1
HALE AND DORR LLP
Draft of 3/27/98
----------------UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-K
For annual and transitional reports pursuant to sections
13 or 15(d) of the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
COMMISSION FILE NO.1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27352
-------
HYBRIDON, INC.
--------------------------------------------------
(Exact name of registrantRegistrant as specified
in its charter)certificate of incorporation)
Delaware 3072298
- ---------------------------- ---------------------------------------04-3072298
(State or other jurisdiction of (I.R.S. Employer
Identification Number)
incorporation or organization) 620 Memorial Drive, Cambridge,Identification Number)
155 Fortune Blvd.
Milford, Massachusetts 02139
- --------------------------------------------------------------------------------01757
(Address of principal executive offices) (Zip Code)
Registrant's(508) 482-7500
(Registrant's telephone number, including area code: (617) 528-7000code)
Securities registered pursuant to Section 12(b) of the Act: None
----NONE
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant: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 [ ]
2
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 13, 1998, the
The approximate aggregate market value of the voting Common Stockstock held by
nonaffiliatesnon-affiliates of the registrant was $9,066,247, based on$12,146,631 million as of April 13, 1999.
For purposes of determining this number, 5,078,083 shares of common stock held
by affiliates are excluded.
As of April 13, 1999, the last
reported sale price of the registrant's Common Stock on the Nasdaq OTC Bulletin
Board on March 13, 1998. There were 5,061,650registrant had 15,306,825 shares of Common Stock
outstanding
as of March 13, 1998.outstanding.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K
Document into which incorporated
-------- -----------------------
Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13 of
with respect to the Annual Meeting of of Part IIIIII.
Stockholders to be held on June 15, 1998
-2-8, 1999.
3HYBRIDON, INC.
FORM 10-K
INDEX
PART I
Item 1. BUSINESS...........................................................2
HYBRIDON..................................................................2
TECHNOLOGY OVERVIEW.......................................................2
Introduction.......................................................2
Conventional Drugs.................................................3
Antisense Drugs....................................................4
HYBRIDON ANTISENSE TECHNOLOGY.............................................4
Medicinal Chemistries..............................................4
Manufacturing Technology...........................................5
Proprietary Analytical Tools.......................................5
Regulatory Know-How................................................5
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS..........................6
The Drug Development and Approval Process..........................6
Hybridon Drug Development and Discovery Programs...................7
CLINICAL PROGRAMS.........................................................8
Protein Kinase A...................................................8
HIV-1 and AIDS.....................................................8
Cytomegalovirus....................................................9
PRECLINICAL PROGRAMS......................................................10
HYBRIDON SPINOUTS.........................................................10
MethylGene, Inc....................................................10
OriGenix Technologies, Inc.........................................11
CORPORATE COLLABORATIONS..................................................11
G.D. Searle & Co...................................................11
Medtronic, Inc.....................................................13
THE HYBRIDON SPECIALTY PRODUCTS (HSP) DIVISION............................13
MARKETING STRATEGY........................................................15
ACADEMIC AND RESEARCH COLLABORATIONS......................................15
DRUG DEVELOPMENT SERVICES.................................................16
PATENTS, TRADE SECRETS AND LICENSES.......................................16
GOVERNMENT REGULATION.....................................................19
FDA Approvals......................................................19
Other Regulation...................................................20
COMPETITION...............................................................20
EMPLOYEES.................................................................21
Item 2. PROPERTIES.........................................................21
Item 3. LEGAL PROCEEDINGS..................................................22
Item 4. SUBMISSION OF MATTERS TO A VOTE....................................22
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY...............22
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PART II.......................................................................26
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................26
Item 6. SELECTED FINANCIAL DATA............................................28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................29
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........45
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................45
PART III......................................................................46
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................46
Item 11. EXECUTIVE COMPENSATION.............................................46
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....46
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................46
PART IV.......................................................................47
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORMS 8-K.......................................................47
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FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such risks and uncertainties include, but are not limited to: the
obtaining of sufficient financing to maintain Hybridon's planned operations; the
timely development, receipt of necessary regulatory approvals and acceptance of
new products; the successful application of Hybridon's technology to produce new
products; the obtaining of proprietary protection for any such technology and
products; the impact of competitive products and pricing and reimbursement
policies; the changing of market conditions and the other risks detailed in the
Risk Factors section of this Annual Report on Form 10-K and elsewhere herein.
The Company does not undertake to update any forward-looking statements.
See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors" for a discussion of certain risks and
uncertainties applicable to the Hybridon and its stockholders, including
Hybridon's need for additional funds to sustain its operations in 1999 and
thereafter.
1
PART I
ITEM 1. BUSINESS.
OVERVIEW
GeneralBUSINESS
HYBRIDON
Hybridon, Inc. (the "Company"), established in 1989, is a leader in the discovery and development of
novel genetic medicinesdrugs. These drugs are based on antisense
technology. Antisense"antisense" technology involveswhich uses
synthetic RNA and DNA that are designed to treat the useunderlying cause of synthetic segments of DNA
(oligonucleotides) to interact atdisease
by stopping or reducing the genetic level with target messenger RNA,
which codes for thebody's production of proteins.proteins that directly or
indirectly cause disease. Hybridon also manufactures and sells synthetic RNA and
DNA, also called oligonucleotides, to third parties on a contract basis.
Hybridon's leadership in the antisense field is based on oligonucleotide
technology it owns or exclusively licenses, including (a) new advanced
chemistries, (b) sequence selection know-how, (c) drug development know-how, (d)
innovations in the manufacturing process, (e) its fully integrated, large scale
manufacturing facility and (f) its experience in manufacturing over 300
different compounds with various chemical modifications.
TECHNOLOGY OVERVIEW
Introduction
The human body contains many organs, such as the heart, liver, brain,
etc., that function together to support life. Each organ in turn is made up of
many microscopic units called cells. Each cell produces proteins which determine
how that cell functions within its organ, and ultimately how well each organ
functions within the body. Almost all human diseases result from abnormal
protein production or altered performance within individual cells. In contrastsome
instances, the proteins act directly to traditionalcause or support a disease. In other
instances, the proteins interfere with other proteins that prevent or combat
disease. Traditional drugs
which are designed to interact with protein molecules associated with diseases,
antisensethat
support or cause diseases. Antisense drugs are designed to work at an earlier
state to stop the genetic levelproduction of disease-causing or disease-supporting proteins.
The information that controls production of a specific protein is
contained in its gene. Each gene is made up of two strands of DNA that pair
together to interruptform a structure called a "double helix." Each strand of DNA is a
string of individual DNA building blocks, called nucleotides, that are arranged
in a specific sequence. One of the processstrands contains the information that directs
the composition of the specific protein, and is called the "coding" strand. The
other strand, the "non-coding" strand, contains a sequence of nucleotides that
are complementary with nucleotides on the coding strand.
The complete human genome consists of over 100,000 genes and contains
the information required to produce all human proteins. A copy of the complete
human genome
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is present in each cell, and the proteins made by each cell are read from its
copy of the genome. Proteins are made from genes in two steps. First, the
information contained in the gene is read from the coding strand of DNA into a
molecule of messenger RNA. The messenger RNA also consists of a string of
nucleotides in a specific sequence. This is called the "sense" sequence. A
sequence that is complementary to the sense sequence is called the "antisense"
sequence. Second, the cell then produces proteins based on the information that
is now recorded in the messenger RNA. The information contained in a single gene
is often read into multiple copies of messenger RNA, which disease-causingin turn causes the
cells to produce more copies of the protein.
A normal cell produces a particular set of normal proteins in the right
amount for the body to function properly. In a diseased cell, the wrong or
mutant proteins are produced. The Companymade, or normal proteins are made in the wrong amount.
Mutant proteins occur because the DNA has changed, either through mutation, or
by infection with a virus. Infection with a virus can also cause the cell to
make proteins that are not coded by the human genome. This misinformation causes
the cell to produce proteins that are harmful to the body.
Antisense technology involves the use of a strand of nucleotides, called
an oligonucleotide, which has a specific sequence exactly complementary to that
of the messenger RNA read from a specific gene. Because of the complementary
nature of its sequence, it binds to and inactivates the messenger RNA, thereby
decreasing or eliminating the production of disease associated proteins.
