Rating: Strong Buy

Summary

Trinity Biotech plc (Trinity, or "the Company"), headquartered in Ireland, develops, acquires, manufactures and markets diagnostic products for the point-of-care (POC) and clinical laboratory segments of the diagnostic market. The broad line of test kits are mostly used to detect infectious diseases, sexually transmitted diseases, blood coagulation disorders, and autoimmune diseases. Through its own sales force, as well as a network of international distributors and strategic partners, Trinity sells products in 80 countries; in 2003 we estimate that North America will account for about 62% of total sales and 25% will be obtained from Europe.

We believe Trinity's outlook is favorable and that its stock is very attractive for investors oriented to companies with modest market capitalizations. Key factors supporting these conclusions are the following:

•    An Attractive Industry. The diagnostic products industry, in general, is an attractive sector for investors. Demand is rather recession-proof, and growth will be stimulated by many of the same factors boosting the entire healthcare industry—expanding and aging populations, societies placing a priority on sustaining good health and treating diseases, and advancing technologies that make achievement of this goal possible. Moreover, as diseases become better understood and treatable, early diagnosis will be even more relevant and valuable. Currently, diagnostics account for less than 1% of each country's healthcare expenditures, but cost-effective diagnostic technology is likely to increase in importance due to such factors as favorable reimbursement policies for clinical labs, genomics technology and rapid growth of POC testing.

•    Growing From a Small Base. Trinity itself accounts for a very small share of the $20 billion worldwide market for diagnostic reagents, consumables and instrumentation. Within the infectious disease category, its area of greatest concentration, Trinity's market share approximates 1%, while in the smaller hemostasis market its share is estimated to be 3%-4%. Although the Company's competition includes several large companies such as Roche, Abbott, Johnson & Johnson, Bayer Chiron and Dade Behring, which are generally strong in terms of finances and marketing, Trinity has demonstrated an ability to grow organically and, particularly, through opportunistic acquisitions which would be less meaningful to its larger competitors. In our opinion, Trinity's small market share represents less of a vulnerability than an opportunity to grow rapidly from a small base.

•    Favorable Near-Term Outlook. Trinity's broad line of older products is likely to post only minimal unit growth, but earnings are nevertheless likely to rise sharply in 2003 as a result of five factors: (1) a significant boost from two recent acquisitions; (2) a 12% price increase posted September, 2002 on sales to Trinity's largest distributor; (3) a more effective direct sales effort in the U.S., which has been further expanded and is now being managed in a more centralized fashion; (4) the contribution from new products, particularly a blood test for HIV that is expected to be introduced to the U.S. market in the second half of the year; and (5) annual manufacturing and tax cost savings of about $1 million from the transfer of certain production to Ireland, where the statutory tax rate for manufacturing profits is only 10.0%.

•    Low Valuation. The stock is currently selling at only 7.3 times estimated 2003 EPS, 4.8 times estimated cash flow (i.e., net income plus depreciation and amortization), and the ratio of its market capitalization to its sales is also among the lowest of several diagnostic companies we reference later in this report. Considering Trinity's participation in an attractive market, impressive current momentum, management's proven ability to successfully supplement internal growth with an aggressive acquisition program, and strong finances, the current valuation is surprisingly low. Assuming a favorable overall market environment, we believe that the stock has the potential to nearly double over the coming year, to $2.50 per share. At that price, it would be selling at a very reasonable 11.4 times our presently anticipated 2004 estimate and, it would appear, still be undervalued.

Challenges and Risks

We view these as falling primarily into two categories, competition and acquisitions.

Competitive Issues

Trinity competes with many companies, as mentioned above. However, quality, product line breadth, and compatibility with automated instrumentation have typically been more important to laboratory customers than price, particularly within the context of favorable reimbursement by third parties for diagnostic testing. But even if the competitive dynamics do not change, it will continue to be important for Trinity to be innovative—as it has been by being a leader in developing tests such as for Lyme disease and HIV—and thereby prevent the commoditization of its product line. In particular, genomics based diagnostics are expected to become the next-generation technology for disease management, and so Trinity must develop or otherwise have access to this technology. Also, Trinity's recent acquisition of Sigma-Amelung, while presenting a new avenue for growth, could expose Trinity to new and unfamiliar types of manufacturing, product warranty and marketing challenges.

Implementation of Acquisitions

Management has thus far successfully implemented an aggressive acquisition program, and we believe that this will remain a key element of its goal to become a much larger factor in its industry. This will require management to correctly identify promising products and technologies that could be purchased at reasonable prices, and then to effectively integrate the manufacture and marketing of these products into Trinity's existing structure. It can be very attractive to transfer production to Ireland, where taxes are low, but this needs to be done efficiently and without incurring quality control problems.

