UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
-------- ----------
Commission File Number 0-22570
Lynx Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3832 Bay Center Place
Hayward, CA 94545
(Address of principal executive offices) (Zip Code)
(510) 670-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Common Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock outstanding as of October 31,
1997, were: 5,889,853; 332,288; 123,299; and 40,000, respectively. The Series B,
Series C and Series D Preferred Stock are convertible into Common Stock on a
ten-for-one basis. Information regarding the aggregate market value of the
Registrant's voting stock is not included because there is currently no
established public trading market for the Company's voting stock.
Page 1 of 17
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<TABLE>
Lynx Therapeutics, Inc.
INDEX
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996............................................................... 3
Condensed Consolidated Statements of Operations - three and nine months
ended September 30, 1997 and 1996.................................................. 4
Condensed Consolidated Statements of Cash Flows - nine months
ended September 30, 1997 and 1996................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 10
Item 2. Changes in Securities................................................................... 10
Item 3. Defaults Upon Senior Securities......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..................................... 10
Item 5. Other Information....................................................................... 10
Item 6. Exhibits and Reports on Form 8-K........................................................ 10
Signatures ........................................................................................ 11
</TABLE>
Page 2 of 17
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996*
----------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,418 $ 12,109
Short-term investments -- 1,973
Accounts receivable 156 118
Other current assets 98 158
--------------------
Total current assets 3,672 14,358
Property and equipment:
Leasehold improvements 3,795 3,193
Laboratory and other equipment 3,434 2,976
--------------------
7,229 6,169
Less accumulated depreciation and amortization (3,254) (2,290)
--------------------
Net property and equipment 3,975 3,879
Notes receivable from employees 199 175
--------------------
$ 7,846 $ 18,412
====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 353 $ 429
Accrued compensation 240 394
Accrued professional fees 117 169
Deferred revenue from related parties - current 2,750 3,875
Other accrued liabilities 570 373
--------------------
Total current liabilities 4,030 5,240
Deferred revenue from related parties - long-term 229 2,292
Other noncurrent liabilities 171 148
Stockholders' equity:
Preferred stock 27,189 27,189
Common stock 17,478 17,361
Notes receivable from stockholders (460) (210)
Deferred compensation (1,514) (2,092)
Unrealized gain on marketable securities 1 3
Accumulated deficit (39,278) (31,519)
--------------------
Total stockholders' equity 3,416 10,732
--------------------
$ 7,846 $ 18,412
====================
* The Balance Sheet amounts at December 31, 1996, have been derived from audited
financial statements at that date but do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
Page 3 of 17
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<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Revenues from collaborative arrangements
with related parties $ 1,124 $ 7,875 $ 3,411 $ 8,625
Other revenues 100 40 270 244
-------------------------------------------
Total revenues 1,224 7,915 3,681 8,869
Operating expenses:
Research and development 3,930 2,546 10,382 7,880
General and administrative 427 833 1,444 2,000
-------------------------------------------
Total operating expenses 4,357 3,379 11,826 9,880
-------------------------------------------
Income/(loss) from operations (3,133) 4,536 (8,145) (1,011)
Interest income 82 132 386 462
-------------------------------------------
Net income/(loss) $ (3,051) $ 4,668 $ (7,759) $ (549)
===========================================
Net income/(loss) per share $ (0.95) $ 0.61 $ (2.44) $ (0.23)
===========================================
Shares used in per share computation 3,208 7,700 3,184 2,339
===========================================
<FN>
See accompanying notes.
</FN>
</TABLE>
Page 4 of 17
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<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (7,759) $ (549)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 964 725
Deferred compensation 429 30
Changes in operating assets and liabilities:
Accounts receivable (38) (3,952)
Other current assets 60 (79)
Accounts payable (76) (465)
Accrued liabilities (9) (24)
Advance from collaborative partner -- 97
Deferred revenue from related parties (3,188) (1,125)
Other noncurrent liabilities 23 43
--------------------
Net cash used in operating activities (9,594) (5,299)
Cash flows from investing activities
Purchases of short-term investments -- (25,957)
Maturities of short-term investments 1,971 23,000
Purchases of property and equipment (1,060) (1,297)
Notes receivable from employees (274) 188
--------------------
Net cash provided by/(used in) investing activities 637 (4,066)
Cash flows from financing activities
Issuance of common stock 266 47
--------------------
Net cash provided by financing activities 266 47
--------------------
Net decrease in cash and cash equivalents (8,691) (9,318)
Cash and cash equivalents at beginning of period 12,109 13,779
--------------------
Cash and cash equivalents at end of period $ 3,418 $ 4,461
====================
<FN>
See accompanying notes.