Hybridon believes that drugs based on antisense technology may have broader
applicability, greater efficacy and fewer side effects than conventional drugs
because antisense compoundsdrugs are designed to intervene early in the disease process at the genetic level and in highly
specific fashion.
The Company's efforts in the antisense field are based on an integrated
antisense technology platform combining patented and proprietary medicinal
chemistries, synthetic DNA manufacturing technology and analytical processes.
The Company's strategy is to leverage this technology platform by applying its
oligonucleotides against a range of genetic targets associated with major
diseases, by manufacturing oligonucleotides for its own internal use and on a
custom contract basis for sale to third parties and by entering into
collaborations with large pharmaceutical company partners for the development
and commercialization of oligonucleotide drugs directed against these genetic
targets.
The Company is focusing its efforts on drug development programs
involving second-generation antisense compounds based on the Company's
proprietary second-generation mixed backbone chemistries. The Company believes
that antisense compounds based on second-generation chemistries will demonstrate
a range of favorable pharmaceutical attributes and provide flexibility in
addressing many biological targets. In particular, the Company believes that
these advanced chemistries provide the potential for enhanced metabolic
stability, which may result in less frequent dosing and therefore lower costs
per treatment, as well as the potential for oral administration. The Company has
three compounds in clinical development (one with two formulations via different
routes of administration) and several other compounds in advanced preclinical
development. The compounds in the clinical phase of drug development are:
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- - GEM 132 for the treatment of systemic cytomegalovirus ("CMV")
infections and retinitis, which is now in Phase I/II clinical trials in
the U.S. and Canada. The Company believes these clinical trials are the
first clinical trials involving administration of a second-generation
chemistry oligonucleotide into humans;
- - GEM 92 for the treatment of HIV infection and AIDS, which has completed
a pilot Phase I clinical study in Europe;
- - GEM 231 for the treatment of a variety of cancers (gene target is
protein kinase A), which is currently in Phase I clinical trials in
patients with solid tumors who are no longer benefited by other
treatments.
The Company's compounds in advanced preclinical development include a
series of antisense oligonucleotides with potential to down regulate the production of vascular endothelial growth factor ("VEGF"), which has been
implicated in diseases ofproteins,
rather than intervening after the retina (e.g., diabetic retinopathy; age related
macular degeneration) related to the abnormal formation of new blood vessels in
the eye. The Company is evaluating other antisense compounds targeting VEGF as
potential therapies for solid tumors, rheumatoid arthritisproteins are made, and psoriasis.
An important part of the Company's business strategy is to enter into
research and development collaborations, licensing agreements and other
strategic alliances with third parties, primarily biotechnology and
pharmaceutical corporations, for the development and commercialization of its
products and to engage in spin-outs of certain technology of the Company to
minority-owned subsidiaries in order to obtain alternative financing for such
technology. The Company is a party to a corporate collaboration with G.D. Searle
& Co. ("Searle"), a subsidiary of Monsanto Company, in the field of
inflammation/immunomodulation. In addition, the Company has spun-out certain
advanced chemistry compounds based on proprietary genetic targets with respect
to DNA methyltransferase to a Quebec company, MethylGene Inc. ("MethylGene") in
exchange for a minority equity interest in MethylGene.
The Company's plan is to seek corporate collaborations with respect to
each of its compounds in development. The Company generally does not anticipate
proceeding with any of its current clinical programs beyond such time as data
from Phase II trials becomes available, or with any other drug development
programs beyond their current stages of development, without a commitment from a
corporate collaborator. The Company is also currently considering the
possibility of a spin-out of its hepatitis B and human papilloma virus ("HPV")
programs to a minority-owned subsidiary.
In 1996, the Company formed its Hybridon Specialty Products Division
(the "HSP Division") to manufacture highly purified oligonucleotide compounds
both for the Company's internal use and on a custom contract basis for sale to
third parties,
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including the Company's collaborative partners. The Company is manufacturing
oligonucleotides in compliance with current good manufacturing practices ("GMP")
at its 36,000 square foot leased manufacturing facility in Milford,
Massachusetts. The HSP Division first began production of oligonucleotide
compounds for sale to third parties in June 1996 and had revenues of
approximately $1.1 million in 1996 and approximately $1.9 million in 1997. The
Company is in discussions regarding a possible joint venture with respect to the
HSP Division, which the Company believes would enable it to maximize the
potential for third party manufacturing by the HSP Division, while ensuring for
the Company and its collaborators a source of oligonucleotides. However, there
can be no assurance that the Company will enter into any joint venture with
respect to the HSP Division or that the terms of any joint venture will be as
anticipated by the Company.
1997 Restructuring and Certain Other Developments
On April 2, 1997, the Company issued $50.0 million of 9% Convertible
Subordinated Notes (the 1997 "9% Notes") with a maturity date of April 1, 2004.
Under the terms of the 1997 9% Notes, the Company is required to make semiannual
interest payments on the outstanding principal balance of the 1997 9% Notes on
April 1 and October 1 of each year during which the 1997 9% Notes are
outstanding. The Company made the first interest payment of $2.3 million at the
beginning of October 1997. In connection with its ongoing financing effort
(described below), holders of the 1997 9% Notes in the aggregate original
principal amount of approximately $42.0 million have consented to the deferral
by the Company of the interest payment due April 1, 1998 until October 1, 1998.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 1997 9% Notes."
In July 1997, the Company terminated the development of GEM 91, its
first generation antisense drug for the treatment of AIDS and HIV infection,
based on a review of new data from an open label Phase II clinical trial of
patients with advanced HIV infection. In this Phase II trial, three of the nine
subjects tested experienced decreases in platelet counts that required dose
interruption. In addition, a review of the data showed inconsistent responses to
the treatment and failed to confirm the decrease in cellular viremia observed in
an earlier clinical trial. As a result, the Company decided to stop the
development of GEM 91 and refocus its efforts on its other most advanced drug
development programs described above.
During the second half of 1997, the Company implemented a restructuring
plan to reduce expenditures on a phased basis over the balance of 1997 and into
the first half of 1998 in an effort to conserve its cash resources. As part of
this restructuring plan, in addition to terminating the clinical development of
GEM 91, the Company reduced or suspended selected programs unrelated to its core
advanced chemistry antisense drug development programs, including its ribozyme
program. In
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addition, the Company terminated the employment of 84 employees at its Cambridge
and Milford, Massachusetts facilities in the second half of 1997 and
substantially reduced operations at its Paris, France office and terminated ten
employees at that location in August 1997. As part of this restructuring, the
Company reviewed all outside testing, public relations, travel and entertainment
and consulting arrangements and terminated or renegotiated various of these
arrangements.
As part of this restructuring, the Company has subleased one facility
in Cambridge, Massachusetts and a substantial portion of its corporate
headquarters located at 620 Memorial Drive, Cambridge, Massachusetts. Effective
March 31, 1998, the Company has also terminated the lease for its office in
Paris, France.
This restructuring of the Company, together with employee attrition,
resulted in a reduction in the number of the Company's employees from 213 at
June 30, 1997 to 102 at December 31, 1997highly specific
and 78 at March 30, 1998 and the
subleasing of an aggregate of approximately 61,000 square feet of space. As a
result, the Company has significantly scaled back the level and scope of its
operations since mid-1997. However, because of the significant costs involved in
terminating employees, subleasing its facilities, terminating research
contracts, suspending or cancelling research programs and substantially reducing
operations, the Company did not begin to experience a material decrease in its
expenditure rate until the fourth quarter of 1997. The Company is continuing to
explore opportunities to reduce operating expenses in an effort to conserve its
cash resources.
In September 1997, the Company received notification from F.
Hoffmann-La Roche Ltd. ("Roche") that Roche had decided not to pursue further
its antisense collaboration with the Company and was terminating the
collaboration effective February 28, 1998. As part of this termination, Roche
has agreed to assign its patent rights to the HPV and hepatitis C programs
covered by such collaboration to the Company, subject to the execution of
definitive documentation.
In December 1997, because of the Company's failure to satisfy the
minimum net tangible assets criteria of the Nasdaq National Market, the
Company's Common Stock was delisted from the Nasdaq National Market and began
being quoted on the Nasdaq OTC Bulletin Board. In addition, in December 1997,
the Company effected a one-for-five reverse stock split of its Common Stock.
