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Solexa, Lynx Ink Definitive Merger Pact; Expect Platform Launch Next Year

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A month and a half after announcing their intention to merge operations, Solexa and Lynx Therapeutics have signed a definitive agreement and expect to market their first jointly developed product by the end of next year.

Essex, UK-based Solexa has been working on optimizing a sequencing system based on clustered arrays, which it expects will be sequencing genomes next year. It also is one of several start-ups chasing the goal of being able to sequence a human genome for $1,000, a feat it aims to accomplish within this decade.

Lynx’s primary business is performing gene expression services utilizing its Massively Parallel Signature Sequencing technology. The Hayward, Calif.-based firm has been floundering financially for years. Over the past couple of quarters, Lynx has seen its revenues drop significantly, while its stock price has fallen dramatically from a high of $8.44 in September 2003 to its Monday close of $2.81 on the Nasdaq Small Cap market.

Officials from both companies said they expect to build a substantial presence in both the DNA sequencing and gene expression markets. In the long term, they expect the technology to be applied to genetic diagnostics.

“We expect that both [the gene expression and DNA sequencing] markets will have significant segments that can be addressed by the combined company,” said Solexa CEO John West, who assumes the same role in the combined company, during a conference call announcing the definitive merger pact. “Our competitive advantage is that the two companies working together will be one of the first companies to deliver to the market molecular arrays.”

“We expect to be able to … make gene expression measurements using DNA sequencing,” West said. “The concept of using DNA sequencing for gene expression measurements is something that has been the core of a lot of Lynx’s service business. And with the new technology of molecular arrays, we expect to be able to bring that down to a price point where it becomes a very important part of the overall market.”

Simon Bennett, Solexa’s director of business development, told BioArray News in an interview last month, “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.” (see BAN 9/8/2004)

West, who joined Solexa in August from Applied Biosystems, where he had served as vice president of DNA platforms, estimated the DNA sequencing market at $600 million to $700 million annually and the gene expression market at roughly $1.2 billion.

The firm is betting that its technology will drive down the cost of DNA sequencing and gene expression experiments by allowing for analysis of “large numbers of samples on a fairly comprehensive basis,” West said. “In order to do that, you need to be able to do really large-scale sequencing quite affordably. I think that’s not the kind of thing you get to by bringing down the cost by a 20 percent or 30 percent factor. I think the things that will be required to really stimulate this market and open the kind of scientific inquiries that our customers have been interested in, have been things where the cost has changed by orders of magnitude.

“As we bring out the capabil-ities to do gene expression by DNA sequencing at much more affordable levels, we expect to see that transition from being sort of a specialty high-end product to being something that becomes ubiquitous,” West said.

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 MPSS 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.

“When arrays are currently used for DNA sequencing it requires four spots just to get a single base. We expect to be able to get at least 25 bases from a single spot — and that number will go up over time as we refine the chemistry,” West added. “We would expect to have a kind of two-dimensional density that’s probably on the order of 100 times the density of devices that are on the market today, but also approximately 100 times as much sequence information per spot.”

Lynx’s Massively Parallel Cluster Sequencing technology, which according to the firm can generate more than 10 million sequence reads per run, is currently being evaluated by the partners. But officials from both firms declined to say which technologies would be incorporated into the instrument that is expected to launch next year.

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

In addition to jointly purchasing the DNA cluster technology, each company has capabilities that the other lacked. Solexa has a large staff of scientists working on nucleic acid chemistry and enzyme engineering, while Lynx has a strong capability in engineering, West said. “But the two technical groups complement each other very well, and their synergies expect to bring us to market much faster than either company would have been able to accomplish on their own.”

One area the firm will definitely need to beef up is its instrument manufacturing capabilities. But officials from both firms said they could not comment yet on how the new entity would address this issue. It also has plans to grow its marketing team considerably before launching a product next year.

Although Lynx has very little cash left in the bank — $2.4 million on its balance sheet in cash, cash equivalents, and short-term investments as of the end of the second quarter — efforts to grow the new firm’s marketing machine and commercialize the technology will be supported by a $14.4 million Series B cash infusion to Solexa, which was announced on the same day as the definitive merger agreement. The round was led by Amadeus Capital Partners and included funding from previous Solexa investors Abingworth Management, Schroder Ventures Life Sciences, and Oxford Bioscience Partners.

Since its inception in 1998 as a spin-off from the University of Cambridge, Solexa has raised nearly $38 million.

West said the firm expects to have beta instruments in the market next year, with the goal of a commercial launch by the end of 2005. There would “be a series of steps that would happen in the quarters and months before that,” West said, “gradually opening up that technology to partners as the technology gets to be more and more robust so that we are confident we can work in collaboration with customers on testing it.”

Although issues regarding staff and management of the combined entity have to be worked out, Corcoran will stay on in an undisclosed senior role.

The terms of the merger call for Lynx 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. Under a separate agreement, Lynx received from Solexa loan advances totaling $1.25 million. Lynx also will receive an additional $500,000 triggered by the signing of the merger pact and a further $750,000 from Solexa in October.

The deal is expected to close by the end of 2004. The company will retain operations in both the US and UK, with West remaining in California. The board of directors will include West, Lynx Chairman Craig Taylor, and four venture capital members currently serving on Solexa’s board.

The companies declined to say what name the combined entity will operate under, but it will continue to trade under Lynx’s ticker symbol “LYNX.”

— EW

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