitro diagnostic products in allergy testing, autoimmune and infectious diseases and for food intolerance. Products are sold direct in the UK, Germany and India or through a global distribution network into 97 other countries especially emerging markets.

Next events

Interim results November 2012

Analyst

Dr John Savin +44(0)20 3077 5735

healthcare@edisoninvestmentresearch.co.uk

Edison profile page

Healthcare

Omega Diagnostics | 24 July 2012

2

Company description: Diverse and global

Omega develops and markets in vitro diagnostic products for the detection of specific allergies, for

food intolerance plus a range of conventional infectious disease, pregnancy, autoimmune and cancer

tests (Exhibit 1). It is in transition from being a supplier of only manual diagnostic tests to becoming,

from spring 2013, a competitor in the automated, global allergy testing business, a segment with low

competition and high margins. New Point of Care (PoC) infectious disease tests for 2013 are aimed

mainly at developing world use with sales probably on large contracts via governments and NGOs.

Omega listed on the UK AIM market in 2006 and has developed through acquisition and strong

organic growth. It now operates from three UK sites and one in Germany. It sells globally through over

100 distributors and has direct sales in the UK, Germany and India.

Exhibit 1: Omega Diagnostics’ business areas

Division Business Key products/notes

Allergy and Autoimmune Total FY12 sales £4.48m

This segment developed with the December 2010 acquisition of a German business supplying manual IgE clinical allergy tests kits. New automated assays are under development. Also reported in this segment are autoimmune ELISA tests acquired earlier.

Manual allergy kits worth £3.87m annually with a library of over 600 allergens are sold to small doctor’s office labs in Germany with a few Polish and Russian exports. Exports are being developed and products are being refreshed. There is probable, but unquantified Doctor’s reimbursement pressure in Germany from 2014 that may limit or cut manual test value growth. ISYS should be unaffected as it is lab-based.

Automated tests running on the IDS-iSYS instrument (exclusively licensed for allergy) are in development. A 40-50 test menu is planned for a March 2013 launch.

Autoimmune tests, £615k in FY12, use the standard 96 well ELISA test format that can be run on open robotic assay systems. Tests include rheumatoid arthritis, coeliac disease, Crohn’s disease and connective tissue diseases. Kits sell for between £10 and £30. These face tough competition. A Total IgE test is also sold.

Food Intolerance Total FY12 sales £3.90m

Food intolerance is one of Omega’s major successes with consumer market, laboratory screens and tests and laboratory services.

The home use Food Detective kit sells for about £25 to distributors and £60 to end users (£59.99 on Amazon). Sales in FY12 were £1m, up 26%. The laboratory service charges up to £200 per sample and turned over £0.48m in FY12, up 45%.

There is a food intolerance range of 96-well ELISA IgG tests for lab use. Sales and services amounted to £0.62k, up 38% due to international marketing.

Genarrayt tests c 200 food intolerance substances at once. The installed base of Genarrayt systems is now 108. System sales (£88k in FY12, 13 units) are being reduced to focus on key accounts with higher reagent use. Reagent revenues were £1.56m, up only 5% but FY12 had very strong one-off Spanish sales. FY12 revenues per system averaged £14.4k but, excluding Spain, these averaged £10,783, up 24%.

Infectious Disease and other tests Total FY12 sales £2.75m

Infectious disease decline of 2% as the former Indian distributor showed a weak performance. The new direct Indian subsidiary should generate strong renewed growth. Products can be categorised into three areas. The new PoC line will produce revenues from FY14 and could be a major growth driver.

Low-cost, very simple but effective and reliable tests (like Latex bead) for diseases like Syphilis, tuberculosis, Dengue fever, hepatitis B and malaria. These are subject to tough competition but are well known. Each kit sells for between £5 and £20. ELISA products for yeast, fungal, parasitic and H. pylori (stomach) infections. There is a CE-marked viral test for herpes. Simple and fast MicroPath bacterial tests. These can, for example, detect bacteria causing food poisoning. They are made by the Co-Tek subsidiary.

Various simple, low-cost tests including pregnancy tests, tests for fertility and 96-well Pathozyme cancer diagnostics.