All per share Common Stock information contained herein (other than in the
Exhibit Index) has been adjusted to reflect this reverse split.
Ongoing Financing Effort
In January 1998, the Company commenced a private offering of up to 400
units, each unit consisting of a Note Due 2007 in the original principal
amount of $100,000 and warrants to purchase Common Stock. The Company is
offering the units at a price of $100,000 per unit. As of March 30, 1998, the
Company had received approximately $4.8 million in gross proceeds from the sale
of units. The Company has very limited cash resources and substantial
obligations to lenders,
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equipment lessors, real estate landlords and trade creditors. The Company's
ability to continue operations in 1998 depends on its success in raising new
funds in this financing or otherwise. If the Company is unable to obtain
substantial additional new funding in April 1998, it will be required to
terminate its operations or seek relief under applicable bankruptcy laws by the
end of April 1998. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- 1998 Financing Activities."
TECHNOLOGY OVERVIEW
Introduction
Proteins play a central role in virtually every aspect of human
metabolism. Almost all human diseases are the result of inappropriate protein
production or performance. Traditional drugs are designed to interact with
protein molecules that support or create diseases. Antisense drugs work at the
genetic level to interrupt the process by which disease-causing proteins are
produced.
The information necessary to produce a specific protein is encoded in a
specific gene. The information required to produce all human proteins is
contained in the human genome and its collection of more than 100,000 genes.
Each gene is made up of DNA, which is a duplex of entwined strands -- a "double
helix." In each duplex, the building blocks of DNA, called nucleotides, are
bound or "paired" with complementary nucleotides on the other strand. The
precise sequence of a nucleotide chain that is the blueprint for the information
that is used during protein production is called the "sense" sequence. The
sequence of a nucleotide chain that is precisely complementary to a given sense
sequence is called its "antisense" sequence.
Protein synthesis or expression typically involves a two-phase process.
First, the information contained in the gene is transcribed from the sense
strand of DNA into one or more molecules of messenger RNA. Second, the
information encoded in the messenger RNA is translated into the sequence of
amino acids that comprise the protein. The information contained in a single
gene is often repeatedly transcribed into multiple copies of messenger RNA,
which in turn are repeatedly translated, giving rise to multiple copies of the
same protein.selective fashion.
Conventional Drugs
Most drugs are chemicals designed to inducethat stimulate or inhibitstop the function of a
targetparticular molecule, typicallyusually a protein, with tolerable side effects. A drug will
cause side effects when it interacts with other proteins in addition to the
target protein. Therefore, a drug that interacts with as few unwantedother proteins as
possible causes fewer side effects as
possible. However, conventionaleffects.
Conventional drugs are not availablewell tolerated for the treatment of many
diseases because of their relatively low level of selectivity. The
selectivity, of conventionalthus producing
more side effects. Conventional drugs is usually determined bybind only a few, generally two or three,
points of interaction at the binding site of the target molecule. Frequently, sites on other non-
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targetnon-target molecules
resemble the target binding site sufficientlyenough to permit the conventional drug to bind
to some degree.degree to the non-target molecules. This lack of selectivity may result
in decreased efficacy,effectiveness of the drug because of unwanted side effects or a need to administer the drug in
less than optimal dosages due to toxicity concerns.effects.
In addition, the development of conventional drugs is generally time
consuming and expensive, as thousands of compounds must be synthesizedmade to find onethe most
effective drug with the right efficacy andfewest side effect profile.
Gene Expression Modulationeffects.
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Antisense Drugs
In contrast to conventional drugs, which usually interact with disease-
associated proteins after they have been produced, gene expression modulation
technology is intended toantisense drugs regulate the actual
production of disease-associated
proteins, thus targeting an earlier biochemical process.proteins. Advances in genomic
sciencethe human genome project, including work
conducted by academic institutions, biotechnology companies and pharmaceutical
companies, have identified many targets for gene expression modulation products.antisense drugs. Once a gene
that codes forassociated with a disease-associated protein is identified, an antisense
oligonucleotide based on the complementary sequence for the selected site can be synthesizeddesigned and its pharmaceutical properties optimizedeffects can be improved
by chemical modification. These chemically-modifiedChemically-modified oligonucleotides may be composed
of DNA, RNA or a combination of the two.
Chemically-modified oligonucleotides can be designed to attack a
disease at the genetic level by binding to messenger RNA or DNA to prevent
production of disease-associated proteins. Binding to messenger RNA generally is
used in the "antisense" approach to gene expression modulation, while binding to
the DNA generally is used in the "triplex" approach to gene expression
modulation.
In the antisense approach to gene expression modulation,
chemically-modified oligonucleotides, which consist of the antisense sequence to
a selected region on a target messenger RNA, are used to inhibit the synthesis
of a particular protein.
Because the sequence of nucleic acid bases of a chemically-modified
antisense oligonucleotide is complementary to its target sequence on a messenger
RNA, the antisense oligonucleotide forms a large number of bonds at the target
site, typically between 1540 and 30, practically assuring
that60. Thus, the oligonucleotide will hybridize (bind) tightly toform a strong
bond with the messenger RNA read from the selected type of
messenger RNA. Since a singlegene. A few identical
messenger RNA molecules may be translated repeatedly into a
protein, a single chemically-modified antisense oligonucleotide may inhibitcause the synthesis ofcell to produce many copies of a protein. Moreover, in vitro tests have shown that
certainprotein;
nonetheless, a few identical chemically-modified antisense oligonucleotides form complexes with their
target messenger RNAs. These complexes activatemay
stop this process. Moreover, an enzyme called RNaseH a cellular enzyme, in a
mannerhas been found that destroyscan
destroy the messenger RNA to whichthat binds the oligonucleotide is bound,oligonucleotide. This occurs without
destroying the oligonucleotide itself, thus freeing the oligonucleotide to bind
with anotherother identical messenger RNA.
The triplex approach involves the interaction of oligonucleotides
directly with the appropriate region of the double-stranded DNA comprising the
target gene, thus
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resulting in a triplex structureRNA molecules and physically interfering with the
transcription of DNA into messenger RNA. The triplex approach typically does not
involve thecause destruction of the regionthese
molecules as well. This is called catalytic activity. All of DNAHybridon's drugs
are designed to which the oligonucleotides are
bound, in contrast with the effectstake advantage of this catalytic activity so that a relatively
small number of antisense oligonucleotides on messenger
RNA. Constraining factors to the triplex approach to date have been the
difficultymolecules can effectively inhibit production of
obtaining access for oligonucleotides to the DNA, the relative
weakness of the bonding of the oligonucleotides with the DNA and concerns over
compounds that interact directly with the DNA genetic information.disease-associated proteins.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed an integratedand owns antisense technology platform
based on proprietarythat includes
important new medicinal chemistries, analytical chemistry and manufacturing
technology. The development of Hybridon's antisense chemistry has been directed
by Dr. Sudhir Agrawal, the Company'sHybridon's Chief Scientific Officer, andOfficer. Hybridon's antisense
chemistry builds on the pioneering work in the antisense field begun in the
1970s by Dr. Paul C. Zamecnik, a founder, consultant and director of the CompanyHybridon.
Currently, Dr. Zamecnik is a Professor Emeritus at Harvard Medical School and
Chairman of its
Scientific Advisory Board, athas a research affiliation with the Massachusetts General Hospital ("MGH")in Boston.
Medicinal Chemistries. Hybridon's first antisense drug, GEM 91, which
was based on its first-generation phosporothioate chemistry and continueddiffered only
slightly from native DNA, was more stable than native DNA, but was still able to
trigger the action of RNaseH for catalytic activity. However, there were side
effects caused by Dr. Zamecnik at the Worcester Foundation for Biomedical Research,
Inc., which has since mergedadministration of this modified DNA into the Universitybody. In
particular, in the last clinical trial of Massachusetts (the
"Worcester Foundation").
Medicinal Chemistries.GEM 91 three of the nine patients
treated experienced unacceptable decreases in platelet counts thus increasing
the possibility of uncontrolled bleeding. As a result, Hybridon discontinued the
GEM 91
4
program. Hybridon has, however, used the information gained from the human
clinical trials of GEM 91 to design its more advanced oligonucleotide
chemistries.