</FN>
</TABLE>
Page 5 of 17
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Lynx Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Basis of presentation
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission (the
"Commission"). Certain prior year amounts have been reclassified to conform with
current year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to Commission rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. The financial
statements include all accounts of the Company and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations, and cash flows of the Company for the interim periods presented. The
results of operations for the three and nine months ended September 30, 1997,
are not necessarily indicative of the results for the full year.
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the Company's
year ended December 31, 1996.
2. Net loss per share
Net loss per share is calculated based on the weighted average number
of common shares outstanding during the period. Common equivalent shares from
stock options and convertible Preferred Stock are excluded from the computation
as their effect is antidilutive. In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share" ("EPS"). SFAS 128 requires that companies present two
measures of earnings per share, basic and diluted. Basic earnings per share is
computed by dividing income or loss applicable to common shareholders by the
weighted-average number of common shares outstanding for the period, while
diluted EPS reflects the potential dilution of securities that could share in
the earnings of the company. SFAS 128 is effective for interim and annual
periods ending after December 15, 1997. The Company does not believe the
adoption of SFAS 128 will have a material impact on its loss per share
calculations.
3. Collaborative Arrangements
The Technology Development and Services Agreement, dated October 2,
1995, between Lynx and Hoechst Marion Roussel, Inc. was amended on September 1,
1997. The amendment modifies the technology milestone included in the original
agreement and extends the date by which such milestone must be achieved under
the contract. If the subject milestone is not met by such date, then Hoechst may
either terminate the agreement or extend the technology milestone date.
4. Subsequent Event
On October 1, 1997, Lynx closed a private placement of common stock at
$10 per share, resulting in gross proceeds of $26.8 million. Proceeds of the
financing will be used both to continue development of the Company's Massively
Parallel Signature Sequencing technology and to build capacity for its early
commercial uses.
Page 6 of 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the Company's annual report (Form 10-K) filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1996.
Overview
Lynx has developed a unique, proprietary technology for the analysis of
DNA called Massively Parallel Signature Sequencing. Massively Parallel Signature
Sequencing, the Company believes, is the only technology available today that
can analyze and identify, simultaneously, very large numbers of DNA molecules or
fragments from a single biological sample. Lynx's technology has several major
applications and each of these can be applied to the genomes of man, pathogenic
organisms, and commercially important plants and animals. These major
applications include gene expression analysis, gene expression databases,
genomic sequencing and high resolution genomic maps.
In 1995, Lynx launched an internal biology-based drug discovery program
to establish the concepts, strategies and techniques necessary for the
identification of drug targets based on the analysis of differential gene
expression. This program is ultimately designed to capitalize on the power of
Massively Parallel Signature Sequencing, but in its early phase it is utilizing
know-how and intermediate technologies currently resident within Lynx. The
initial projects are centered on the medically important field of neurovascular
diseases that are particularly well suited to analyses with the Company's gene
sequencing and target discovery technologies.
Lynx was originally formed in 1992 to target inappropriate gene
expression in disease with synthetic DNA fragments designed to bind to, and
functionally block, genes whose inappropriate expression could be correlated
with disease. Lynx's early efforts in this area formed the foundation and
understanding for the development of its new genetic technologies. The research
efforts have resulted in a compound (LR-3280) for the prevention of coronary
artery restenosis. The acute safety segment of its Phase II study on the LR-3280
has recently been completed. Certain follow-up measurements and analyses from
the clinical trial are expected to be completed early next year. Two
pharmaceutical companies have purchased the rights to market that compound and
have also committed to bear the costs of its continued development.