Two new point of care tests will be introduced in calendar 2013 after validation. These were developed by Burnet Institute, Australia with Gates Foundation funding. The two are: VISITECT CD4 (a CD4+ test, to monitor HIV infection progress) and a syphilis test. Omega has worldwide rights. These tests might be used in western STD clinics as an immediate check. However, the main markets are developing countries with few lab facilities. These tests are priced at $5-8 each. They both require CE marking.

Source: Edison Investment Research

Omega Diagnostics | 24 July 2012

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FY13 outlook

Omega has three strategic elements. The first is growing its core business including manual allergy

Allergozyme tests basically restricted to the German market and developing its Indian direct sales

subsidiary. The second element is to launch the new allergy iSYS product by March 2013. Automated

allergy testing on iSYS provides a major part of the investment case. The third aspect comes from the

two PoC tests licensed from the Burnet institute. Sales and forecasts are shown in Exhibit 2.

Exhibit 2: Historic and forecast sales by segment

2011 2012 Growth 2013e Growth 2014e Growth

Autoimmune and Allergy

Manual Allergy (Germany) 955 3,862 304% 4,325 12% 4,325 0.0%

Automated Allergy (iSYS) 50 NA 1,569 3021.5%

Indian autoimmune sales 70 70 0% 127 81.4% 175 37.8%

Other autoimmune 514 545 6% 590 8.3% 640 8.5%

Total division 1,539 4,477 191% 5092 13.8% 6,710 31.8%

Food Intolerance

Genarryt systems 192 88 -54% 80 -9.1% 146 82.5%

Genarrayt kits 1,490 1,560 5% 1,965 26.0% 2,364 20.3%

Indian Food Detective sales

-

42 N/A 150 257.1%

Food Detective 772 980 27% 1,235 26.0% 1,563 26.5%

FoodPrint 332 481 45% 600 24.7% 700 16.7%

ELISA 774 792 2% 840 6.1% 850 1.2%

Total division 3,560 3,901 10% 4,762 22.1% 5,774 21.2%

Infectious disease

India Infectious Sales 330 332 1% 681 105.0% 850 24.9%

Infectious disease (ex India est) 2,470 2,415 -2% 2,400 -0.6% 2,500 4.2%

Point of Care 250 N/A

Total division 2,800 2,747 -2% 3,081 12.2% 3,600 16.9%

Total Sales 7,899 11,124 41% 12,935 16.3% 16,083 24.3%

Source: Edison Investment Research, Omega Diagnostics

Allergy-iSYS update With iSYS on track for launch in late Q4 of FY13, the impact on sales will be felt in FY14. Ideally, iSYS

could deliver over £3m of revenues in FY14 and £11.5m in 2015. In the forecast financials, these are

risk adjusted.

Clinical allergy tests look for a specific IgE antibody in a patient’s serum against a known allergen. In

the body, if IgE recognises an allergen, it triggers mast cells, resulting in histamine release causing

localised swelling, sneezing and rashes; other potent mediators are also involved. The worst cases

result in anaphylactic shock, which is fatal if not treated quickly with adrenalin. Total IgE can be tested

directly; these are manual or semi-automated tests like Omega’s Allergozyme IgE and Phadia’s

automated ImmunoCAP. An IgE above normal can indicate an active allergy. To find the specific

substance that is triggering the allergic response, individual allergens are tested. Omega has a 600

allergen library, so clinicians can test exhaustively for common and rare allergens. The most common

method is still a skin test but this is a rather crude method. Modern blood-based tests are faster, more

accurate and automated.

Omega Diagnostics | 24 July 2012

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Assay development

Assay development has two aspects: the system and the assays. The two interlink, making a

combined instrument-reagents system complex to develop, especially with an extensive, if

standardised, test range.

Omega licensed the iSYS system for exclusive allergy testing use from Immunodiagnostic Systems

(IDS) in 2011. ISYS is a sophisticated machine with a flexible 120 patient sample load. Omega

estimates that it can get a rapid test result time and be able to reconfigure the iSYS reagent system to

accommodate up to 130 on-board assays. Given the range of potential allergens, this capacity could

be important in gaining sales. When launched, it will compete in the market with the Phadia 100 and

250 models. iSYS should be as sensitive, faster, more flexible and very reliable.

To be commercially attractive, an adequate test panel will need to be available. Omega has set up a

specialist technical team to handle the transfer and, in March 2011, recruited Dr Valente, an

experienced immunoassay development manager from Axis-Shield, to lead the development process.