Hybridon's scientists have designed and synthesizedmade over 20 proprietarytwenty families of
synthetic antisenseadvanced oligonucleotide chemistries including DNA/RNA combinations, also called
hybrid or mixed backbone chemistries. The CompanyHybridon believes that antisense compounds
based on these advanced chemistries may demonstrate a range ofwill show favorable pharmaceutical
attributes,
including: reducedcharacteristics; thus significantly increasing their potential therapeutic
value. These compounds are likely to have the following properties:
o catalytic activity;
o fewer side effects, increased duration of action, increased potency
and susceptibility to lower dosing, less frequent dosing, controlled release
formulation and alternative routes of administration, including oral
administration. Hybridon designed its first generation phosphorothioate
oligonucleotides to increase their resistance to enzymatic degradation and their
biological activity and to act catalytically by triggering RNase H. GEM 91 was
such a phosphorothioate-modified oligonucleotide. Hybridon has used the insights
gained by iteffects;
o more stable in the human clinical trials of GEM 91 in the design of itsbody enabling a patient to take
doses less frequently;
o more advanced oligonucleotide chemistries.potent, enabling a patient to be given lower
doses and therefore be less expensive than
first-generation drug candidates; and
o ability to be given to patients different ways
(such as by injection, orally, or topically).
Manufacturing Technology. The Company'sHybridon's expertise in the structure,
design and analysissynthesis of
chemically-modifiedchemically modified oligonucleotides has served as the foundation of its
manufacturing technology and know-how. The CompanyHybridon has developed proprietary
technology, including equipment, to increase the purity of oligonucleotide
products, enhanceits oligonucleotides,
improve the efficiency of the production process, and increase the scale of
production. In 1996, the Company completed development of two separate
commercial scale oligonucleotide synthesizers, one in an internal programproduction and one in a collaboration with Pharmacia Biotech, Inc. The synthesizer developed by
Hybridon is capable of producing advanced chemistry antisense oligonucleotides.
In addition, the Company has implemented proprietary purification processes,
which use water in place of chemical solvents, simplifying environmental
compliance and permitting purification of kilogram batches of
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oligonucleotides. The Company has also developed proprietary chemical synthesis
processes and novel reagents used in the synthesis process, which the Company
believes may further decreasereduce the cost of production of its modified
oligonucleotides.drug compounds significantly.
Proprietary Analytical Tools and Processes. The CompanyTools. Hybridon has established
proprietary analytical tools
and processes that enable it to analyze
oligonucleotide compounds with greater speedtest the purity of oligonucleotides more quickly
and accuracy when compared toaccurately than traditional methods. Hybridon has developed a novel method of determining
antisense purity that is sensitive to a single DNA base difference; this method
is significantly more accurate than traditional chromatography methods. The
Company uses the information that it
obtains with its proprietary analytical
tools and processes to improve production quality control, to comply with
regulatory requirements and to monitor the pharmacokinetic behaviorabsorption and stability of its oligonucleotide compoundsdrugs in
preclinical studies and clinical trials. Hybridon has the capability to provide or
support all required quality control functions.
Regulatory Know-How. Hybridon personnel also have extensive experience
in navigating the regulatory process in a cost-effective manner. Hybridon often
assists HSP customers in creating drug/devise master files and writing chemistry
and manufacturing control sections for their submissions to the FDA.
5
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The CompanyDrug Development and Approval Process
The process of taking a compound from the laboratory to human patients
is likely to take a number of years. This process is extremely expensive and is
rigorously regulated by governmental agencies. In the United States, this
process is regulated by the Food and Drug Administration (the "FDA"). The FDA
requires that each drug undergo a series of trials and studies (preclinical and
clinical) prior to considering its approval for commercial sale. The FDA or the
company conducting the trials can discontinue clinical trials at any time if it
is felt that the patients are being exposed to an unacceptable health risk or if
there is not enough evidence that the drug is effective. The FDA may also
require a company to provide additional information or conduct additional tests
before a drug proceeds from one phase to the next. If the FDA's concerns are not
addressed by additional information or tests, the drug will not be allowed to
proceed to the next phase. The regulatory process in other countries is
generally similar to the process required by the FDA. The sequential phases of
the preclinical and clinical trials and studies are described below.
o Preclinical Studies. Preclinical studies are designed to provide data on
the effectiveness and safety of the compound before the compound is
administered to humans.
o Investigational New Drug Application ("IND"). If the data from the
research and preclinical studies are promising, the company will file an
IND with the FDA. The IND contains the results of the preclinical
studies and the protocol for the first clinical trial. The IND becomes
active in 30 days unless the FDA disapproves it or requires additional
information. Once the IND becomes active, the company can begin clinical
trials in humans.
o Phase I Clinical Trials. In Phase I trials, the drug is given to a small
group of healthy individuals or patients with the disease. These trials
are designed to produce data on the drug's safety, the maximum safe
dose, how the drug is absorbed, distributed, metabolized and excreted,
as a function of time. In some cases, early indications suggesting
effectiveness can be found. A very small Phase I study is sometimes
called a Pilot Phase I study.
o Phase II Clinical Trials. In Phase II studies, the drug is given to a
larger group of patients with the disease to evaluate the drug's
effectiveness and side effects at doses that are considered to be
appropriate for the larger Phase III trials that follow.
o Phase III Clinical Trials. These studies generally have a large number
of patients. The primary purpose of a Phase III study is to confirm the
drug's effectiveness and produce additional information on side effects.
A Phase III study that provides data
6
critical to support the registration of the drug with the FDA is often
called a Pivotal Trial.
o New Drug Application ("NDA"). Once Phase III studies are complete, a
company will file a New Drug Application (NDA) with the FDA. The NDA
contains all of the information gathered from the Phase I, II and III
trials. Based on the NDA, the FDA may approve the drug for commercial
sale. Before approving an NDA, the FDA may require additional tests and,
in any event, may deny an NDA if the applicable regulatory requirements
are not met. Even after approval by the FDA, the company must file
additional reports about the drug with the FDA from time to time.
Product approvals may be withdrawn by the FDA if compliance with
regulatory standards is not maintained or if problems occur following
initial marketing.
o Accelerated Approval. Drugs meeting certain criteria are candidates for
special consideration during the review and approval process after
submission of an NDA. Accelerated review and marketing approval of an
NDA is possible for drugs that are intended to treat persons with
debilitating and life-threatened illnesses, especially where no
satisfactory alternatives are available. The more severe the disease,
the more likely the drug will qualify for accelerated approval. If the
new drug receives accelerated approval, the company may be required to
conduct specific post-marketing studies to obtain additional information
about its safety, benefits and optimal use.
Hybridon Drug Development and Discovery Programs
Hybridon is focusing its drug development and discovery efforts on
drug development programs
involving second-generation antisense compounds based onwhich incorporate its advanced chemistries for the Company's
proprietary mixed backbone chemistriestreatment
of diseases in three major therapeutic areas: cancer, disease caused by viruses
and diseases of the eye.
Hybridon believes there are significant additional opportunities for the
use of antisense, particularly for the treatment of cancer. Compared to
conventional drugs, antisense may provide:
o more specific therapy for cancer;
o more rapid development of drugs targeting newly-discovered
cancer-related proteins;
o fewer toxic side effects, thereby allowing long-term therapy,
either alone or in combination with other cancer therapies (such
as shown below. The Company's planradiation or chemotherapy); and
o in the case of combination therapy, additive or synergistic
therapeutic effects.
For these reasons, Hybridon is exploring new antisense targets relevant to the
treatment of cancer.
7
Hybridon plans to seek corporate collaborations with respect tofor each of its
compounds in development. The CompanyHybridon intends to proceed with its GEM 231 clinical
program for the treatment of cancer through Phase II clinical trials, at which
time it may seek a corporate collaborator. Hybridon generally does not
anticipate proceeding with any of its current clinical programs beyond such time as data from Phase II trials
becomes available, or with any of its other drug development programs described below beyond
their current stages of development without a commitment fromcollaborative arrangement with a
corporate collaborator.