Another type of challenge relates to the importance of attracting broader investment interest in the stock. Trinity is not a development-stage company and its finances are strong, but the stock's low price suggests otherwise. At some point management could effect a reverse split, although the benefit of this action is not clear, since this often causes a short-term reduction in a company's market capitalization. Another observation is that presentation of the income statement based on Irish GAAP is probably a modest negative for U.S. investors, and so simultaneous reporting of quarterly earnings according to both U.S. and Irish GAAP could be helpful.

Company Background

Trinity Biotech plc was formed in 1992, and in the same year completed an IPO which raised $4.5 million. This was achievable because investors were attracted to the Company's initial focus of commercializing a "rapid" (20 minute) saliva-based test for the detection of HIV antibodies. The technology for this product was accessed through a relationship with Disease Detection International (DDI), an Irvine, California company that in 1994 merged with Trinity. The HIV test, SalivaCardTM, was developed successfully, although this seven-step, three-reagent test has largely been superceded by more convenient tests, and Trinity has a new, particularly promising test that is in the process of being submitted to the FDA. Trinity's early history also included the development and sale of a pregnancy test, which was subsequently acquired by Sybron.

Prior to founding Trinity, management had gained some experience with a small Irish diagnostics company and had developed a broader vision for Trinity beyond its initial focus of the HIV test—specifically, to become involved with mainstream diagnostics. This has in fact been achieved, largely through the aggressive acquisition program shown below:

Table 1. Trinity Biotech
Acquisitions and Equity Investments

Business Description

Trinity's products test for foreign agents such as viruses, bacteria and parasites, and for naturally occurring conditions such as cancer cells and hormones. Revenues are derived from 400 different tests within numerous diagnostic categories.

Table 2. Trinity Biotech
Products and Estimated Revenues
(US$ in millions)

The Company's products may also be broken down according to key technologies and techniques. (See Appendix for a description of certain technologies.)

•    Enzyme Immunoassay (EIA) products include over 100 assays utilizing different formats. These tests are performed on plates that allow for up to 96 simultaneous tests and can be performed manually or more typically on automated equipment.

•    Fluorescence Assays are either Direct Fluorescence Assays (DFA) or Immune Fluorescence Assays (IFA). Trinity offers 40 fluorescence assays, which are typically performed in medium to large hospital laboratories around the world. Most of the tests are IFAs, and the majority of these are used to diagnose autoimmune disorders. The remainder of the assays are used to assist in the diagnosis of infectious diseases such as Lyme disease and Legionnaires disease. Of the 8 DFAs Trinity offers, the largest range are for detecting causative agents of sexually transmitted diseases (STDs), principally Chlamydia and Herpes.

•    Rapid Assays include a range of 14 membrane-and latex-based rapid assays utilized in POC and over-the-counter markets. These tests give a definitive qualitative answer, indicating the presence or absence of antigens or antibodies as an aid in the diagnosis of infection or other clinical conditions.

      Tests for HIV are available in three formats. SalivaCardTM is a self-encased, flow-through rapid EIA device where results are obtained by visual interpretation of a color change of a saliva sample, whereas CapillusTM utilizes latex agglutination enhanced by capillary slide technology. The CapillusTM test has been approved by the World Health Organization as a rapid test, but has not been sold in the U.S. because it lacks FDA approval. However, these older technologies are expected to be superceded by the UniGoldTM test, a 5-10 minute test performed on a drop of blood, which does not require refrigeration. As mentioned previously, Trinity is in the process of submitting the UniGoldTM test to the FDA and is hopeful of receiving marketing clearance this summer.

      Trinity's UniGoldTM HIV test has the potential to become its single most important product, due to the continued increase in the number of HIV positive cases and despite competition from other rapid tests. During November, OraSure Technologies received FDA approval of its lab-based blood test, the OraQuick® Rapid HIV-1 Antibody Test, which uses a finger-stick whole blood sample for the detection of HIV-1 antibodies. This is being distributed by Abbott Laboratories, but thus far has reportedly received only limited acceptance; in fact, its relatively high price probably limits its use to the more developed countries. Apparently Trinity's UniGoldTM test is faster than OraSure's (i.e., 5-10 minutes vs. 20 minutes) and is more widely used outside the U.S.

      Another prospective competitive product is a rapid (less than 20 minute) urine-based test for HIV being developed by Calypte Biomedical. Calypte plans to introduce this test to selected foreign markets as early as this March, but because of extensive clinical studies required by the FDA, U.S. marketing is unlikely before the end of 2004. Calypte plans to offer its product in two formats—a simple, inexpensive dip stick version and, for the U.S. market, a product incorporated in a cassette, similar to U.S. pregnancy tests.

•        Western Blot Assays are typically used in reference or specialty laboratories for confirming the presence, or absence, of antibodies. Trinity's tests include the first Lyme Western Blot assay to receive FDA clearance for distribution in the U.S. Other Western Blot kits include assays to aid in the diagnosis of autoimmune disorders and, more typically, infectious diseases such as Syphilis and Epstein Barr Virus.