Current planning envisages up to 48-assays in the core test launch menu covering the allergy tests

commonly requested. After proof of concept on a total IgE assay, eight allergens as type examples

were evaluated. Six of these showed excellent correlation with international standard units and

progressed to Phase 2 of development, Exhibit 3 (NB this does not refer to clinical trial stages). A

further 18 assays have now entered initial evaluation and two further batches of 8-12 are planned prior

to March 2013. There are always some timing risks as some assays may prove challenging due to the

antigen chemistry, even though the format of all assays is identical.

A limiting factor may be the availability of patient samples for development and validation. To develop a

clinical allergy assay, one needs a range of patients who are allergic to a specific allergen and so

express antibodies. The results on iSYS can then be compared to Phadia and other test systems. So

far, Omega has serum for 24 of the 40-50 initial test menu planned and is sourcing samples for the

remaining 16-24 tests.

Automated allergy market

Phadia controls the $408m Automated allergy market. A private equity sale to Thermo-Fisher, a global

life science and diagnostic company, was completed in August 2011 for 6.6-fold revenues. Phadia

revenues were €367m with an operating margin of 33% (90% of sales are consumables). Allergy

makes up 85% of Phadia sales, but only 23% are in the US, largely as skin prick tests still dominate

and Phadia has limited distribution. Allergy market entry requires an extensive, expensive, allergen

library. Omega has such a library so it could become an acquisition target itself by 2015-16.

Marketing the new system

Lead times in diagnostic instrument sales can be long as customers often wish to evaluate systems on

a trial basis. Edison assumes that there will be some beta site evaluations from early calendar 2013

that can become early-adopter sales for the 2013 allergy season. Most diagnostic instruments are

placed on a reagent rental basis. This creates a capital cost upfront on each direct sale, but

distributors buy systems to place. Placements are highly lucrative due to the volumes of reagents at

high margin sold under contract.

Omega Diagnostics | 24 July 2012

5

Exhibit 3: Projected allergy-iSYS development programme

Source: Omega

In a specific Edison iSYS model, Exhibit 4, sales start with two distributor sales and a placement in

March 2013 (end of Q4 of FY13), increasing to one or two direct and four distributor placements per

month by March 2015 – note this might have some seasonality. Direct sales are only assumed in the

UK and Germany with a few Indian placements. There is a one-month evaluation per system by

customers. Test sales average £200k per system per year, although, as yet, the inherent seasonality of

the test demand is not modelled. Systems are bought from IDS at £40k. There is an 80% gross margin

on direct reagent sales and a 50% distributor discount. Note that it is not clear that the current

distributor network is suited to diagnostic sales and service. A launch update may be given at the

interim results.

The development schedule is critical to this forecast. The initial test menu needs to include all major

allergens otherwise an allergy-iSYS lab will not gain business. The limited launch menu may restrict

sales initially; note that Omega can still supply 600 manual assays.

Exhibit 4: Forecast allergy-iSYS projections

Source: Edison Investment Research

Point of Care Point of Care tests are ideal for developing world use, with the major product being an HIV progression

monitoring test. The product is only useful if available with anti-retroviral therapies so is best seen as

part of government and NGO AIDS management projects. A syphilis test offers significant public health

opportunities by reducing transmission to neonates. Note no technical details have been released.

£-

£5,000

£10,000

£15,000

£-

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

FY13 FY14 FY15

Total Allergy iS

YS

Revenues &

G

M (£

'000s)

Alle

rgy

iSY

S re

venu

es b

y ca

tego

ry (£

'000

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Tests Evaluation Tests Direct Tests DistributoriSYS Purchase only iSYS Revenues (RHS) iSYS Gross Margin (RHS)

Omega Diagnostics | 24 July 2012

6

Both tests were developed by the Burnet Institute in Melbourne, Australia. The Burnet Institute has

strong links to the Gates foundation, which funded the CD4 test, and good connections to developing

world health ministries and NGOs. Edison expects that some ministries and Aid agencies in Papua

New Guinea, India and South Africa are likely to be among the first to access the Burnet CD4 test.