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====================================================================================================
TARGET PRIMARY THERAPEUTIC STATUS(1)
INDICATION(S)
- ----------------------------------------------------------------------------------------------------
CLINICAL PROGRAMS
Cytomegalovirus CMV Retinitis GEM 132 for Intravitreal
Injection - Phase I/II Clinical
Trial/Seeking Partner
CMV (Systemic) GEM 132 for Systemic Injection
- Phase I/II Clinical
Trial/Seeking Partner
HIV-1 HIV-1 Infection and AIDS GEM 92 - (Intravenous and
Oral Formulations) - Pilot
Phase I Clinical Trial/Seeking
Partner
Protein Kinase A Cancer GEM 231 - (Intravenous
Formulation) - Phase I Clinical
Trial/Seeking Partner
PRECLINICAL PROGRAMS
Vascular Endothelial Growth Retinopathies (e.g. macular GEM 220 - Preclinical/Seeking
Factor degeneration and diabetic Partner
retinopathy)
Cancer Angiogenesis Preclinical/Seeking Partner
Psoriasis Preclinical/Seeking Partner
Hepatitis C Virus Hepatitis; Liver Cancer Lead Compounds/Seeking
Partner(2)
Murine Double Minute-2 Cancer Research Compounds/Seeking
Partner
Amyloid Proteins Alzheimer's Research Compounds/Seeking
Partner
Human Papilloma Viruses Genital Warts Preclinical 2)(3)
Hepatitis B Virus Hepatitis; Liver Cancer Research Compounds (2)(3)
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUT
DNA Methyltransferase Cancer Preclinical/MethylGene(4)
- ----------------------------------------------------------------------------------------------------
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12
- ----------
(1) Phasepartner.
CLINICAL PROGRAMS
Hybridon has conducted clinical studies in the following areas, with
those in more advanced stages of development described first.
Protein Kinase A
Unlike the growth of normal human cells, cancer cells grow in an
uncontrolled and harmful manner. The protein molecule protein kinase A (PKA) has
been implicated in the formation and growth of various solid tumors, including
colon, ovarian, breast and lung. There are two kinds of PKA. Type I is normal in
developing fetuses, but its production is abnormal in adults. PKA type II clinical trials. The product is
administeredfound in, and is necessary to a limited
patient populationthe health of, normal adults. Certain cancer
cells, however, produce PKA type I in adults. Hybridon's cancer drug that
targets PKA, GEM 231, is designed to (i) evaluatestop the effectiveness for specific
indications and (ii) identify possible short-term adverse effects and
safety risks.production of the harmful PKA type
I without interfering with the production of PKA type II. Current cancer drugs
based on conventional mechanisms can only stop production of both types, leading
to unacceptable side effects.
Hybridon has conducted a Phase I clinical trials. The product is administered to a limited
numberstudy that has evaluated the
safety of healthy human subjects or patientsGEM 231 at multiple doses and tested for
pharmacokinetics (absorption, metabolism, distribution and excretion),
pharmacologic action, dose response, safety and, if possible, early
evidence of effectiveness.
Pilot Phase I Study. The product is administered to a small number of
patients to assess safety, pharmacokinetics and other data on a
preliminary basis.
Preclinical: Compounds are undergoing additional testing and
alternative chemistries are being evaluated in biological assays and/or
appropriate animal models in order to assess efficacy, toxicology and
pharmacokinetics and to select particular chemistries with optimal
pharmaceutical attributes. If these procedures are completed
satisfactorily and other scientific and financial criteria are met, the
Company may initiate IND-enabling Good Laboratory Practices ("GLP")
studies and begin preparation of an IND application.
Lead Compounds: One or more antisense compounds have demonstrated
biological activity for a particular gene target in a specific and
relevant biological assay.
Research Compounds: Appropriate target gene(s) and sequence(s) are
being determined; antisense compounds are being synthesized and
screened for biological activity.
(2) Developed as part of the Company's collaboration with Roche, which was
terminated by Roche as of February 28, 1998. Roche has agreed to assign
all rights to these programs to the Company in connection with such
termination, subject to the execution of definitive documentation.
(3) The Company is currently considering the possibility of a spin-out of
its hepatitis B and HPV programs to a minority-owned subsidiary.
(4) Technology relating to target has been licensed to and is being
developed by MethylGene, a Canadian company co-founded by the Company
and in which the Company owns a minority interest. See "Item 1.
Business -- Financial Collaborations -- MethylGene Inc."
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13
CLINICAL PROGRAMS
Cytomegalovirus
CMV is a member of the herpes virus family which exists latently in
approximately 60% of the general U.S. population, and in approximately 90% of
the HIV/AIDS population. Because of their immunocompromised state, AIDS patients
often suffer from CMV infection. In this patient population, CMV may be
manifested as retinal, gastrointestinal, hepatic, pulmonary and/or neurological
disease, although in 75% of patients with CMV, CMV usually manifests itself as
retinal disease. CMV retinitis lesions progress rapidly and can result in
blindness if left untreated.
Prior to the advent of combination therapy including protease
inhibitors (a highly active anti-retroviral therapy ("HAART")), for AIDS,
approximately 15% of AIDS patients had active CMV disease and another 25% were
considered at risk. Because the introduction of HAART treatment has been
effective at delaying progression of AIDS, the introduction of HAART treatment
has reduced the incidence of new cases of CMV retinitis in AIDS patients by
about three-fold.
The Company believes that aggressive AIDS treatment will prolong the
time that patients are living with CMV retinitis. Between 1994 and 1996, the
mean time of survival of CMV patients increased from 12 to 18 months. The
Company expects such period to increase to 30 months by the end of 1998. As
patients live longer and with less evidence of disease, the Company believes
there is likelyfound it to be a marked decrease in tolerance of cumbersome dosing
regimens and adverse side-effects characteristic of present therapies.
Although the market for CMV drugs is relatively small, the Company
expects the market to grow due to (i) failures of HAART therapy and (ii) CMV
breakthrough during HAART therapy at CD4+ lymphocyte counts above 100. Failures
of HAART therapy may occur as a result of development of resistance, intolerance
and lack of compliance due to complex dosing regimens involving multiple
products.well tolerated. The
Company believes that although HAART therapy is effective for a
limited period of time, the duration of HAART therapy is highly variable.
Several reports presented at the 1997 Interscience Conference on Antimicrobial
Agents and Chemotherapy suggest CMV reactivation in protease-experienced
patients at CD4+ lymphocyte counts greater than 100 and, in some cases, greater
than 200.
The Company is conducting clinical trialsmaximum tolerated dose of GEM 132, its
second-generation antisense oligonucleotide231 was established for the treatment of CMV infection.
In these trials, the Company is studying two different routes of administration.
In an escalating dose, Phase I/II multicenter trial in the U.S.both single doses and
Canada, in
which GEM 132 is
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14
administered by injection into the vitreous of the eye, the Company is studying
the safety and activitymultiple doses. Even high doses of GEM 132231 did not show the side effects
normally seen with current cancer treatments. Evaluation of efficacy was not an
objective of this trial. In December 1998, Hybridon received approval to start a
Phase II Clinical trial of GEM 231 in patients with CMV retinitis who are no
longer ablesolid tumors which had not
responded to benefit from marketed therapies.prior therapy. In addition to continuing to evaluate GEM 231 as a
single-agent therapy, Hybridon plans to conduct small Phase I trials in normal
volunteers, the Company is administering a series of single and multiple dose
regimens, employing two-hour intravenous infusions of up to 150 mg/dose at
weekly intervals over four weeks. In Phase I/II studies involving patients
infected bothin at
least two types of solid tumors using GEM 231 in combination with HIV and CMV, the Company is evaluating the effects of
multiple two-hour intravenous infusions, given at weeklyradiation or
biweekly intervals,
on the quantities of CMV cultured from the semen as a measure of antiviral
activity. All doses studied to date in these clinical trials have been well
tolerated. The Company anticipates these trials will result in the
identification of one or more promising doses and a schedule of administration
for more extended evaluation in patients with CMV infection.
GEM 132 has demonstrated significant inhibition of the replication of
CMV in tissue culture assays. GEM 132 has demonstrated activity in cell culture
against both clinical isolates and viruses which have become resistant to
current therapies,other anti-tumor agents, such as ganciclovir. In addition, in cell culture studies,
GEM 132 has demonstrated significantly more potent anti-viral activity than the
two existing therapies against which it has been tested, ganciclovir and
foscarnet.Taxol.
