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Sinking Lynx Finds Life Preserver in Solexa; Merger Expected to Close Within Two Weeks

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Since announcing last month a preliminary agreement to merge with privately held Solexa, beleaguered Lynx Therapeutics has kept its investors and the market in the dark about details of the planned combination.

Who will be the surviving entity? Will the firm be publicly or privately held? How much cash does Solexa have to support Lynx’s operations? Will gene expression or sequencing products drive revenue growth at the combined firm? These are just a few of the questions that have not yet been answered but are expected to be cleared up very soon — most likely within the next couple of weeks, a source close to the acquisition told BioArray News.

One question that appears to have been answered is who will lead the new company, as John West, a former vice president of DNA platforms for Applied Biosystems, was named CEO of Solexa on Aug. 27. West replaces Nick McCooke, who led Solexa through its early stages in developing single-molecule arrays.

If the merger is completed, West is expected to split his time between the UK and California, according to Simon Bennett, Solexa’s director of business development. “Regardless of whether or not we go ahead with the merger, we plan to build a team in North America,” Bennet said. “That was in the plans for next year — to get some marketing activity going in the USA at a USA-based office. It’s likely that John, being in the US at least part of the time, will provide that opportunity.”

A close working relationship between the firms was forged in March 2004, when they jointly purchased technology for generating DNA colonies from Swiss firm Manteia. Lynx planned to replace its Megaclone micro-beads, part of its Massively Parallel Signature Sequencing technology, with the DNA cluster approach. The move was expected to enable Lynx to deliver its technology and instrumentation directly to customers, effectively shifting its focus from providing gene expression and genomic structure analysis services to selling instruments.

At the time, the partners said they anticipated further collaborations based on the DNA cluster technology. As time progressed, the firms decided that pursuing a merger might make more sense than further alliances.

Lynx officials did not respond to calls seeking comment on the pending merger. But Lynx President and CEO Kevin Corcoran said in a statement announcing the pact that combining the firms’ technologies would allow faster integration of the cluster technology and accelerate development of Lynx’s MPSS-based instrumentation. “Solexa has proven expertise in nucleic acids biochemistry, surface chemistry, and software for genome assembly, all of which could provide valuable contributions to our development efforts,” he said.

Essex, UK-based Solexa has been working on integrating the DNA cluster technology into its single-molecule sequencing system. The company, which was founded in 1998 as a spin-off from the University of Cambridge, has raised £15 million (US$23 million) since its inception.

Its technology is primarily aimed at resequencing, rather than de novo sequencing, and involves chopping up genomic DNA and depositing the molecules on an array in a random, unaddressed form. Researchers then add one base at a time to the billion fragments of DNA attached to the chip, measuring fluorescence to see which base attached to which strand of DNA.

Solexa is currently optimizing a sequencing system based on clustered arrays, which the firm expects will be sequencing genomes next year. The firm is one of several start-ups chasing the goal of being able to sequence a human genome for $1,000, which it is aiming to accomplish within this decade.

But the benefit Solexa would get out of merging with Lynx — a firm that has racked up significant losses, posted consecutive quarters of dwindling revenues, and burned through nearly all of its cash — was not immediately clear. “One thing we can be certain of is that we will only continue with the merger if it makes commercial sense for Solexa,” Bennett said.

He would not specifically comment on what Lynx’s assets provide the firm in its goals for the marketplace, but he said that gene expression would be a key area of focus for Solexa. “We have a technology that has very broad application from whole-genome resequencing to gene expression,” he said.

West, Solexa’s new CEO, “is very keen on the gene expression market,” he said. “We’re already talking to a number of research organizations about setting up a collaboration to develop a gene expression application. It’s a different market, and a growing market, but there are some barriers to entry. The only technology that’s going to enter the market in gene expression is one that offers something new,” Bennett said.

“We’re moving through this transition from technology development into product development, and the plan is to launch a resequencing technology as soon as we possibly can,” Bennett told BioArray News. “To do that you need the right people, [and] the right know-how.”

Lynx has been floundering financially for years. Over the past couple of quarters, the firm has seen its revenues drop significantly, despite slashing prices for its MPSS services late last year. Meanwhile, its stock price has dropped dramatically from a high of $8.44 in September 2003 to Friday’s close at $1.65 on the NASDAQ Small Cap market.

As of June 30, the company listed $2.4 million on its balance sheet in cash, cash equivalents, and short-term investments. And despite raising $11 million in three separate private financings over the past year, it was clear Lynx was going to need greater funding to support its plans to develop a marketable instrument.

Although neither Lynx nor Solexa has attached a price tag to the merger, they did announce that Solexa would loan Lynx $2.5 million to sustain its operations while merger negotiations continued.

Solexa is privately held, but that status could change if the deal is structured as a reverse acquisition with Solexa’s shareholders holding the majority of publicly traded shares. This seems a likely scenario, as Lynx already stated that Solexa’s shareholders would be the majority shareholders under a combination.

Solexa also publicly stated this year its intention to raise additional funds through a private round. Although Bennett could not confirm it, the loan to Lynx is a likely signal that the firm has already completed or is nearing completion of a deal that will provide Solexa with that additional funding.

— EW

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