THE Serious Fraud Office inquiry into Merlin Biosciences is understood to be looking into a biotech merger last January between Amedis Pharmaceuticals and Paradigm Therapeutics (see Commentary, facing page).

It is understood that a member of the public has alerted SFO investigators to the rescue of Amedis Pharmaceuticals — which specialises in finding new molecules that might one day become best-selling drugs — by Paradigm Therapeutics.

Amedis was founded in 2000 by several Merlin executives with their own cash. In June 2001 the directors arranged a second round of financing to bring in outside investors, including the Merlin Biosciences Fund II LP, one of three venture capital funds managed by Sir Christopher Evans.

Under the financing deal, the executives are understood to have agreed to forfeit their shares if Amedis ran into financial trouble. By last December, Amedis was running out of cash. Paradigm bought the company in an all-share deal that, according to one Amedis investor, valued the business at £5.4 million.

Merlin’s executives are thought to have received nothing, while Amedis’s outside investors, including the Merlin Biosciences Fund II, received Paradigm shares.

However, a vehicle known as Merlin GBR appeared on Paradigm’s share register alongside the Merlin Biosciences Fund II, on completion of the deal, according to a major Paradigm shareholder with detailed knowledge of the transaction.

Mystery surrounds the identity of Merlin GBR. A spokesman for Merlin Biosciences last night could not say who was behind the entity, saying only that it had “something to do with Germany”.

The enlarged Paradigm is being lined up for a trade sale next year, with a price tag of £75 million to £100 million.

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