CD4: HIV disease monitoring

The CD4 test will be presented at 19th International AIDS Conference, AIDS 2012, in Washington DC

from 22-27 July 2012. It does not diagnose HIV infection. Rather, it measures the effect of the virus on

the immune system of patients known to be infected. HIV attacks the CD4+ T-helper cells (CD4),

which are crucial to effective immune system functioning. There need to be at least 350 CD4

permicrolitre (µl) of blood. i Untreated, this level typically falls by about 50-80 CD4/µl every year,

although this varies in individuals. Under 350/µl, the immune system is less able to control pathogens

and respond to therapy, and under 200-250CD4/µl, the clinical symptoms of AIDS appear. With anti-

retroviral therapy, the CD4 level should stabilise and increase. However, therapy can be ineffective due

to viral resistance. Also, patient, compliance with complex drug regimen can be sporadic.

It is recommended that patients are tested every six months for CD4 levels once stable on therapy

with more frequent testing initially. ii Current tests are based on lab instruments such as the BD

FACSCount flow cytometry system, sold by BD. This product, designed for Africa, provides both

absolute CD4 counts and percentage results from a single-tube test. These lab tests are accurate but

logistically take some days to run and are over US$10 per test, often more.

The Burnet PoC test, Exhibit 5, runs in 40 minutes, which is slow for a western GP/doctor’s office test

but realistic in an HIV clinic. It would appear to be compatible with the comprehensive WHO Patient

monitoring guidelines for HIV care and antiretroviral therapy (ART). This notes that “The median CD4

count for a group of patient is a good measure of immunosuppression and predictor of mortality and

serious opportunistic infections (OIs).”

In the developing world context, sophisticated lab facilities and funding are not available. Omega

estimates that there are 26.3m developing world HIV infected individuals. India, of particular relevance

to Omega, has 10m of these. If 65% of these do not get tested currently, the maximum potential

market is 17.1m cases. If 50% of these were tested twice yearly at US$5-8 per test, the market would

be £53-86m annually. Whether this is feasible depends on Omega’s ability to manufacture up to 20m

units per year (it has scaled to 20,000 currently) and the capability of government and NGO HIV

management programmes. Realistically, even if this level is achieved, it will take some years for it to be

implemented as much untreated HIV is in sub-Saharan Africa, a challenging part of the world. iii Edison

has initially used purely nominal forecasts of £250k in FY14 and £500k in FY15.

ii The normal range is 500-1,200/1,500 CD4/µl of whole blood. The absolute levels vary somewhat with various natural factors (menstrual cycle for example). Most CD4 are in tissues like the lymph nodes. In children, percentage CD4 counts are preferred so the Brunet test will be mainly for adult use. ii WHO notes: ”CD4 counts (or CD4 percentages in young children) are very valuable when available, particularly baseline CD4 to identify asymptomatic patients who are eligible for ART (especially useful during pregnancy and for identifying those at greater risk of nevirapine-related liver toxicity). Use of CD4 is additionally helpful to monitor response to ART, evaluate possible treatment failure, and make decisions on discontinuing prophylaxis. Finally, periodic monitoring of CD4 counts when there is ample laboratory capacity can be used to monitor disease progression prior to ART, and detect treatment failure.” iii www.who.int/hiv/pub/towards_universal_access_report_2008.pdf

Omega Diagnostics | 24 July 2012

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Exhibit 5: Design of the CD4 test for HIV monitoring

Source: Omega, Edison Investment Research annotations

PoC Syphilis

Syphilis is a big risk to embryos and new born children, who can suffer high mortality and morbidity

from maternal transmission. iv A 1991 WHO survey reported prevalence of syphilis among pregnant

women at sentinel surveillance sites of between 10-15 percent, with over half these pregnancies

resulting in an adverse outcome, such as abortion, stillbirth, low birth weight, premature delivery, or

congenital infection. In 2005, WHO estimated there were half a million cases but the incidence is hard

to assess as many developing countries have limited antenatal screening and syphilis may not be

tested till late in pregnancy, if at all. At this time, Edison has not forecast any sales and no data on test

performance is available. The global birth rate is about 134m annually. If this test was available to 10%

of pregnant women at $5 via governments and NGOs, it could have sales of £42m and save up to 2m

children (£21/child) and their mothers. Pricing may be very sensitive, however, and the false positive

rate will govern the economics as with any screening test. Primary Syphilis is treated by a single

penicillin injection; tertiary syphilis needs longer treatment.