HIV-1 and AIDS
AIDS is caused by infection with HIVthe HIV-1 virus and leads to severe,
life-threatening impairment of the immune system. HIV causes immunosuppression
by attacking and destroying T-cells, which coordinate muchAIDS therapy using a
combination of the network of
normal immune responses. HIV infection usually leads to AIDS, although
progression to symptomatic disease may take many years. The process of HIV
replication involves the integration of a DNA copy of the viral RNA into the
human genome, the transcription of the DNA copy into messenger RNA ("reverse
transcription") and the synthesis of viral proteins and copies of viral RNA for
packaging into new virus particles that may infect other cells.
As of June 30, 1996, approximately 548,100 cases of AIDS had been
reported to the U.S. Center for Disease Control and Prevention (CDC), and the
current population of surviving AIDS patientsdrugs has resulted in the U.S. was estimated to be
approximately 200,000. As of June 30, 1996, AIDS was the second leading causedecreased rates of death in the U.S. for men between the ages of 25 and 44 and the third leading
cause of death in the U.S. for women between the ages of 25 and 44. In 1996, the
U.S. Public Health Service estimated that more than 1,000,000 other people in
the U.S. were infected with HIV. As of June 30, 1996, the World Health
Organization (the "WHO") reported that approximately 1,394,000 AIDS cases had
been reported worldwide, but it estimated that the actual total number of cases
was over 7,700,000. The WHO also estimated that, as of June 30, 1996,
approximately 21,800,000 individuals were infected with HIV/AIDS worldwide.
-14-
15
A growing number of drugs for the treatment of HIV infection and AIDS
have received marketing approval from the FDA, and from other regulatory
authorities. All of those approved drugs are either inhibitors of the reverse
transcriptase enzyme or the protease enzyme of HIV-1. Although each of these
drugs has demonstrated some evidence of antiviral activity as a monotherapy by
reducing the quantities of virus in the plasma, any studies which have
demonstrated prolonged benefit on the surrogate markers (viral RNA and CD4+
lymphocyte counts) and sustained clinical remission have involved combinations
of these agents.
The standard HAART therapy involves treatment with a protease inhibitor
in conjunction with two inhibitors of reverse transcriptase. While use of these
regimens has been associated with decreased mortality rates and important improvements
in the quality of life for patients with AIDS,AIDS.
8
However, there are increasing reports of failure of HAARTthat this therapy may be failing to sustain the initially-achieved viral
suppression andgive
sustained clinical benefit. The CompanyHybridon believes that these reports
underscorethis underscores the need for new
antiretroviral therapies, preferably active against
targets other than protease or reverse transcriptase.
The Company recentlyAIDS therapies.
Hybridon has completed a pilot Phase I clinical study in Europe of GEM
92, the Company's second-generationHybridon's advanced chemistry compound for the treatment of HIV-1 infection
and AIDS. This study was designed to explore the safety and to provide
information on the pharmacokineticsabsorption of GEM 92 after oral dosing and intravenous dosing.injection. All
doses administeredgiven in the pilot study were well tolerated. The Company is developingFurther, GEM92 was detected
in the blood after both oral dosing and injection, suggesting that it may be
possible to develop GEM 92 using insights gainedas an oral drug. Hybridon believes this was the first
oral administration of an antisense molecule to humans. In vitro studies have
indicated that GEM 92 is additive with a number of marketed compounds.
Importantly, both its medicinal approach and genetic target are unique.
Cytomegalovirus
Cytomegalovirus ("CMV") is present, although inactive, in approximately
60% of the general population in the developmentUnited States and in up to 90% of the
HIV/AIDS population. Because AIDS patients have such severely damaged immune
systems, advanced AIDS patients often suffer from active CMV infection. The most
frequent active form of CMV infection in AIDS patients is CMV retinitis, which
can result in blindness if left untreated. Active CMV infection in AIDS patients
has declined in recent years because of the success of the current combination
AIDS therapy. CMV infection is also a medical problem in other patients with
weak immune systems, such as those who have undergone organ transplants and
those undergoing chemotherapy.
Hybridon has conducted Phase I and early Phase II clinical trials of GEM
91, which involved over 250
volunteers132, Hybridon's advanced chemistry antisense oligonucleotide for the treatment
of CMV infection. No clinical studies with GEM 132 are currently ongoing and
patients with HIV-1 infection. The Company elected to discontinue
further developmentnone are currently planned. Hybridon will reevaluate the status of GEM 91 in July 1997 based on preliminary data from a
Phase II clinical trial in which three132
development should the current poor market conditions improve. A competitor of
the nine subjects treated had
experienced decreases in platelet counts that required dose interruption. In
addition, a review of the virology data showed inconsistent responsesHybridon has recently received FDA approval to market an antisense therapeutic
for the treatment of CMV retinitis. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations -- Risk Factors --Hybridon Faces
Intense Competition, And Hybridon's Products Could Be Rendered Obsolete; Many Of
Hybridon's Competitor's Have Greater Resources And Experience Than Hybridon."
9
PRECLINICAL PROGRAMS
Hybridon has also conducted preclinical studies in the following areas.
- -----------------------------------------------------------------------------------------------------------------------
Target Primary Therapeutic Status
Indication(s)
-------------
- -----------------------------------------------------------------------------------------------------------------------
MDM2 Cancer Research
Compounds/Searle
Collaboration
Vascular Endothelial Growth
Factor Cancer Angiogenesis Preclinical/Seeking Partner
Retinopathies (e.g. Preclinical/Seeking Partner
macular degeneration
and diabetic
retinopathy)
Psoriasis Preclinical/Seeking Partner
Hepatitis C Virus Hepatitis; Liver Lead Compounds/Seeking
Cancer Partner
- -----------------------------------------------------------------------------------------------------------------------
HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund uses of its antisense
technology that it cannot develop at present without external funding. Hybridon
has used one such strategy with MethylGene, Inc. and failedOrigenix Technologies Inc.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene, Inc. Hybridon currently owns approximately 30% of MethylGene.
Hybridon has granted exclusive worldwide licenses and sublicenses to confirmMethylGene
to develop and market (i) antisense compounds to inhibit the decrease in cellular viremia observed in an
earlier trial.
GEM 92 differs from GEM 91 in that GEM 92 is based onprotein DNA
methyltransferase for the Company's
second-generation chemistries, whichtreatment of any disease, (ii) other methods of
inhibiting DNA methyltransferase for the Company believes providetreatment of any disease and (iii)
antisense compounds to inhibit up to two additional targets for the potential
for enhanced metabolic stability compared to the Company's first-generation
compounds. The Company believes that this improved stability may make it
possible to administer lower doses at less frequent intervals and may make the
oral routetreatment of
administration feasible.
Protein Kinase A
Protein Kinase A ("PKA")cancers. DNA methyltransferase is a protein that has been shown to be
expressed in human cancer cell lines and in primary tumors after cells have been
transformed with
-15-
16
various oncogenes or after stimulation of cell growth with cell growth
stimulating factors. Based on cell culture studies, the Company believes that
overexpression of PKA may be associated with colon, breast, ovarian and lung
cancer. Hybridon has identified specific sequences on the PKA gene as targets
for chemically-modified antisense oligonucleotides and has synthesized an
advanced chemically-modified antisense compound, GEM 231, that has demonstrated
inhibition of the expression of PKA and tumor growth in animal model studies. In
these studies, repeated doses of Hybridon's oligonucleotide compound
administered either intraperitoneally or orally resulted in reduction of PKA,
associated with suppression of tumor growth. GEM 231 has also demonstrated in
cell culture tests and in an animal xenograft model that a combination of GEM
231 with cytotoxic drugs or other classes of anticancer agents may enhance the
antitumor effect of GEM 231.
In January 1998, the Company initiated a Phase I dose-escalation trial
of GEM 231 in patients with refractory solid tumors. In this safety trial, GEM
231 is being administered by two-hour intravenous infusions given twice a week.