Lynx has been unprofitable since its inception and may incur
substantial losses for the next several years, due primarily to the expansion of
its research and development programs, including additional development of its
Massively Parallel Signature Sequencing technology. Lynx may generate revenues
based on its agreements with collaborative partners as a result of achievement
of the milestones defined in the agreements. However, there is no guarantee that
the milestones will be achieved or that the technologies will be proven
successful. Lynx does not anticipate that it will generate significant revenues
and profits, if any, from the commercial sale of its products and services for
several years, if not longer. There can be no assurance that Lynx will ever
successfully develop and market any of its proposed products or that it will
ever be able to achieve or sustain profitability.
Lynx's business is subject to significant risks, including the risks
inherent in its research and development efforts, uncertainties associated with
obtaining and enforcing patents, the lengthy and expensive regulatory approval
process, and possible competition from other products. The Massively Parallel
Signature Sequencing program is dependent upon the successful integration of
independent technologies, each of which has its own development risks. In
addition, the technology could face competition from the development of
similarly efficient, or better, combinations of novel cloning and sequencing
techniques. Lynx's therapeutic compounds may not reach the market for a number
of reasons
Page 7 of 17
<PAGE>
even if they appear promising at early stages of development. Such reasons
include, but are not limited to, the possibilities that the compounds are found
to be toxic or ineffective during clinical trials, the failure to receive
necessary regulatory approvals, the difficulty to manufacture on a large scale,
or the inability to market a compound due to proprietary rights of third
parties.
Results of Operations
Revenue
Lynx had total revenues of approximately $1.2 million and $7.9 million
for the quarters ended September 30, 1997, and 1996, respectively. The 1997
revenue was comprised of approximately $1.1 million earned under collaborative
agreements with corporate partners, $60,000 in product revenue and $40,000
earned under a government grant. The 1996 revenue was comprised of approximately
$7.5 million in initial license fees under collaborative agreements with Tanabe
Seiyaku Co., Ltd and Schwarz Pharma AG; $375,000 earned under a collaborative
agreement with Hoechst Marion Roussel; and $40,000 from a government grant.
Lynx had revenues of approximately $3.7 million and $8.9 million in the
nine months ended September 30, 1997, and 1996, respectively. The 1997 revenue
consisted of approximately $3.4 million in collaborative revenue, $145,000 in
product revenue and $125,000 in grant revenue. The 1996 revenue was comprised of
approximately $7.5 million in initial license fees, $1.1 million in
collaborative revenue and $244,000 earned from a government grant.
Revenue will continue to fluctuate based on activity with current and
potential corporate partners, achievement of milestones, and timing of
government grant funding.
Operating Expenses
Research and development expenses were $3.9 million and $2.5 million in
the three months ended September 30, 1997, and 1996, respectively. For the nine
month periods ended September 30, 1997, and 1996, research and development
expenses were approximately $10.4 million and $7.9 million, respectively. In
both the three and nine month periods, the increases were primarily due to the
costs associated with increased levels of research and development personnel,
and the amortization of deferred compensation recorded in conjunction with the
Agreement of Merger between Lynx and its majority owned subsidiary, Spectragen,
Inc. Lynx expects its research and development expenses to increase due to
planned spending for ongoing research and technology development activities and
new applications.
General and administrative expenses were approximately $427,000 for the
quarter ended September 30, 1997, and $833,000 for the quarter ended September
30, 1996. The decrease was due to lower corporate development and legal expenses
in the third quarter of 1997 as compared to the third quarter of 1996, which
reflected the costs associated with the signing of two corporate collaborative
agreements. General and administrative expenses were approximately $1.4 million
for the nine months ended September 30, 1997, compared to approximately $2.0
million for the nine months ended September 30, 1996. As in the three-month
period, the decrease was due to lower corporate development and legal expenses,
as well as slightly lower headcount related expenses. Lynx expects to continue
to incur substantial administrative expenses in support of its research and
development efforts.
Interest Income
Interest income was approximately $82,000 and $132,000 for the three
months ended September 30, 1997, and 1996, respectively. For the nine months
ended September 30, 1997, and 1996, interest income was approximately $386,000
and $462,000, respectively. The decrease was due to lower average cash balances
in the three and nine-month periods in 1997 as compared to the same periods in
1996.