India Up until June 2012 Omega sold products in India via a distributor: Thermo-Fisher. FY12 sales were

£402k. By selling direct, the annual value automatically rises to £800k, as sales were previously at 50%

discount. In FY13 there will be three months of distributor sales (April-June at 50% discount) and nine

months of direct sales at full price. This means the sales before any growth should be £700k. Omega

plans to relaunch its Food Detective, launch AllergoDip (an eight test strip format) and to aim for

volume sales growth in its infectious disease products, which are well suited to this market. This could

iv The 2005 WHO paper notes: “Syphilis is a sexually transmitted infection (STI), caused by the bacterium Treponema pallidum. If it is not treated in its early stages, the disease can become chronic, spreading through the body and causing irreversible damage to the cardiovascular and nervous systems. At any stage of the disease, if a woman with syphilis becomes pregnant, Treponema pallidum may be transmitted to her unborn child, via the placenta, causing miscarriage, stillbirth, or congenital syphilis in the child at birth.”

1) Add drop of who le blood taken form a fingerpick (in a capillary collection tube)2) After 20 minutes add co lour

reagent to A.

3) Cont rol line: after 40 minutes, this line should be developed to show the test has run correctly.

5) Res ult line: if this line is less intense than the reference line (4), the patient needs antiretroviral therapy or further clinical evaluation. If higher, the patient is not yet in the danger zone but this should also be evaluated clinically.

The line colour is stable for at least s ix months so the test can be compared to previous assays to give a qualitative feel for disease progress ion. In more sophisticated healthcare environments, a small handheld reader can be used to make a semi-quantitative reading and store an electronic patient record.

4) Reference line: the colour intens ity of this line gives a reference of 350|CD4+ cells per ml of blood.

Omega Diagnostics | 24 July 2012

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take FY14 sales to £850k. Edison expects £1.2m in sales from India in FY14. In addition, Omega

reports that several companies are interested in selling via Omega India. This could boost profits.

Review of FY12: Revenues £11.12m

Overall, sales on a like-for-like basis showed 5% growth. PBT was £479k but adjusted for amortisation

and non-cash items, it was £1m.

Allergy and Autoimmune – £4.48m This segment reported a formal operating loss of £212k after £296k of acquisition amortisation. If this

is adjusted, the segment had a profit of £134k. Allergy also had significant H1 R&D investment of

about £300k due to the allergy iSYS development. The iSYS development costs from H2FY12

onwards (£334k) were capitalised and the second £435k payment to IDS was made as an intangible

asset. The next iSYS payment is £130k in Q2FY13 with the final payment of £500k due in Mar 2014.

Divisional sales were £3.87m of Allergozyme sales (FY11: £0.96m) with 8% like-for-like sales growth.

The £/€ rate will influence these reported figures. Omega’s manual Allergozyme tests are sold directly

in Germany by seven salespeople to c 320 customer accounts. There are limited exports to Poland

and Russia. It might be better to develop other markets using the automated platform rather than try

and expand manual test sales. Omega is actively trying to promote more export sales and this could

be a good source of growth with most export tests running on standard automated platforms like the

Brio. Edison has assumed sales rise 15% in FY13 due to £500k of new export sales. Omega has

noted that the German government is undertaking a reimbursement review of allergy tests. This may

have an impact on manual test sales from calendar 2014. The German market for allergy-iSYS should

be unaffected as this is lab-based. Pressure on doctors could drive an increase in lab test demand –

which might be very positive for iSYS. At the moment, the review outcome is unknown.

There were also £615k of autoimmune ELISA tests; the sales level of these has fluctuated for the last

few years and the long-term growth trend is not clear.

Food Intolerance – £3.90m The business segment generated £1m of PBT, a 22.4% net margin. It was the most profitable in FY12

at £1.04m PBT. The products are Food Detective, Foodprint (plus ELISA tests) and Genarrayt.

Food intolerance testing detects IgG rather than IgE detected by allergy tests, like Allergozyme. As

intact food proteins are in the intestinal lumen, where they are digested, food proteins should not be

found in the blood. Most people have IgG against some common food proteins or molecules but no

IgE is normally detected. The current scientific consensus is that IgG does not provoke an allergic

response and there is no link between IgG and food allergy. However, the science consensus is being

challenged. The food intolerance area has little direct competition; mainstream IVD companies do not

compete. There are a variety of mostly unregulated home and laboratory test kits, especially in the US.