If treatment is well tolerated and if there is no progression of the tumor at
eight weeks, treatment can be continued until there is toxicity or until there
is clearly no effect on the tumor. This trial is designed to establish a maximum
tolerated dose for GEM 231 when used as a single agent. The study is also
intended to assist the Company in selecting one or more doses to evaluate more
extensively in Phase II trials.
PRECLINICAL PROGRAMS
Vascular Endothelial Growth Factor. Vascular Endothelial Growth Factor
("VEGF") is a growth factor that stimulates angiogenesis, the process of new
blood vessel formation. Angiogenesis plays a major role in wound healing and
organ regeneration and also is involved in certain pathological processes, such
as tumor growth and metastasis. VEGF has been shown to be overexpressed in
developing tumors and is believed to be a key factor in providing new blood
supply to feed developing tumors. Hybridon has identified specific sequences on
the VEGF messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized an advanced chemically-modified antisense
oligonucleotide, GEM 220, that has inhibited the expression of the VEGF gene in
in vitro and tissue culture assays.
Dermatology. VEGF, in association with its role in angiogenesis, has
recently been implicated in psoriasis, which currently afflicts more than
6,000,000 people in the U.S. with between 150,000 and 260,000 new cases in the
U.S. each year. Hybridon has identified specific sequences on the VEGF messenger
RNA as targets for chemically-modified antisense oligonucleotides and has
synthesized chemically- modified antisense oligonucleotides that have inhibited
the expression of the VEGF gene in in vitro and tissue culture assays. The
Company has explored optimal forms of topical delivery of oligonucleotides to
the basal layers of the epidermis, where
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17
VEGF has been found to be overexpressed in psoriasis.
Ophthalmology. Overexpression of VEGF has also been implicated in four
major causes of blindness: late stage, age-related macular degeneration, which
afflicts approximately 500,000 people in the U.S.; proliferative diabetic
retinopathy, the major cause of blindness in diabetics which affects
approximately 250,000 people in the U.S.; central retinal vein occlusion, which
afflicts approximately 200,000 people in the U.S.; and retinopathy of
prematurity, which affects approximately 10,000 premature newborns annually in
the U.S. Hybridon has identified specific sequences on the VEGF messenger RNA as
targets for chemically-modified antisense oligonucleotides and is synthesizing
chemically-modified antisense oligonucleotides designed to inhibit the
expression of the VEGF gene in retinal cells. These oligonucleotides have been
shown in an animal model of retinopathy to inhibit vascular proliferation and
prevent aberrant angiogenesis in the retinas of mice in a model for retinopathy
of prematurity. Hybridon's antisense oligonucleotides have also been shown to
inhibit neovascularization in a primate animal model of neovascularization.
Oncology. Angiogenesis is a key prerequisite for solid tumor growth and
may also constitute an early event in tumorigenesis. In order for tumor cell
masses to grow beyond a few millimeters in size, additional vascularization is
needed. In fact, tumor growth will slow or stop in direct proportion to blood
supply.
VEGF has been shown to be a tumor angiogenesis factor, contributing to
new vessel growth. Several studies in experimental animal model systems have
shown that inhibition of VEGF will inhibit tumor vascularization. In addition,
VEGF has been shown in in vitro studies to provide an autocrine growth stimulus
for some tumor cell lines.
Hepatitis C Virus. There are approximately 3,500,000 people in the U.S.
carrying the hepatitis C virus, and approximately 150,000 individuals in the
U.S. become infected with hepatitis C each year. Approximately 80% of those who
contract the virus each year develop chronic hepatitis C infections and
approximately 30,000 cases each year ultimately result in cirrhosis of the
liver. Chronic infection due to hepatitis C is a significant disease in Japan
and other Pacific Rim countries that has been linked to the development of
primary liver cancer. Pursuant to its collaboration with Roche, Hybridon
identified through joint research with Roche specific sequences on the messenger
RNA as targets for chemically modified antisense oligonucleotides and
synthesized a lead compound that inhibited hepatitis C viral gene expression in
in vitro and tissue culture assays. In connection with the termination by Roche
of the
-17-
18
Company's collaboration with Roche, Roche has agreed to assign all of its rights
to the lead compound to the Company, subject to the execution of definitive
documentation.
Murine Double Minute-2. MDM-2 is a human oncogene which has been shown
in in vitro studies to encode a protein that binds to and inactivates tumor
suppressor genes p53 and Rb. Recent studies by a number of academic institutions
have suggested that overexpression of the MDM-2 gene is present in approximately
70% of all breast cancers and correlates with increased malignancy as well as
drug resistance. The Company, in collaboration with two academic institutions,
has identified specific sequences on the messenger RNA as targets for
chemically-modified antisense oligonucleotides and have synthesized
chemically-modified antisense oligonucleotides that inhibit MDM-2 production in
tissue culture assays. Preliminary studies are being conducted in animal models.
The Company is in the process of seeking to obtain exclusive rights to these
sequences from its academic collaborators.
Amyloid Proteins. Alzheimer's disease is a neurodegenerative disease
which is the most common cause of dementia in the elderly. It is estimated to
affect approximately 4,000,000 individuals in the U.S. The presence of amyloid
precursor protein ("APP") in the brain at abnormal sites and in abnormal amounts
has been reported to be associated with Alzheimer's disease. Hybridon has
identified a specific sequence on the messenger RNA as a target for
chemically-modified antisense oligonucleotides and has synthesized
chemically-modified antisense oligonucleotides that inhibit APP production in
tissue culture assays.
Human Papilloma Viruses. Human papilloma viruses are associated with a
variety of warts, including benign genital warts which, if untreated, can lead
to cervical cancer. Each year, condyloma acuminata (genital warts) are diagnosed
in approximately 750,000 patients in the U.S. and accounts for more than
2,000,000 visits to health care providers in the U.S. HPV infections are the
most common sexually transmitted diseases in the world today, with an estimated
11 to 46 percent of sexually active women having DNA evidence of HPV infection.
Traditional therapies include wart removal through cryotherapy, laser therapy
or excisional surgery; topical application of formulations of podophyllotoxin,
trichloroacetic acid and salicylic acid or 5-flurouracil, or alternatively,
direct injections of interferon into the wart. While existing therapies may help
eliminate the warts, none of them eradicates the virus. Consequently, recurrence
of genital warts, as well as transmission of the virus, remains a significant
problem.
Pursuant to its collaboration with Roche, Hybridon identified through
joint research with Roche specific sequences on the messenger RNA of the
papilloma virus as targets for chemically-modified antisense oligonucleotides
and synthesized a lead compound that inhibited human papilloma virus gene
expression in tissue culture assays. This compound also has been shown in an
animal model to be active in preventing wart-like tissue proliferation. In
connection with the termination by
-18-
19
Roche of the collaboration with Roche, Roche has agreed to assign all of its
rights to the lead compound to the Company, subject to the execution of
definitive documentation. The Company is currently considering the possibility
of a spin-out of this program.
Hepatitis B Virus. Hepatitis B is a major health problem throughout the
world, with endemic infection in some less developed countries. Hepatitis B
infections can lead to liver cirrhosis and cancer of the liver. The WHO
estimates there are more than 1,000,000 new cases of hepatitis B infection
annually in developed countries and 350 million chronically infected carriers
worldwide. Based on data from the CDC, an estimated 30 percent of these will
progress to symptomatic acute infections while a total of 10 to 15 percent will
become chronic hepatitis B carriers at risk of chronic liver disease and
progression to cirrhosis or hepatocellular carcinoma. The Company has acquired
an established cell-base assay for selecting compounds targeted to hepatitis B
as well as several active oligonucleotide compounds that the Company plans to
evaluate as potential pre-clinical candidates. Approximately 1,200,000
individuals in the U.S. carry the hepatitis B virus. There are an estimated
200,000 to 300,000 new hepatitis B infections in the U.S. each year. Pursuant to
its collaboration with Roche, Hybridon identified through joint research with
Roche specific sequences on the messenger RNA as targets for chemically-modified
antisense oligonucleotides and synthesized chemically-modified antisense
oligonucleotides that inhibit the expression of hepatitis B virus in cell
cultures. Although Roche determined not to pursue this program, the Company is
continuing its development efforts. All rights relating to the Roche- sponsored
research with respect to hepatitis B reverted to the Company when Roche
determined not to pursue the program. The Company is currently considering the
possibility of a spin-out of this program to a minority owned subsidiary.
