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Lynx Reports Sharp Decline in Revenue; Merger Completion Expected in Q1 05

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Lynx Therapeutics this week posted an 81-percent decline in third-quarter revenue and a net loss for the period, as the firm pushed back the expected completion date of its merger with Solexa to the first quarter of 2005.

Lynx reported revenue of $1.6 million for the quarter ended Sept. 30, down from reported revenue of $8.3 million in the third quarter of 2003.

The decrease in technology access and service fees, from which Lynx derives all of its revenue, was primarily due to three factors. First, during the first nine months of 2003, the company reported full recognition of technology access fee revenue of $7 million, for which there was no corresponding amount in 2004. Second, the firm decreased the fees it charges for its core Massively Parallel Signature Sequencing experiments.

In addition, during the first three quarters of last year, Lynx sold MPSS instruments to Japanese firm Takara under an amended collaboration. There was no such transaction in the first nine months of this year, Lynx noted.

For the first nine months of the year, the Hayward, Calif.-based firm reported a decline in revenue to $4.6 million from $16.1 million in the comparable period a year ago.

The firm also posted a net loss for the quarter of $4.3 million, or $.57 per share, compared to net income of $1.8 million, or $.38 per share, for the third quarter of 2003.

The firm’s shares had risen steadily over the past week in advance of the third-quarter report, climbing from $2.41 on Nov. 8 to close at $3.89 on Nov. 15, just minutes before Lynx released the results. But investors punished Lynx for the poor performance, sending its stock down $1.45, or 37.3 percent, to $2.44 in overnight trading fol-lowing the release.

Solexa Merger Pushed Back to Q1 ‘05

In a conference call following the release of the Q3 results, investors sought more clarity from Lynx on its proposed merger with UK-based Solexa. The firms signed a definitive merger pact at the end of September, under which Lynx agreed to issue up to 29.5 million shares in exchange for all of the outstanding shares of privately held Solexa’s capital stock and all options to purchase shares of Solexa stock (see BAN 10/6/2004).

Under a separate agreement, Lynx received from Solexa loan advances totaling $2.5 million. That amount was increased under an OEM pact signed between the firms in late October. Solexa agreed to pump an additional $500,000 into Lynx in exchange for “certain product design and development services,” Lynx disclosed in an Oct. 29 filing with the US Securities and Exchange Commission (see BAN 11/3/2004).

According to Lynx, the cash infusion was made to speed the development of new sequencing technologies in time for the completion of the firms’ merger. But the funding was also necessary to keep the firm afloat. Lynx finished the third quarter with $1.7 million in cash, cash equivalents, and short-term investments — and in an amended filing to its 2003 year-end earnings report with the SEC noted that its independent auditor, Ernst & Young, had raised “substantial doubts” about the firm’s ability to stay solvent.

The combined firm, while being publicly traded under the “LYNX” ticker symbol, would also have the backing of several high-profile venture-capital firms that recently invested in Solexa. The privately held concern received a $14.4 million Series B cash infusion in late September led by Amadeus Capital Partners and included funding from previous Solexa investors Abingworth Management, Schroder Ventures Life Sciences, and Oxford Bioscience Partners.

Although the merger has yet to be consummated, the firms’ scientists have been working together on developing its first product, a new DNA sequencing instrument based on jointly purchased DNA cluster technology from Swiss firm Manteia.

“I think we have the basis for being able to really accelerate the kind of work we’ve been doing together without fully waiting for there to be a combination,” said John West, CEO of Solexa, who would assume the same role in the combined firm, during the conference call.

West noted that the firm expects to launch a product in late 2005. But, “we have not laid out an exact time schedule for that,” he said. West said the firm would offer a beta version to test sites first before a full commercial launch.

Kevin Corcoran, the current president and CEO of Lynx, said during the call that the partners expect to complete the transaction in the first quarter of 2005, pushing back the initial target date of completing the merger by the end of the year.

Although Lynx has yet to set a date for its shareholders to vote on the merger and related items, Cor-coran asked for their support by approving the issuance of 29.5 million shares of Lynx common stock in connection with the acqui-sition pact, the election of seven directors to the combined firms’ board, and a reverse stock split.

Due to a change in control of Lynx’s shares, the firm must requal-ify for trading on the Nasdaq. Under the exchange’s rules, a company’s stock must trade above $4 for the 90 days preceding the completion of the transaction. Lynx cur-rently does not satisfy this requirement, and according to the SEC documents, “intends to effect a reverse split of its outstanding shares.” The firm’s shares have not traded above $4 since May, so a reverse split is likely.

The reverse stock split is one item that shareholders have concerns about, since it will dilute the holdings of the company. Corcoran noted that the reverse split would be post-issuance of shares to Solexa. “It’s difficult to predict what the market will do,” Corcoran said. “If it is the case that [the merger] does close and we haven’t met that requirement to maintain the small cap listing, we would have to do the reverse split.”

Corcoran echoed earlier statements made by company officials that they “expect the combined company will be able to address significant segments in both [the gene expression and DNA sequencing] markets.”

Tom Vasicek, Lynx’s vice president of business development, said during the call, “We have continued to expand our applications of Lynx’s technologies beyond our traditional gene-expression market. We see the broader application of these breakthrough technologies as a stepping stone to our future in providing reagents and next-generation instrumentation for the DNA sequencing market.”

The launch of Lynx’s next-generation DNA sequencers should provide “an additional major boost,” he added. “We expect these instruments could be adopted broadly across all components of the research community including DNA sequencing and gene expression analysis.”

— EW

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