Solexa will pump up to an additional $500,000 into Lynx Therapeutics in exchange for “certain product design and development services,” Lynx disclosed in an Oct. 29 filing with the US Securities and Exchange Commission.
According to a press release issued by Lynx the day before, the cash infusion was made to speed the development of new sequencing technologies in time for the completion of the firms’ merger.
For Lynx, the merger — and especially the additional cash infusion — appears to be its only lifeline. The floundering gene-expression-analysis company said that its independent auditor, Ernst & Young, recently raised “substantial doubts” about the firm’s ability to stay solvent. Lynx reported this announcement to the SEC in an amended filing to its 2003 year-end earnings report.
In a paragraph attached to the amended report, Lynx said the company’s “losses since inception, including a net loss for the six months ended June 30 ... [indicates that the company] will require additional funding to continue its business activities through at least December 31, 2005 and raises substantial doubt as to Lynx’ ability to continue as a going concern.”
Prior to this most recent funding, Lynx had received at least $2.5 million from Solexa — the last $500,000 installment of which was received on Oct. 15 — as part of the companies’ preliminary merger agreement signed in August. The partners inked a definitive pact a month ago, under which Lynx will 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)
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. For the first six months of 2004, privately held Solexa posted a net loss of $4.2 million, or $.67 per share, compared to a net loss of $3.1 million, or $.49 per share, for the first six months of 2003, according to Lynx’s form S-4. The Essex, UK-based firm had virtually no revenue, and as of June 30, 2004, had 6.3 million shares outstanding.
Solexa’s cash position as of June 30 was not much better than Lynx’s — with $2.8 million in cash and cash equivalents — but that was before its Series B round. According to the SEC filing, the firm’s cash “will be sufficient to enable it to meet its projected operating and capital requirements through at least the end of October 2005.”
A date for Lynx shareholders to vote on the proposed merger and related issues has not yet been set, Lynx President and CEO Kevin Corcoran told BioArray News this week. The firm has to wait 10 days after filing form S-4 to see if the SEC will review the document or not. If the commission does decide to review the document, that process could take 30 to 45 days. If it does not, then Lynx would “move ahead [with the shareholder meeting] much sooner than that,” Corcoran said. However, he said, the firms are still aiming to complete the merger by the end of this year.
The combined company will continue to operate both in the US and in the UK and will trade on the Nasdaq SmallCap Market under the ticker symbol LYNX. A name for the combined entity has not been chosen, but Corcoran acknowledged that it most likely will not operate under the Lynx name.
Due to a change in control of Lynx’s shares, the firm must requalify 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 currently 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 highly likely.
“We’ll look at that. If the stock were up, we wouldn’t do it,” Corcoran said. The ratio of the split would depend on what the price of the stock was to meet that requirement. “You’d want some buffer there,” Corcoran added.
The new company plans to develop novel DNA sequencing technology, based on molecular arrays, and to release its first commercial instrument for whole-genome resequencing and for gene-expression analysis by sequencing next year.
Solexa to Control IP if Merger Fails
Although the firms signed a preliminary agreement in August, an initial discussion on combining the firms occurred as long ago as March 2002, when Lynx Chairman Craig Taylor contacted Tom Daniel, a Solexa board member, and asked Solexa to consider a combination of the businesses. Although Solexa decided not to proceed with negotiations at the time, the firms forged a close relationship in March 2004 through the joint purchase of DNA cluster technology from Swiss firm Manteia in a bankruptcy auction.
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.
According to SEC documents, Lynx and Solexa entered into a deed last week, amending the terms of their joint technology purchase. Under the amended agreement, if the merger is not completed, Lynx would transfer all rights to the cluster technology to Solexa. In exchange, Lynx would get a worldwide, perpetual and non-exclusive license to the technology.
Although intellectual property developed as a result of the cluster technology would belong to Solexa, Lynx would be allowed to develop products or make modifications to the technology without infringing Solexa’s patents. In addition, Lynx would grant Solexa a worldwide, perpetual, and non-exclusive license to such developments.
According to the document, “In the event that Lynx or its licensees sells any products, Lynx is obliged under the deed to pay Solexa royalties at a rate of 11.5 [percent]. In the event that Solexa or its licensees sells any products, Solexa is obliged under the deed to pay Lynx royalties at a rate of 3 [percent].”
In addition to voting on the merger and related terms of the agreement, shareholders will vote to approve seven candidates for the board of directors. The candidates are Taylor; Tom Daniel, who in addition to serving on Solexa’s board is a partner in the venture capital firm Schroder Ventures Life Sciences; Solexa CEO John West, who will also serve as CEO of the combined firm; Steve Allen, a current director of Solexa; Mark Carthy, a director of Solexa and a partner in venture capital firm Oxford Bioscience Partners; Hermann Hauser, co-founder of Amadeus Capital Partners; and Genghis Lloyd-Harris, a Solexa director and partner in venture capital firm Abingworth Management.
One notable absence from the board is Sydney Brenner, a current Lynx director and developer of the Massively Parallel Signature Sequencing technology — which, up until the purchase of the DNA cluster technology, was the focus of Lynx’s gene expression and sequencing offerings. Corcoran declined to comment on why Brenner was not among the candidates that are up for election to the board of the combined firm.