•        Hemostasis test kits were added to Trinity's product line through the acquisition of the Biopool hemostasis business and promise to become Trinity's single largest assay in 2003. These kits assess and diagnose disorders of blood coagulation, thrombotic risk factors, fibrinolysis, platelet function and the vascular systems. They are sold to hospitals, clinical laboratories, commercial reference laboratories and research institutions.

During August 2002, Trinity greatly broadened this product line through the acquisition of the hemostasis division of Sigma Diagnostics, part of Sigma Aldrich. This included a portfolio of 50 tests, covering both routine and specialty assays, manufactured in St. Louis. Combined with the Biopool business, Trinity now also has extensive distribution and direct sales forces in key markets, including the U.S., Germany and the U.K.

The major acquisition from Sigma also included the Amelung line of automated and semi-automated instruments, on which the hemostasis tests can be performed. Manufactured in Lemgo, Germany, they consist of small, medium-size and large throughput instruments that address the physician's office market as well as large reference and university laboratories. There is an installed base of 500 instruments, each of which is expected to generate revenues of about $15,000 per year in plastic consumables and reagents, and management is hopeful of expanding this base by an additional 100 instruments per annum through a combination of sales and placements typically linked to annual commitments to purchase reagents. This business should also be boosted by the addition of a new coagulation analyzer, the DestinyTM, which received FDA marketing clearance last November. This product is the culmination of three years of product development effort, and gives small laboratories the ability to process hemostasis tests formerly offered only in large reference laboratories. It can process about 100 samples per hour.

Competition in hemostasis instrumentation comes from a limited number of competitors, primarily Dade Behring, the Japanese instrument manufacturer Sysmex, and Instrumentation Laboratory (now part of a Swiss conglomerate). We understand that one important advantage offered by Trinity's equipment is the ability to confirm measurements by both optical and mechanical readings.

Management publicly estimated that revenues from the hemostasis business in the first 12 months following this acquisition will approximate $19 million, with $11 million derived from the Sigma Diagnostic products and $8 million from Biopool's products. (As shown previously, we estimate that in calendar 2003 combined sales will approximate $22.5 million, including sales of related instruments). Furthermore, after all hemostasis test manufacturing from both entities is transferred to Ireland, there should be significant cost savings. Another important point is that Trinity also intends to expand its equipment expertise into the manufacture of immunoassay instruments on which Trinity's existing broad range of immunoassay diagnostic tests will run.

Sigma Diagnostics had acquired the Amelung instrument business in 2000 to complement its hemostasis test kit product line in St. Louis, and reportedly paid in excess of $20 million for Amelung. However, in April 2002, Sigma's management announced its decision to exit diagnostics in order to concentrate on its core business of selling research chemicals. Apparently Sigma was losing money in diagnostics, which, in addition to the hemostasis component, included a line of immunoassay products (subsequently sold to IVAX) and clinical chemistry products; a specialty portion of the clinical chemistry product line was sold to Trinity in late November.

Investment in HiberGen Limited

This represents an entry for Trinity into the area of molecular diagnostics. In 2000, Trinity acquired 33% of HiberGen for U.S. $1.4 million, and in mid-2001, increased its holding to 40% at a cost of $0.3 million. HiberGen is currently exploring the possibility of obtaining an additional $5 million, largely through venture capital investors, and up to $750,000 of this amount is expected to come from Trinity.

HiberGen, also based in Ireland, was founded in 1996 with the objective of identifying genetic variations of medical relevance. In pursuit of this goal, a proprietary technology was developed, called SNaPIT. This is a rapid genetic variation detection technology that has been licensed to San Diego-based Sequenom Inc. and an East European reagent manufacturer, Fermentas; other third party licenses are anticipated. Licensing revenues from existing agreements are expected to approximate $2.0 million in 2004, and thereby help fund a potentially more valuable disease gene program.

HiberGen also has an isothermal amplification technology called GMA (Glucosolase Mediated Amplification), an extension of the SNaPIT technology. This provides an alternative for Trinity to upgrade its existing immunoassay and other diagnostic products to molecular diagnostics, since Trinity has the exclusive license for this technology in pathogen detection. GMA is similar to PCR (Polymerase Chain Reaction) technology, which is being used by others to replicate, or amplify, the DNA supply so as to permit many more tests.

In addition to its technology platform, HiberGen has disease gene management programs in several areas, including rheumatoid arthritis and diabetic nephropathy. HiberGen's objective in these programs is to build an intellectual property position around the identification and characterization of the disease-associated genes for diagnosis and treatment.

A final element of HiberGen's business involves pharmacogenomics, whereby it will use the SNaPIT technology in the generation of genetic profiles. These will access the unusually homogenous, Celtic-based population in Ireland to conduct population and familial studies. These studies will be applicable to drugs under development as well as to drugs being marketed, with the objective of improving safety and efficacy. Currently HiberGen has obtained access to ten disease cohorts from the Irish population, and in three of these it has a sufficient number of samples to begin the genetic analysis. These three are ADD (attention deficit disorder), CAD (coronary artery disease), and IBD (inflammatory bowel disease). It plans to establish partnerships with major pharmaceutical companies, whereby it would receive upfront and milestone payments associated with the development of multiple products in each disease category.