Page 8 of 17
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Liquidity and Capital Resources
The net cash used in operating activities of approximately $9.6 million
for the nine months ended September 30, 1997, differs from the net loss for the
same period primarily due to current period recognition of a portion of
previously deferred revenue, offset in part by depreciation and amortization,
and deferred compensation expense. Net cash provided by investing activities
resulted from maturities of short-term investments partially offset by costs
associated with purchases of capital equipment and the expansion of laboratory
facilities. Lynx expects that future capital expenditures will be commensurate
with growth in the employee base and the development of its Massively Parallel
Signature Sequencing and other technologies. At September 30, 1997, Lynx's cash
and cash equivalents were approximately $3.4 million.
On October 1, 1997, Lynx closed a private placement of common stock at
$10 per share, resulting in gross proceeds of $26.8 million. Lynx plans to use
the funds to continue development of its Massively Parallel Signature Sequencing
technology and to build capacity for its early commercial uses. Pending such
uses as described above, Lynx intends to invest its excess cash in short-term,
investment grade, interest-bearing securities or certificates of deposit.
Since commencing operations as an independent company, Lynx has
obtained funding for its operations through sales of preferred and common stock
to venture capital investors, institutional investors, and collaborative
partners; revenue from collaborative research and development arrangements;
interest income; product sales; and government grants. The cost, timing and
amount of funds required for specific uses by Lynx cannot be precisely
determined at this time and will be based upon Lynx's progress in its research
and development, the scope and results of preclinical research and clinical
trials, the cost and timing of regulatory approvals, administrative and legal
costs, the establishment of corporate collaborations and other arrangements, and
the availability of alternate methods of financing.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as needed,
through debt or equity offerings and from collaborative research and development
agreements with corporate partners. There can be no assurance that any
additional financing required by Lynx will be available or, if available, will
be on terms favorable to Lynx. The Company believes that, at current spending
levels, its existing capital resources and interest income thereon will enable
it to maintain its current and planned operations through mid 1999.
Page 9 of 17
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - The following documents are filed as Exhibits to
this report:
Exhibit
Number Description
------ -----------
10.32 First Amendment to Technology Development and Services
Agreement, dated September 1, 1997, between the Company
and Hoechst Aktiengesellschaft and its Subsidiary,
Hoechst Marion Roussel.**
27.1 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
**Portions of this agreement have been deleted pursuant to our request for
confidential treatment.
Page 10 of 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
------------------------------------
By: Sam Eletr, Ph.D.
Chief Executive Officer and
Chairman of the Board
Date: November 14, 1997
/s/ Edward C. Albini
------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 14, 1997
Page 11 of 17
Exhibit 10.32
Text omitted and filed separately
Confidential Treatment Requested
Under 17 C.F.R ss.ss.200.80(b) (4),
200.83 and 240.24b-2
FIRST AMENDMENT TO
TECHNOLOGY DEVELOPMENT AND SERVICES AGREEMENT
This amendment ("First Amendment") to the Technology Development and Services
Agreement ("Agreement") is made and entered into as of the first day of
September, 1997 (the "First Amended Effective Date") by LYNX THERAPEUTICS, INC.,
a Delaware corporation, and its majority-owned subsidiaries, including
SPECTRAGEN, INC., (collectively referred to as "Lynx") and Hoechst Marion
Roussel, Inc., a Delaware corporation, to whom the Agreement was assigned, and
its affiliates ("HMRI").
RECITALS
WHEREAS, Lynx and HMRI agree that the Practical Application Milestone as set
forth in the Agreement needs to be amended;
WHEREAS, HMRI continues to desire early, preferred access to Lynx's library
analysis capabilities;
NOW THEREFORE, in consideration of the foregoing premises and the covenants and
promises in the Agreement and in this First Amendment.
ARTICLE 1 - DEFINITIONS
Capitalized terms used in this First Amendment shall have the meanings ascribed
to them in the Agreement unless otherwise defined in or amended by this First
Amendment.