Omega’s UK laboratory service competitor is YorkTest Laboratories.

Nonetheless, there is a belief, particularly in conditions like irritable bowel syndrome (IBS), that food

intolerance may play a role. A 2004 clinical study found that people who eliminated dietary foods to

which they had IgG response scores saw a health improvement. This was statistically significant,

p=0.024 with p=0.001 for the high compliance group. The authors concluded that IgG testing might

be useful. Commentary was more sceptical.

Omega Diagnostics | 24 July 2012

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Food Detective

Food Detective is a home-use kit also used by nutritionists. It detects antibodies against 59 common

food types. Sales rose 27% to £980k from £772k. The volume grew 45% to over 60,782 kits vs

41,665; the disparity in sales vs volume reflects local manufacture in China from bulk components.

Brazil and Poland are also important new markets. India has not been developed due to previous

distributor arrangements. It will now be actively developed by the new subsidiary. Other tests totalled

£791k, up 2%; this appears to be a rise in international service sales to £621k, but a fall in ELISA test

kits. In the US, Omega has a 10-year exclusive deal with Toyota Tsusho America (TTA) for Food

Detective as a consumer product. TTA undertakes regulatory work and negotiates with the FDA; a

510(k) strategy is being developed as an alternative to a PMA clinical trial approval. The FDA does not

approve any IgG food test kits at present, but some independent testing is done in CLIA-waived

(expert) labs. There is no update on possible timelines. Edison does not value this major opportunity.

Genarrayt

Genarrayt is a microarray product, a small square of treated paper, with up to 200 food types printed

as a microarray. The array test results are read by a scanner. It is suited to a specialist laboratory.

Foodprint is a laboratory-based Genarryt service. This achieved £480k of sales, up 45% from £330k.

Links to large retail accounts are being discussed which might drive volumes much higher. The

installed base of Genarrayt systems is now 108 systems after 13 sales worth £88k. There has been a

strategic move to limit systems in any national market to maximise regents sales per unit and hence

profits. Reagent revenues were £1.56m, up 5% after an exceptional FY11. Average test sales per

system, excluding a major Spanish account, were £10,783, up 24%. Including Spanish sales,

revenues averaged £14.4k/system. Genarrayt has previously been a big growth driver and can be

again as new markets are developed, but it will be a smaller percentage of the mix from FY14. Edison

has assumed Spanish sales of £400k from two units. If Spanish growth is 5% and other markets

achieve 15% reagent growth with 10 more units sold, FY13 sales could be £1.9m in FY13 and £2.3m

in FY14.

Infectious Disease – £2.75m The Infectious Disease segment reported formal PBT of £298k, a 10.7% net margin with an adjusted

PBT of £315k. It has a broad spread of diverse products ranging from simple but robust and reliable

latex bead aggregation products to cancer diagnostics. Most are sold through Omega’s 100-strong

global distributor network. Russia has been a particular growth area as contracts have been regained.

Indian distributor sales in FY12 were weak.

Sensitivities

Omega benefits from profitable manual allergy test sales in Germany offset by R&D investment in

allergy-iSYS. However, the manual allergy range shows little export growth and its slow growth manual

German niche is possibly threatened by a reimbursement review. Edison expects steady sales in the

core home market, but if Germany becomes embroiled in a market consolidation due to

reimbursement cuts, manual sales could plateau or decline and iSYS placement rates might be

affected even if in the long term a degree of market consolidation could be very beneficial.

In the medium term the allergy iSYS system gives a powerful automated platform to compete with

Phadia’s lower-end systems. Omega has made significant progress in optimising IgE detection assays

on the iSYS, but still has the challenge of fine-tuning and producing up to 48 individual tests for the

Omega Diagnostics | 24 July 2012

10

core launch menu although 24 assays are now in development; six of which are in Phase 2

optimisation. US sales could offer a major upside, but the approach and timing are still unclear.

Food intolerance is a high-margin business with considerable Asian and Brazilian potential for Food

Detective and Genarryt. Omega has appointed a specific food intolerance business executive and

Edison expects considerable future expansion. The US deal on Food Detective may eventually gain

sales, probably not before FY14-15.

The core of lower-margin tests in infectious disease and autoimmunity provide solid revenues. Direct

sales in India will double revenues and enable faster growth in the second half of FY13 and especially

from FY14.