Competitive Issues and Strategies

•    Technological Challenges. Trinity's revenues from some of its older tests have been restrained and eroded somewhat by the introduction of competing products based on molecular diagnostics. In particular, products offered during the past 2-3 years by PerkinElmer and others, encompassing PCR technology have effectively challenged EIA and fluorescence technologies within the STD product category, especially in France and Sweden. However, Trinity is hopeful that this erosion can be stabilized and even reversed, in part because of a recently published study which concludes that the EIA format is better for detecting Chlamydia than PCR. In addition, the cost of EIA testing is significantly lower than that for PCR.

•    Adapting Products to European Platforms. This is not a significant technological challenge, but reflects a realization that if Trinity is going to more aggressively penetrate European markets, then some of its products need to be modified. In one instance this will require changing from a two-plate format to a single-plate format, and in other cases it will require reconfiguring tests to address the European preference for relying primarily on quantitative rather than qualitative results. Another example is the planned development of a Western Blot test for the European strain of Lyme disease.

•    Filling in Voids. Besides modifying existing tests to better address European needs and preferences, management has been evaluating opportunities where it does not have any offering. For example, it has only an IFA-based product for diagnosing Coeliac disease (an auto-immune disorder that stems from an intolerance to gluten in cereals), but because the market is now shifting to EIA-based tests, Trinity plans to offer this test in both formats.

      Another strategy is to have each of the Company's distributors—of which there are approximately 250 worldwide— increase the number of products they handle. Many of these distributors offer only a limited number of Trinity's products.

•    Bundling Products. Trinity's increasingly broad product line is enabling it to become a comprehensive supplier of a laboratory's needs at a time when these customers prefer to deal with fewer vendors. This, in turn, facilitates the bundling together of orders for many products, whereby the customer may be given an incentive for a volume discount and, more importantly, Trinity can in effect couple a price-competitive product, such as its TOCH panel, with a more proprietary product, such as its test for diagnosing Epstein Barr virus or Lyme disease. The recent acquisition of Sigma's special clinical chemistry tests has also added proprietary products which have given Trinity access to some new accounts.

•    Product Standardization. There is already a high degree of standardization among Trinity's products, which means that a laboratory with automated instrumentation can run many batches of tests simultaneously using the same instrument. Management nevertheless plans to further increase the uniformity of its products to make them more automation friendly. Consolidation in the lab industry has also accelerated the trend toward greater standardization of ready to use components where no preparation, such as dilution, is required, and incubation times have been adjusted so as to be suitable for automation. Trinity is benefiting from this trend, because its highly standardized product line is receptive to greater automation.

•    Opportunities in Instrumentation. The acquisition of Sigma's instrument business has given Trinity a new capability that it can leverage. In addition to selling its branded instruments, Trinity could manufacture one or more of these on an OEM basis for others. Also, as mentioned previously, it could develop equipment to run many of its non-hemostasis tests.

•    Expanding Direct Sales. As discussed below, in the last two years, direct sales forces have been established in the U.S., Germany and the U.K. The U.S. sales force sells different products than does its U.S. distributor, but this relationship is changing so as to enable Trinity to eventually offer all products, while still maintaining Wampole as a distributor.

Sales and Marketing

Through a network of approximately 250 international distributors, Trinity has a worldwide customer base in 80 countries. These distributors are managed by regional sales directors in North America, Europe, the Middle East and Africa, Asia Pacific, and Latin America.

Table 3. Trinity Biotech Estimated Sales
(US$ in millions)

The most important agreement is with Wampole, formerly a division of Carter-Wallace that was purchased by Medpointe Capital and then recently sold to Inverness Medical Innovations. Trinity entered into a supply agreement with Wampole in 1995 whereby that company was granted exclusive rights to Trinity's products in the U.S. and Puerto Rico. Nevertheless, Trinity is permitted to sell certain of its products in those territories which Wampole chose not to market, and products subsequently obtained by Trinity through acquisitions are not covered by this agreement.

Trinity's direct sales in the U.S. began following the December 2000 acquisition of Bartels, Inc., which had its own sales force. Additional sales people were subsequently obtained with the acquisition of Biopool in December 2001, but until the acquisition of products from Sigma Aldrich in 2002, these sales efforts were managed as separate organizations. All U.S. sales are now being directed from St. Louis, the location of Sigma's hemostasis and specialty clinical chemistry businesses. This has also included centralization of customer service. Sales and marketing personnel in the U.S. now total about 30. Also, in mid-2001, the Company initiated direct sales in the important German market which, including sales people formerly employed by Sigma Aldrich, now total about 22. Then, late in 2002, Trinity formed a sales force of five people in the U.K.