1.1 "Practical Application Milestone" means achievement by Lynx of sufficient
development of MPSS to demonstrate that the reproducibility and specificity of
the technology is such that it is ready for practical application, as more
specifically set forth in Exhibit A attached hereto.
Page 12 of 17
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ARTICLE 2 - DEVELOPMENT OF MPSS TECHNOLOGY
2.1 Lynx Program. Lynx shall continue to use commercially reasonable efforts in
performing the Development Work, consistent with its normal business practices,
with the goal of achieving the Practical Application Milestone expeditiously.
Notwithstanding, Lynx makes no representations, warranty or guarantee of any
kind that it can or will achieve the Practical Application Milestone at any
time.
2.2 Reports and Information. No amendment is made to this Article.
2.3 Ownership of Technology. No amendment is made to this Article.
2.4 Development Payments to Lynx. Lynx acknowledges that Hoechst has paid to
Lynx three million U.S. Dollars ($3,000,000), in part, for Lynx's commitment to
undertake the Development Work. Lynx agrees that no additional payment by HMRI
to Lynx shall be required for Lynx's continued effort to achieve the Practical
Application Milestone. Within thirty days after Lynx notifies HMRI that it
believes the Practical Application Milestone has been achieved and provides HMRI
with the data demonstrating achievement of such milestone, HMRI will, if in
agreement, so indicate its agreement or will indicate that, in HMRI's sole
discretion, the data is sufficiently satisfactory to HMRI that the milestone has
effectively been achieved. In either case, HMRI, in place of Hoechst, agrees to
pay Lynx Eight Million U.S. Dollars ($8,000,000) within fifteen (15) days after
such indication. In the event that Lynx does not achieve the Practical
Application Milestone by January 15, 1998, HMRI, pursuant to Article 5.1, may
terminate the Agreement, as amended hereby, or HMRI may, in its sole discretion,
allow Lynx up to four months additional time (additional from January 15, 1998)
to achieve the Practical Application Milestone and HMRI will indicate to Lynx
the extended milestone date. If additional time beyond January 15, 1998 is
granted, then the Practical Application Milestone payment shall be reduced by
Seven Hundred Fifty Thousand U.S. Dollars ($750,000) for each month thereafter
that Lynx does not achieve the Practical Application Milestone (with a maximum
reduction of Three Million U.S. Dollars ($3,000,000). In the event that Lynx
does not achieve the Practical Application Milestone by the extended milestone
date, HMRI may, in its sole discretion exercisable during the thirty day period
after the extended milestone date, pay Lynx the milestone payment then due
($8,000,000 less any reduction as set forth above) in lieu of the milestone
payment contemplated hereby, in which case the Practical Application Milestone
will be deemed to have been achieved on extended milestone date. If the
Practical Application Milestone will be deemed to have been achieved on extended
milestone date. If the Practical Application Milestone is not so achieved by the
extended milestone date and HMRI does not elect to regard the Practical
Application Milestone as having been achieved, the Agreement, as amended hereby,
will terminate on the thirtieth day following the extended milestone date.
Page 13 of 17
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ARTICLE 3 - LYNX MPSS SERVICES
No amendment is made to this Article.
ARTICLE 4 - CONFIDENTIALITY
No amendment is made to this Article.
ARTICLE 5 - TERM AND TERMINATION
5.1 Term. The provisions of Article 5.1 of the Agreement are amended to provide
for termination or expiration as contemplated by Article 2.4.
5.2 All other terms and conditions of Article 5 of the Agreement are not amended
hereby.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES
No amendment is made to this Article.
ARTICLE 7 - MISCELLANEOUS
No amendment is made to this Article except that all notices to Hoechst pursuant
to article 7.6 of this Agreement shall hereafter be delivered to
Hoechst Marion Roussel, Inc.
2110 East Galbraith Road
Cincinnati, OH 45215
Attention: General Patent Counsel
IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment
as of the date first written above.
LYNX THERAPEUTICS, INC. HOECHST MARION ROUSSEL, INC.