The new PoC products, as noted above, could be very significant business areas with £50-100m

potential. The uptake will depend on Omega’s ability to manufacture in bulk (a 50% share of the

developing world HIV monitoring market would need 25-30m test sticks per year) and at the types of

price points that larger developing world governments may seek ($8/test being the current upper

estimate). These types of contracts can have prolonged negotiation time but equally the influence of

the Burnet Institute may drive a fast uptake. Edison notes that no technical performance data on the

tests have been released and they are not yet CE marked. For syphilis, the test specificity and

sensitivity are crucial. For CD4+ with its manual reading method, the ability to identify the crucial cut off

for therapy could be a literal life or death decision as it will be a gatekeeper to therapy.

Valuation

The development time required for a core allergy-iSYS menu means that substantive sales will start in

FY14 and may be very seasonal; March/April 2013 launch is late for the 2013 allergy season. Edison

has increased the risk probability on development and commercial success to 50% from 40%. The

new PoC tests have limited current impact. Edison has used a nominal £250k sales value in FY14 and

£500k in FY15. These could be underestimates by an order of magnitude. However, it is still early in

the process to properly assess the full commercial impact. Edison is now cautious on manual allergy

sales in Germany in FY14 assuming flat revenue. The FY13 revised estimate of an increase in manual

allergy from £3.8 to £4.2m still looks bullish, but could be revised once interim figures are available.

With these adjustments, the model indicates a risk adjusted 34p value. A 12-fold profit multiple has

been used, which is conservative if iSYS sales develop and take even a small share of the large, high-

margin automated allergy market.

Financials

Exhibit 2 shows segment sales and forecasts for FY13 and FY14. Underlying business costs are

expected to rise as the senior management team and business infrastructure are developed. This is a

necessary expense with the critical iSYS launch now due in about a year’s time and the move to direct

sales in key markets. If Indian and other business sales develop as forecast, Omega is about £400k

cash positive before R&D expenses; after R&D, there was a £343k outflow. The Edison forecast

indicates that tax in FY14-15 may affect EPS growth as iSYS development ends (so tax credits reduce)

and revenues grow. The business could be overall cash positive from FY14.

Cash at the end of FY12 was £1.16m. The company has short-term borrowings of £0.51m and long-

term debt of £0.79m with a £700k overdraft facility. There is no immediate funding requirement unless

extra cash is needed for iSYS launch costs. Exhibit 5 shows a financial projection through FY14.

Omega Diagnostics | 24 July 2012

11

Exhibit 6: Financial summary

Year to end March (£ 000s) 2011 2012 2013e 2014e Accounting basis IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 7,902 11,124 12,935 16,083 Cost of Sales (3,196) (4,120) (4,742) (5,361) Gross Profit 4,706 7,004 8,194 10,722 EBITDA 893 1,227 1,545 2,194 Operating Profit (before GW and except) 749 962 1,280 1,929 Goodwill Amortisation (193) (415) (415) (415) Exceptionals 0 0 0 0 Share payment charge (8) (30) (17) (17) Operating Profit 548 517 847 1,497 Net cash finance charges (13) 42 50 (15) Net non-cash finance charges (18) (86) 0 0 Profit Before Tax (norm) 736 1,004 1,330 1,914 Profit Before Tax (IFRS) 105 473 897 1,481 Tax (74) 48 (83) (296) Profit After Tax (norm) 662 983 1,177 1,617 Profit After Tax (IFRS) 31 521 815 1,185 Average Number of Shares Outstanding (m) 44.0 85.2 85.2 85.2 EPS - normalised (p) 1.7 1.2 1.4 1.9 EPS - IFRS (p) 0.1 0.6 1.0 1.4 BALANCE SHEET Fixed Assets 11,458 11,441 11,999 12,413 Intangible Assets 9,377 9,136 9,651 9,735 Tangible Assets 1,954 2,069 2,198 2,527 Defferred Tax 127 236 150 150 Current Assets 5,944 5,270 5,671 6,666 Stocks 1,503 1,690 1,750 1,963 Other current assets 2,386 2,422 2,500 2,644 Cash 2,055 1,159 1,421 2,060 Current Liabilities (2,086) (2,088) (2,475) (2,782) Other current liabilities (1,753) (1,578) (1,966) (2,272) Group borrowings (332) (510) (510) (510) Long Term Liabilities (2,350) (1,299) (1,299) (1,299) Long term borrowings (1,276) (794) (794) (794) Other long term liabilities (1,074) (504) (504) (504) Net Assets 12,966 13,325 13,896 14,998 CASH FLOW Operating Cash Flow 348 686 1,707 1,848 Net Interest (13) (27) (20) (15) Tax 0 0 0 0 Capex (201) (454) (334) (534) Acquisitions/disposals (5,620) 0 0 0 Purchase of intangibles and R&D capitalisation (435) (769) (930) (500) Financing and loan movements 7,625 (28) (160) (160) Dividends 0 0 0 0 Net Cash Flow 1,705 (592) 262 638 Opening net debt/(cash) 1,258 (447) 145 (117) HP finance leases initiated 0 0 0 0 Other inc loan repayments and finance leases 0 0 0 0 Closing net debt/(cash) (447) 145 (117) (755)