One of Trinity's important selling points is the breadth of its product line, particularly in the diagnosis of infectious diseases, but the appeal of this and other features varies according to the individual customer. For example, it has been very successful selling the MarDx line of Western Blot diagnostic tests to large reference laboratories such as Laboratory Corporation of America and Quest Diagnostics, while its hemostasis line has been relatively more successful in penetrating large hospital accounts. As indicated previously, the unique specialty clinical chemistry products recently acquired from Sigma should be helpful in broadening Trinity's access to new accounts, and centralization of the U.S. sales and marketing efforts in St. Louis should also help the Company broaden the penetration of its product line in many accounts.

Another important recent development was a price increase of about 12% obtained by Trinity last September on the products that it sells to Wampole. At that time the Company also altered the terms of its relationship whereby Trinity will have the right to sell in the U.S. its products that are currently being sold exclusively by Wampole. We understand that the shift in this arrangement will begin in the third quarter of 2004.

Facilities

The primary raw materials required for Trinity's test kits consist of antibodies, antigens and other reagents, plastic and packaging materials. The reagents used as raw materials are acquired for the most part from third parties. The Company's manufacturing and other facilities consist of the following:

                                                                            Location                               Employees

                                                                          Bray, Ireland                                250

                                                                          Jamestown, N.Y.                         100

                                                                          Carlsbad, Calif.                              40

                                                                          St. Louis, Mo.                                35

                                                                          Lemgo, Germany                            90

                                                                                                                                515

Bray, Ireland         This 70,000 ft2 leased facility is the site of corporate headquarters, and houses a broad range of functions, from R&D to manufacturing, distribution, marketing, finance and administration.

Jamestown, N.Y.  This facility (24,000 ft2) was obtained with the 1997 acquisition of Clark Laboratories. A broad range of infectious disease diagnostics are manufactured, and this is also the logistics center for the U.S. business as well as the U.S. engineering center (i.e., it conducts U.S. training for instrumentation service technicians and some product development).

Carlsbad, Calif.    The two leased facilities at this location (36,000 ft2 combined) are associated with the MarDx business. There is some product development work, but these are primarily manufacturing plants, most importantly producing Lyme disease diagnostics.

St. Louis, Mo.       Subsequent to the August 2000 acquisition of the hemostasis reagent business from Sigma, the Company opened offices at this location to accommodate the U.S. sales force. This includes a number of former Sigma employees who provide marketing, sales and technical support.

Lemgo, Germany This 80,000 ft2 facility was also part of Sigma, producing instruments and associated plastic consumables for the hemostasis market. Trinity has also consolidated the marketing and shipment of this product line at Lemgo.

With the December 2001 acquisition of Biopool's hemostasis business, Trinity also obtained two additional facilities — a leased 25,000 ft2 plant located in Ventura, California and a leased 12,500 ft2 plant in Umea, Sweden. However, the Ventura operation was closed in September and its production is currently being transferred to Ireland, while the production portion of the facility in Sweden is in the process of being closed.

Research and Development

Trinity employs 34 full time R&D professionals at its facilities in Ireland, Jamestown, N.Y., and Carlsbad, Calif., and in 2003, associated expenditures are estimated to be about $5.7 million. The Company has five R&D groups in Ireland and the U.S., focusing separately on the areas outlined below. Trinity also subcontracts some R&D to independent researchers in the U.S. and also sponsors various projects in the U.S., the U.K. and Ireland.

Microtitre Plate Development Group

•    Development of microtitre plate assay for the detection of HSV-1 (which causes serious complications in pregnant women) and HSV-2 (which makes patients more susceptible to contracting HIV).

•    Adaptation of assays on Microtrak XL units. During 1998 Trinity acquired the Microtrak Chlamydia business from Dade Behring Inc., and thereby obtained instruments to run Microtitre plate tests. Since these only ran Chlamydia EIA tests, Trinity has been reconfiguring its other Microtitre assays so that they can also run on this instrument.

•    Redevelopment of the CAPTIATM EIA products. The Company's Syphillis IgG product is undergoing reformatting in order to make these kits more compatible with automated assay systems.

•    Recombigen HIV. This microtitre plate test is being re-developed so as to allow it to be more competitive in the marketplace as well as suitable for automation.

Rapid Development Group

•    Development of Recombinant HIV UniGoldTM Test. This represents a modification of Trinity's UniGoldTM HIV Test using recombinant proteins, and allows the test to be produced in a more cost-effective manner.

•    Modified Strep A Test. Trinity has developed a simpler form of its rapid Strep A test to be sold to doctor's offices in the U.S.

•    UniGoldTM Flu Test. Trinity is developing a rapid test for Flu A and Flu B on its UniGoldTM platform.

Western Blot Development Group

•    European Lyme IgG and IgM Western Blots. Development has been completed on two new Western Blots that have been designed specifically for the detection of European Lyme disease.

Immunofluorescent Assay Development Group

•    Trinity's development department has been expanded to include a group that will work exclusively on redesigning various immunofluorescent assays from indirect assays to direct assays. The aim is to make the products more user- friendly and reduce assay times.