By: /s/ Sam Eletr By: /s/ Norbert Riedel
--------------------------- -------------------------------
Title CEO Title VP, Head of Biotechnology
-------------------------- -----------------------------
Date September 10, 1997 Date September 19, 1997
-------------------------- ------------------------------
Page 14 of 17
<PAGE>
EXHIBIT A
Practical Application Milestone
The achievement of the Practical Application Milestone will be demonstrated by
testing three components of the Lynx Method. Those components will be termed
[...***...], [...***...] and [...***...]. These three components of the Lynx
method will be tested in the chosen mammalian cell culture system ([...***...]
and [...***...] induced with [...***...] and [...***...] according to the
[...***...]) to provide sufficient support for validation of this technology.
In terms of [...***...], this method must demonstrate it is at least as useful
as existing methods available to HMR in which this mammalian cell culture system
has been tested. To that end, it is agreed that HMR will share with Lynx the
identity and expression pattern of a number of genes ([...***...] to
[...***...]) known to be [...***...] in this biological paradigm and these
[...***...] genes must appear in the Lynx datasets and reflect the qualitative
[...***...] expected from known results as well. Should there be a discrepancy
in the appearance of any of these [...***...] expressed genes, Lynx will run
appropriate Northern Blot analyses to determine the existence or absence of
those genes in question in that biological material. In addition, HMR will also
share with Lynx the identity of all available genes from internal and external
sources based on this biological model. In order to accommodate the known
efficiency of the [...***...] used in the Lynx experiment, [...***...] percent
of those sequences from this HMR dataset must also appear in the Lynx validation
data. For this section of the validity evaluation, should any sequences from the
HMR dataset not appear in the Lynx dataset, HMR will choose a maximum of
[...***...] sequences which Lynx will probe against their libraries to determine
their presence or absence. The presence of [...***...] of these genes during the
library probe will indicate that the Practical Application Milestone has not
been met. The absence of these genes in the library probe will be sufficient to
remove them from further consideration in the validation experiment. All
sequence data sets delivered by HMR will be analyzed to assure there is
sufficient sequence information, given the expected [...***...] near the
[...***...] end of the sequence, to overlap with the expected Lynx signature.
In terms of [...***...], this method must provide more information than is
currently available to HMR. To that end, HMR will choose [...***...] additional
genes, other than those above, which are differentially expressed in the Lynx
validation experiment with a minimum expression level of [...***...] copies per
sequencing run [...***...] and confirm their existence through biological
evaluation, i.e. northern blot. These genes will be chosen by HMR at the time
the data become available from the first [...***...] sequencing runs
[...***...].
In terms of [...***...] of the Lynx technology, all genes repeated in the Lynx
datasets, [...***...] of expressed genes, must have, within the set of
[...***...] as well as within the set of [...***...] sequencing runs, a maximum
difference within any pair of that set falling within [...***...].
- ------------------
*Confidential Treatment Requested
Page 15 of 17
<PAGE>
Additionally, prior to beginning the validation sequencing, Lynx will complete
its internal [...***...] sequencing experiment and forward this data to HMR.
Also, HMR will hold that the validation will be met only when [...***...] sets
of [...***...] sequencing runs of [...***...] and [...***...] sequencing runs of
[...***...] material meet the above standards internally and across the sets as
described in the validation scheme. This will provide assurance to HMR that the
technology will be applicable with minimal sequencing runs. It is also agreed
that when the first [...***...] sequencing runs have been completed according to
the attached scheme, HMR will analyze the dataset to determine the maximal
signature length necessary for the remaining validation experiment only. These
results will be applied to the remaining [...***...] sequencing runs.
Also, although not formally part of the validation experiment, HMR will validate
the preparation of [...***...] at Lynx by performing Northern blot analyses on
one [...***...] sample each from the [...***...] and [...***...] cell cultures
for selected genes on this material as well as material prepared at HMR using
the identical protocols. To this end, Lynx agrees to provide [...***...] of
[...***...] from one each of the [...***...] and [...***...] samples.
/s/ Sam Eletr /s/ Norbert Riedel
- ---------------------------- ----------------------------
Lynx Therapeutics, Inc. for Hoechst Marion Roussel
- ------------------
*Confidential Treatment Requested
Page 16 of 17
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