West Coast Editor

Lynx Therapeutics Inc.'s plan - disclosure of which was nestled in its second-quarter earnings report - to merge with the overseas firm Solexa Ltd. might have come as no big surprise to investors paying close attention in March.

Wall Street, though, reacted. Lynx's shares (NASDAQ:LYNX) closed Friday at $1.67, down 36 cents, or 17.7 percent.

Kevin Corcoran, president and CEO of Lynx, said he was "delighted" with the deal, but pointed out in a conference call from the UK that the "tremendous opportunity" depends on executing the agreement now subject to a nonbinding letter of intent, which is not guaranteed to happen.

March was when Lynx, a Hayward, Calif.-based genomics instruments firm, jointly acquired with Essex, UK-based Solexa the rights to DNA colony generation from another company outside the U.S.: Manteia SA, of Coinsins, Switzerland.

The technology gained allows for parallel amplification of millions of DNA fragments - each from a single DNA molecule - to create DNA colonies or clusters, and was intended to replace Lynx's Megaclone method, which transforms a sample containing millions of DNA molecules into one made up of millions of micro-beads coated with DNA.

Now, Lynx has signed a nonbinding letter of intent to merge with privately held Solexa, which will provide Lynx with up to $2.5 million in loans to sustain Lynx's operations as efforts to bring off the merger continue.

Under the preliminary terms of the stock-for-stock deal, Solexa shareholders would hold a majority interest of the combined company. Lynx has received a first advance of $750,000 under the loan agreement, and the parties are hoping to close the deal next month.

Lynx said it aims to make its large-scale gene expression technology, called Massively Parallel Signature Sequencing (MPSS), the method of choice for such work, as well as for determining genome structure and performing epigenomics analysis. Combining Solexa's resources with Lynx's could make the integration of the acquired cluster technology move along much more quickly, thus enabling Lynx to accelerate its MPSS-based instruments.

Over the years, Lynx has been steadily sharpening its focus on MPSS, laying off 30 percent of its work force in 2002 and another 15 percent two years later. Seven service customers have been signed since the beginning of the year, Corcoran said. (See BioWorld Today, April 19, 2002, and March 19, 2004.)

Clients include the National Cancer Institute, the Howard Hughes Medical Institute, the National Institute of Mental Health, and others.

Thomas Vasicek, vice president of business development for Lynx, called an agreement with the National Institutes of Health to build a reference transcriptome database "one of our more exciting ongoing programs."

When finished, the set will provide publicly available information that is "a critical resource for the emerging field of systems biology" - and should markedly increase the visibility of MPSS.

"We began delivering data last month," he said.

In its earnings report, Lynx reported net revenues for the second quarter totaled $1.7 million, including technology access and service fees of $1.5 million, compared to net revenues for the same period last year of $4.6 million, with technology access and service fees of $4.2 million. The company's net loss was $3.6 million, or 48 cents per share, for the quarter ended June 30, compared with $2.9 million, or 61 cents per share, for the same period in 2003.

Corcoran said revenues were affected by the "timing and number of biological samples received from existing customers and collaborators" and the volume of new samples was not built as quickly as Lynx hoped. Total net revenues for the year are expected to be in the $8 million to $9 million range, he said.

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