Instrumentation Group

•    Trinity is commencing research in instrumentation. This group includes development personnel that were formerly part of Sigma-Amelung.

Earnings Record and Outlook

An outline of the Company's long-term annual earnings record is tabulated below, and more detailed recent results and projections are shown on pages 13 and 14. Prior to 1997 Trinity was essentially a development stage company, largely utilizing technology obtained through the acquisition of Disease Detection International in March 1994. Acquisitions in 1997 and subsequent years have dramatically increased and broadened the Company's business.

               Table 4. Trinity Biotech Historical Earnings

2001

Sales jumped 25% in 2001, largely reflecting the contribution from three recent acquisitions: MarDx Diagnostics (acquired March 2000); assets of Bartels Inc. (December 2000), and the Amerlex hormone business (October 2001). Sales of other products, in the aggregate, rose an estimated 5%. Gross profits advanced 32%, or $4.6 million, but this was offset by a doubling of administrative expenses to $10.3 million (excluding exceptional items), reflecting costs incurred by the companies acquired in 2000 and 2001 plus the investments in direct salesforces in Germany and the U.S. Amortization also increased by $0.5 million, due to commencement of amortization on certain product lines and the recent acquisitions. The cumulative impact of all these factors was that net income for the year (before exceptional items) declined by 17%. EPS fell by a greater amount (23%), due to an increase in the weighted average number of shares.

Exceptional administrative expenses in 2001 were $3.65 million. Of this total, $2.85 million related to commitments made upon the acquisition of Biopool's assets—specifically, payments to employees for redundancy and plant closure costs, including commitments for onerous leasing arrangements. The balance of the exceptional charge of $0.8 million related to the acquisition of Bartels, and was mostly payments to employees to ensure the effective transfer of the business from Seattle to other facilities.

We believe that Trinity's results should be viewed before these exceptional charges, and observe that certain provisions made for restructuring costs incurred as a result of acquisitions (principally payments to employees) would not be recognizable under U.S. GAAP until they were actually incurred. Unfortunately, the comparison between Irish GAAP and U.S. GAAP is also complicated by different treatment of other items. In particular, in 2001 U.S. GAAP would not have permitted the capitalization of certain R&D costs, and therefore R&D expensed in 2001 would have been $0.9 million greater than under Irish GAAP. A more significant difference relates to the amortization of goodwill. Under new rules, effective December 2001, goodwill is no longer amortized under U.S. GAAP but will be subject to annual impairment tests. In contrast, under Irish GAAP, goodwill must be capitalized and amortized over the period of its useful life. Therefore, it is believed that the net effect in the future will usually be that the statement of earnings according to Irish GAAP will be more conservative than earnings according to U.S. GAAP.

2002 and 2003

As shown on page 14, sales and pretax income posted strong gains during the first three quarters of 2002, and for the nine month period rose 36% and 25%, respectively. (Excluding Trinity's share of the operating loss in its genomics associate, HiberGen, pretax income advanced nearly 29%). Sales were boosted by inclusion of two 2001 acquisitions for the entire nine months (the Amerlex hormone business, acquired October 2001, and the Biopool hemostasis business, acquired December 2001) as well as five weeks' sales from the Sigma acquisition of August 2002. The latter two acquisitions also continued to boost year-to-year comparisons in the December quarter. EPS comparisons were penalized by a higher effective tax rate.

We estimate that earnings for the fourth quarter of 2002 were similar to those of the third quarter, although sales were probably somewhat higher because they included a full quarter's contribution from Sigma-Amelung and some initial sales from the more recently acquired Sigma specialty clinical chemistry business. Results should also have benefited modestly from a weighted average price increase of about 12%, effective in early September, on products sold to the U.S. distributor, Wampole. However, we believe that these benefits were offset by costs associated with integration of the Sigma-Amelung acquisition. Also, cost reductions from elimination of Biopool's facility in Ventura, Calif., as well as Biopool's facility in Sweden, will not be evident before the first quarter of this year.

We expect strong sales gains throughout 2003, for inclusion of the two acquisitions from Sigma for the entire year should virtually guarantee favorable comparisons and, among prospective new products, the new HIV blood test could make a meaningful contribution to U.S. sales during the second half of the year. Manufacturing efficiencies should also accompany higher volume. Our estimates do not anticipate any additional acquisitions, an assumption that seems logical near term as Trinity more fully digests its recent purchases. However, in this regard our 2004 estimates could prove to be conservative, since we expect opportunistic acquisitions to continue to be a key component of management's growth strategy.

