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Cash-Starved Lynx Therapeutics Stock Listings Moved To Nasdaq s Smallcap Marketplace

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Lynx Therapeutics announced last week that its securities would trade on the Nasdaq SmallCap Market, the latest in a series of moves for the Hayward, Calif.-based microarray technology firm.

The company operates around its flagship Massively Parallel Signature Sequencing technology, the brainchild of Nobel laureate scientist Sidney Brenner, which consists of tags that attach to the ends of DNA fragments in the sample to be studied, and complementary antitags that are added to microbeads.

The tagged fragments hybridize to the antitags, and the beads are directed into a flow cell, where the fragments are sequenced using Lynx’s instruments. The sequenced fragments are counted to see how much of a certain transcript is present in each sample — a digital type of readout in an industry that is mainly analog.

The technology is sold on a services basis and is regarded as producing high-quality data at a much higher degree of resolution than other methods.

The Nasdaq exchange transferred the company’s listing to its small-cap exchange as Lynx’s reported stockholder equity of $8.1 million, as of March 31, fell below the market’s minimum equity requirements necessary for listing on the prestigious big board.

Lynx had resisted the move since Dec. 13, 2002, when it received notice from Nasdaq that it was in danger of falling off its market for failing to maintain a minimum bid price of $1 a share. Lynx appealed to maintain its listing, and then, on Jan. 15, 2003, announced a 1-for-7 reverse split, which would effect-ively raise its bid price above the minimum standard, a not-unusual tactic many companies employ in an effort to maintain the prestige and benefits of trading on the big exchange.

Lynx executives did not respond to a BioArray News request for comment.

Lynx joins a market populated by some 800 companies, many of them survivors of the high-tech bear market. In fact, it shares this market listing with Acacia Research, the parent of CombiMatrix.

The move to the SmallCap market primarily affects the company’s ability to raise funds through the sale of its stock, a financial analyst said.

“It’s a lot more difficult to raise money if they need to,” said Sa’ar Yaniv of the investment bank Friedman, Billings, Ramsey, the only analyst who follows Lynx. He holds no investment in Lynx but his firm did help Lynx in a previous financial transaction.

The definition of small-cap stocks can vary from companies with market capitalization below $100 million to as high as $500 million. Trading on the SmallCap exchange makes it more difficult for large investors, like mutual funds, to take meaningful positions in these companies’ stock as they are required to file with the SEC, essentially tipping their hands to other investors.

Small-cap trading is a volatile market as trading volumes are smaller and any movement is magnified.

On the upside, some gurus say small-cap stocks can do well in an economy emerging from recession.

Judging by the spate of recent announcements of new customers, Lynx is on the threshold of revenue-producing deals. The company now has seven partnerships.

The company recently announced the signing of the International Livestock Research Institute of Nairobi, Kenya, and the Center for Tropical Veterinary Medicine of Edinburgh, Scotland, to agreements for gene-expression research services on livestock parasites and certain arthropod vectors.

Lynx will collect fees based on the services it performs on samples provided by its customers — creating a time lag between dotted-line and payment.

The company could use those funds. Lynx reported revenues of $3.4 million for the first quarter ending March 31, compared to $5 million for the year-ago quarter. The company had an operating loss of $4 million for the quarter, compared to $3.8 million for the same period in 2002, and reported cash and cash equivalents of $7.4 million as of March 31. Lynx spent $3.6 million for R&D for the quarter, compared to $6.9 million for the year-ago period.

Kevin Corcoran, who will observe his one-year anniversary as Lynx president and CEO in June, said in a statement the firm grew revenues from technology access and services fees to $3.2 million in the quarter, compared to $2.3 million for the first quarter last year.

In the first quarter, the company reduced its workforce by 25 percent, laying off workers in its R&D facilities in Heidelberg, Germany, and those working in Lynx’s proteomics group in California, taking a $300,000 charge in the quarter for costs associated with the layoffs.

Additionally, the company announced an agreement with Millennium Pharmaceuticals to study gene expression in specific blood cell populations. Also, it announced an extension of a service agreement with the Institute for Systems Biology of Seattle to conduct gene-expression analysis as part of a prostate cancer study. Lee Hood, who founded ISB in 2000, is a member of the Lynx board of directors.

Yaniv of FBR responded to Lynx’s first-quarter financials by reducing his revenue estimates for the year to $20 million for 2003, and $26.5 million for 2004.

In a research note, he wrote: “We continue to believe that the company can reach cash flow neutrality in late 2003, and profitability in 2004 because of the cost-control measures management has been implementing.”

He told BioArray News that the company has to continue to create new revenue prospects.

“The company is getting traction, signing agreements with high-profile research organizations, universities and government,” he said.

— MOK

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