Source: Edison Investment Research, Omega Diagnostics accounts

Omega Diagnostics | 24 July 2012

12

Contact details Revenue by geography

Omega House, Hillfoots Business Village, Alva FK12 5DQ, Scotland +44 (0)1259 763030 www.omegadiagnostics.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation

EPS 10-14e 4.4%

EPS 12-14e 26.9%

EBITDA 10-14e 34.9%

EBITDA 12-14e 33.7%

Sales 10-14e 26.9%

Sales 12-14e 20.2%

ROCE 2013e 8%

Avg ROCE 11-14e 6%

ROE 2013e 8%

Gross margin 2013e 63%

Operating margin 13e 9.9%

Gr mgn / Op mgn 13e 6.4

Gearing 2013e N/A

Interest cover 2013e N/A

CA/CL 2013e 2.3

Stock turn 2013e 49.4

Debtor days 2013e 70.5

Creditor days 2013e 55.5

Litigation/regulatory

Pensions

Currency

Stock overhang

Interest rates

Oil/commodity prices

Management team

CEO: Andrew Shepherd CFO: Kieron Harbinson

Founder CEO of Omega. Executive with more than 30 years’ experience in the diagnostics industry with Bioscot Limited, Cambridge Biomedical Limited and Cambridge Life Sciences. Active member of relevant trade associations.

Joined Omega in 2002. Prior to Omega, finance director of Kymata, an optoelectronics company, and group financial controller of Scotia Holdings. Fellow of Association of Chartered Certified Accountants.

Chairman: David Evans Marketing director: Jag Grewal

David Evans is the non-executive chairman. He is also chairman of Epistem and former chairman of Immunodiagnostic Systems. Previously CFO and CEO of Shield Diagnostics and COO of Axis-Shield.

Jag Grewal joined Omega in June 2011. He was business development director of GSTS Pathology in London and held senior marketing positions and business development roles within the diagnostics industry at Beckman Coulter.

Principal shareholders (%)

Legal & General 18.0

Matrix VCT 14.7

Octopus Investment 13.1

Brewin Dolphin 6.1

Unicorn AIM VCT 5.0

David Evans (Chairman) 3.4

Andrew Shepherd (CEO) 2.2

Companies named in this report

Thermo-Fisher (Phadia), BD, Immunodiagnostic Systems

EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. It has won industry recognition, with awards both in Europe and internationally. The team of 90 includes over 55 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 350 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. Edison’s research is read by institutional investors, alternative funds and wealth managers in more than 100 countries. Edison, founded in 2003, has offices in London, New York and Sydney and is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). DISCLAIMER Copyright 2012 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Omega Diagnostics and prepared and issued by Edison Investment Research Limited for publication in the United Kingdom. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison Investment Research Limited at the time of publication. The research in this document is intended for professional advisers in the United Kingdom for use in their roles as advisers. It is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. A marketing communication under FSA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison Investment Research Limited has a restrictive policy relating to personal dealing. Edison Investment Research Limited is authorised and regulated by the Financial Services Authority for the conduct of investment business. The company does not hold any positions in the securities mentioned in this report. However, its directors, officers, employees and contractors may have a position in any or related securities mentioned in this report. Edison Investment Research Limited or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. This communication is intended for professional clients as defined in the FSA’s Conduct of Business rules (COBs 3.5).

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