Table 5. Annual Income Statements

(000's of $US, except EPS)

Table 6. QUARTERLY Income Statements

(000's of $US, except EPS)

Finances

Trinity's financial position is strong, for although its cash is modest, in our opinion it has the ability to increase its borrowings by several million dollars. In late December, in conjunction with the acquisition of Sigma's specialty clinical chemistry business, Trinity obtained $2.5 million through the private placement of debentures. These carry an interest rate of 5.25% and are convertible into 1.67 million shares at $1.50 per share. The previously outstanding 7.5% debentures (footnoted below) have also been exchanged for debentures which carry similar terms as the recent private placement. These debentures are held primarily by London based Tailwind Fund Ltd., and if Tailwind converted this holding they would own approximately 5.7% of the Company's common stock.

Selling terms typically call for payments within 45 days, and the Company has generally had good experience collecting its receivables. There were no delinquencies in 2001, although we understand that two receivables written off in 2002 totaled $55,000.

Capital expenditures were about $1.1 million in 2002 and are projected to be $1.8 million in 2003, with the increase largely reflecting expansion and realignment of operations in Ireland. Depreciation approximated $0.9 million in 2002, and is expected to be about $1.3 million this year, while goodwill amortization is currently $2.5 million annually.

Table 7. Balance Sheet as of September 30, 2002
($US, in millions)

A lawsuit has recently been filed against Trinity which is rather complicated but does not appear to threaten its strong financial position. It should nevertheless be recognized by investors. In brief, on December 19, 2002 Trinity filed a lawsuit against Xtrana, Inc. (formerly Biopool International), alleging that Xtrana misrepresented the status of a single product that had been part of the hemostasis product line purchased from Biopool a year earlier. It had accounted for less than 2% of the acquired product line's sales, but had been the subject of an earlier patent infringement lawsuit against Xtrana by Instrumentation Laboratory (IL). In essence, Trinity alleges that Xtrana had improperly committed Trinity (as the subsequent owner of the product) to terms of the negotiated settlement with IL. On January 17, 2003, Xtrana filed a counter suit, seeking $27 million in actual damages and $30 million in punitive damages which, it claims, were caused by an alleged late payment by Trinity in December 2002 of a $855,000 note associated with Trinity's acquisition of the hemostasis business. Trinity states that this payment was in fact within the allowable grace period, and considers the suit baseless.

Table 8. Ownership as of September 30, 2002

Valuation

There is some similarity among the companies shown below, although there are also many important differences. The table indicates that Trinity's valuation relative to these companies is quite low on the basis of a few measurements.

Table 9. Valuation

Bio-Rad Laboratories derives 56% of revenues from clinical diagnostics test kits and equipment; 37% is obtained from life sciences products (used to separate and analyze complex chemicals); and the remaining 7% is from the sale of analytical instruments for research by the chemical and semiconductor industries.

BioSite Inc. provides rapid tests, primarily for use in hospitals, that aid in the diagnosis of diseases. Its Drugs of Abuse line accounts for 40% of sales, while a POC test, BNP, that aids in the diagnosis of congestive heart failure, has been growing rapidly and contributes about 32%. However some analysts expect BNP to experience increased competition.

Diagnostic Products Corporation manufactures and markets a broad line of immunodiagnostic test kits and related instrumentation for hospital and clinical laboratory use.

Meridian Bioscience, Inc. manufactures and markets diagnostic test kits used for the rapid diagnosis of infectious diseases, particularly related to gastrointestinal, viral and respiratory infections. Meridian also is a supplier of specialty reagents and biologicals to other diagnostic companies, and, as such, is positioned to capitalize on their research efforts to develop new biopharmaceuticals arising from genomics.

OraSure Technologies has the only FDA-approved oral fluid collection device used with a lab-based EIA screening test for HIV-1 antibody detection, which it sells to the insurance risk assessment and infectious disease testing markets. Another similar product detects drugs of abuse. As noted earlier in this report, during November, 2002, OraSure received FDA approval of its lab-based blood test, which uses a finger-stick whole blood sample for the detection of HIV-1 antibodies.

Quidel Corporation develops, manufactures and market point-of-care rapid diagnostic tests, and in particular is a leader in tests to detect pregnancy, Strep A and influenza. The focus is substantially on women's and family health in areas such as reproduction, infectious diseases, general health screening, and diseases associated with the elderly. The stock declined 55% last year due to lower than expected sales and earnings.

Board of Directors

Ronan O'Caoimh, Chairman and Chief Executive Officer (47), co-founded Trinity in 1992 and acted as CFO until 1994 when he became CEO. Prior to joining Trinity, Mr. O'Caoimh was Managing Director of Noctech Limited, an Irish diagnostics company. He holds a Bachelor of Commerce degree from University College, Dublin and is a Fellow of the Institute of Chartered Accountants in Ireland.

Brendan Farrell, President (55), joined Trinity in 1994. He was previously Marketing Director of B.M. Browne Limited, a company involved in the marketing and distribution of medical and diagnostic products. Prior to that he was CEO of Noctech Limited, following six years with Baxter Healthcare where he was Director of European Business Development. Mr. Farrell has a Masters degree in Biochemistry from University College, Cork.

Rory Nealon, CFO (35), joined Trinity in January, 2003 from Conduit plc, a telecom services company, where he was CFO. Previously Mr. Nealon was employed by Allied Irish Banks plc where he invested equity and short-term mezzanine finance into emerging growth companies. Mr. Nealon holds a Bachelor of Commerce degree from University College, Dublin, and is a Fellow of the Institute of Chartered Accountants in Ireland, the Institute of Taxation in Ireland and the U.K. Institute of Corporate Treasurers.

Jim Walsh, Ph.D., Chief Operating Officer (44), joined Trinity in 1995. Previously Dr. Walsh was Managing Director of Cambridge Diagnostics Ireland Limited (CDIL). Before joining CDIL in 1987, he worked with Fleming GmbH as R&D Manager. Dr. Walsh has a degree in Chemistry and a Ph.D. in Microbiology from University College, Galway.

Denis Burger, Ph.D., non-executive director (59), was Chairman of Trinity from 1992 to 1995. He is President, CEO and a director of AVI Biopharma Inc., an Oregon based biotechnology company. Dr. Burger is also a 50% partner is Sovereign Ventures, a healthcare consulting and funding firm, also based in Oregon. He was a co-founder and, from 1981 to 1990, Chairman of Epitope Inc. In addition, Dr. Burger has held a professorship in the Department of Microbiology and Immunology and Surgery (Surgical Oncology) at the Oregon Health Sciences University. He received his degree in Bacteriology and Immunology from the University of California in Berkeley and his Master of Science and Ph.D. in 1969 in Microbiology and Immunology from the University of Arizona.

Peter Coyne, non-executive director (44), joined the board of Trinity in late 2001. He is a director of AIB Corporate Finance, a subsidiary of AIB Group plc, the Irish banking group, and has extensive experience in advising public and private groups on all aspects of corporate strategy. Prior to AIB, Mr. Coyne trained as a chartered accountant and was a senior manager in Arthur Andersen's Corporate Financial Services practice. He holds a Bachelor of Engineering degree from University College, Dublin and is a fellow of the Institute of Chartered Accountants in Ireland.

Appendix

Enzyme Immunoassays

These are the mainstay of standard clinical laboratories around the world. They are performed on plates that allow for up to 96 simultaneous tests and can be performed manually or more typically on automated equipment. In essence, each "well" is coated with antigen or antibody, depending upon the analyte being tested for.

When the test is run, the first step is to add the sample and a reaction will bind any antibodies or antigens (if present) to the "well" wall. After removal of interfering substances through washing steps, a color-forming reagent is added and the intensity of color is read on an instrument indicating the result. EIAs can aid in providing the clinician with accurate information to assist in the diagnosis of a variety of disorders such as autoimmune diseases, hormonal imbalances, sexually transmitted diseases, enteric infections, respiratory infections, cardiovascular diseases, and a wide range of other diseases.

Fluorescence Assays

These assays utilize two distinct technologies, namely Direct fluorescence Assays (DFA) and Immunofluorescence Assays (IFA). The principle of the IFA test can be summarized as the introduction of patient's serum to a specially prepared slide containing the specific antigen to which the antibody is directed. The antibody, if present, binds to the antigen and after a series of washing steps and addition of a conjugate, will emit fluorescence when viewed through a microscope equipped with an ultra-violet light source, The principle of DFA, however, is the fixation of a patient sample to a microscope slide, which is then introduced to an antibody conjugated to a fluorescent dye, to stain and thereby identify the antigen to which the antibody is directed.

Western Blot Assays

The principle of these types of tests is that a membrane containing electrophoreticaly separated proteins of a particular organism are incubated with a patient's serum sample. If specific antibodies to individual proteins are present, they will bind to the corresponding antigen bands. After various washing steps and conjugation, the strip is finally reacted with a precipitating color developing solution which deposits a visible precipitate on antibody reacted antigen bands. Bands can then be visualized, scored for intensity relative to a band of a weakly reactive control, and recorded.

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J. M. Dutton Ratings Breakdown - All Covered Companies

Stephen L. Handley has been engaged in investment research since 1961, in a career that has encompassed broad experience at several major Wall Street firms. These have included institutional investors (Morgan Guaranty Trust and Chemical Fund) and other investment banking/securities brokerage firms (White Weld, F. Eberstadt, L.F. Rothschild and Smith Barney). In 1986, Steve joined Smith Barney, where he initially followed special situations and then was a dedicated health care analyst focusing primarily on small market cap stocks. In 1997, he retired from Smith Barney, moved to New Hampshire and formed S.L. Handley Associates, LLC to focus on investment research, money management, and selective investment banking transactions. Mr. Handley graduated from Stanford University with a B.S. in Chemical Engineering, and obtained an MBA from Stanford Business School.

Trinity Biotech plc. IDA Business Park, Bray, Co. Wicklow, Ireland. Phone: (353) 1 276 9800. Contacts: Brendan K. Farrell, President; Rory Nealon, Chief Financial Officer. Web site: www.trinitybiotech.com

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