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUT
DNA Methyltransferase. DNA methyltransferase is a regulatory protein
that has been implicated in the processes of cell growth and differentiation and
has been shown to be overexpressedoverproduced in some tumors, such as small cell lung cancer, colon cancer and
breast cancer. MethylGene is obligated to purchase from Hybridon has identified specific
sequences on the messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized chemically-modified antisenseall formulated
oligonucleotides that alter DNA methylation of cultured human cancer cells and
inhibit the ability of such cells to grow in cell culture and their ability to
form tumors in mice. The Company has licensed the technology relating to the
development of this compound to MethylGene whichrequires at specified prices. Hybridon is currently developing this
technology. See "Item 1. Business -- Financial Collaborations -- MethylGene
Inc."
CORPORATE COLLABORATIONS
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An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements or other strategic
alliances with third parties, primarily biotechnology and pharmaceutical
corporations, for thealso
performing drug development and commercialization of certain products. As
of the date hereof, the Company is a party to corporate collaborations with
Searle and Medtronic, all as summarized below. The Company intends to retain
manufacturing rightsother services for many of the products, if any, it may license pursuant
to these collaborations.
G.D. Searle & Co.
In January 1996, the Company and Searle entered into a collaboration
relating to research and development of therapeutic antisense compounds directed
at up to eight molecular targets in the field of inflammation/immunomodulation
(the "Searle Field").
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the Searle
Field designated by Searle. In this project, Searle is funding certain research
and development efforts by the Company, and each of Searle and the Company have
committed certain of its own personnel to the collaboration. The initial phase
of research and development activities relating to the initial target will be
conducted through the earlier of (i) the achievement of certain product
candidate milestones and (ii) 36 months after commencement of the collaboration,
subject to early termination by Searle. The parties may extend the initial
collaboration by mutual agreement, including agreement as to additional research
funding by Searle.
In addition, under the collaboration Searle has the right, at its
option, to designate up to six additional molecular targets in the Searle Field
(the "Additional Targets") for collaborative research and development with
Hybridon on terms substantially consistent with the terms of the collaboration
applicable to the initial molecular target. This right is exercisable by Searle
with respect to each of the Additional Targets upon the payment by Searle of
certain research payments (beyond the project specific payments relating to the
particular Additional Target) and the purchase of additional Common Stock from
the Company by Searle (at the then fair market value). The aggregate amount to
be paid by Searle for such research payments and equity investment in order to
designate each of the Additional Targets is $10,000,000 per Additional Target.
In the event that Searle designates all of the Additional Targets, the aggregate
amount to be paid by Searle for research payments will be $24,000,000 and the
aggregate amount to be paid by Searle in equity investment will be $36,000,000.
If Searle has not designated all of the Additional Targets by the time it
advances the product candidate for the initial molecular target to certain
stages of preclinical development, Searle will be required to purchase an
additional $10,000,000 of Common Stock (at the then fair market value) on
specified
-20-MethylGene.
10
21
dates in order to maintain its right to designate any of the Additional Targets
that it has not yet designated. The payment for any such Common Stock will be
creditable against the equity investment portion of the payments to be made by
Searle with respect to the designation of any of the Additional Targets that
Searle has not yet designated.
Searle also has the right, at its option, to designate a molecular
target in the Searle Field to develop a therapeutic agent for cancer that acts
through immunomodulation (the "Searle Cancer Target") for collaborative research
and development with the Company on terms substantially consistent with the
terms of the collaboration applicable to the initial molecular target. At the
time of such designation, Searle will be required to make certain research
payments to the Company and purchase additional Common Stock from the Company
(at the then fair market value). The aggregate amount to be paid by Searle for
such research payments and equity investment will range from $14,000,000
(comprised of $7,000,000 in research payments and $7,000,000 in equity
investment) if the Searle Cancer Target is designated in 1998 to $26,000,000
(comprised of $21,000,000 in research payments and $5,000,000 in equity
investment) if the Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting
from the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests and
clinical trials of the product candidate and will be responsible for regulatory
approvals for and marketing of the product. In certain instances and for
specified periods of time, the Company has agreed to perform research and
development work in the Searle Field exclusively with Searle. In addition, as to
each product candidate, the Company will be entitled to milestone payments from
Searle totalling up to an aggregate of $10,000,000 upon the achievement of
certain development benchmarks. The Company also will be entitled to royalties
from net sales of products resulting from the collaboration. Subject to
satisfying certain conditions relating to its manufacturing capacities and
capabilities, Hybridon will retain manufacturing rights, and Searle will be
required to purchase its requirements of products from the Company on an
exclusive basis at specified transfer prices. Upon a change in control of the
Company, Searle would have the right to terminate the Company's manufacturing
rights, although the royalty payable in respect of net sales would be increased
in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional Targets
or in certain other instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities,
Searle will have the right, exercisable in its sole discretion, to require the
Company to form a joint venture with Searle for the development of products in
the Searle Field (other than products relating to molecular targets that have
already been designated by Searle) to which each party will contribute
$50,000,000 in cash, although the Company's cash contribution
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22
would be reduced by the value of the technology and other rights contributed by
Hybridon to the joint venture. The Company and Searle would each own 50% of the
joint venture, although Searle's ownership interest in the joint venture would
increase based upon a formula to up to a maximum of 75% if the joint venture is
established in certain instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities.
Under the collaboration, Searle also purchased 200,000 shares of
Common Stock in the Company's initial public offering.
Medtronic, Inc.
In May 1994, the Company and Medtronic entered into a collaboration
involving the testing of a drug delivery device for use in delivering Hybridon's
antisense oligonucleotides for the treatment of Alzheimer's disease. See "Item
1. Business -- Hybridon Drug Development and Discovery Programs -- Preclinical
Programs -- Amyloid Proteins." Hybridon will be responsible for the development
of, and hold all rights to, any drug developed pursuant to this collaboration,
and Medtronic will be responsible for the development of, and hold all rights
to, any delivery system developed pursuant to this collaboration. The parties
may extend this collaboration by mutual agreement to other neurodegenerative
disease targets. The research and development to be conducted is determined and
supervised by a committee comprised of an equal number of designees of the
Company and Medtronic.
As part of the collaboration, Medtronic purchased an aggregate
of 131,667 shares of the Company's Common Stock.
FINANCIAL COLLABORATIONS
In order to maintain financial flexibility, Hybridon considers
innovative arrangements to finance certain applications of its GEM technology,
particularly applications that it would not develop in the near term without
external funding. The Company has entered into one such arrangement, which is
summarized below.
MethylGene Inc.
In 1996, the Company and certain Canadian institutional investors
formed a
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23
Quebec company, MethylGene, to develop and market (i) antisense compounds to
inhibit DNA methyltransferase for the treatment of cancers, (ii) other methods
of inhibiting DNA methyltransferase for the treatment of any indications and
(iii) antisense compounds to inhibit a second molecular target other than DNA
methyltransferase for the treatment of cancers, to be agreed upon by Hybridon
and MethylGene (such three product areas being referred to herein as the
"MethylGene Fields"). In December 1997, Hybridon and Methylgene expanded the
Methylgene Fields to include (a) antisense compounds to inhibit DNA
methyltransferase for any indication and (b) antisense compounds to inhibit a
second and third molecular target for any indications, as may be selected by
Methylgene, so long as such molecular targets are not bona fide targets under
investigation by the Company on or prior to the date that Methylgene notifies
the Company of the identity of such second or third molecular target.
Hybridon initially acquired a 49% minority interest in MethylGene for
approximately CDN$1,000,000, and the Canadian investors acquired a majority
interest in MethylGene for a total of approximately CDN$7,500,000. On March 4,
1998, Methylgene raised an additional CDN$15,800,000 from the private placement
of securities. As a result of such financing, Hybridon now owns an approximately
30% interest in Methylgene.
The Canadian investors who initially invested in the Company continue
toMethylGene have the
right to exchange all (but not less than all) of the shares of stock in
MethylGene that they initially purchased for shares of Common Stock of Hybridon
on the basis of 37.5 MethylGene shares (for which they paid approximately USU.S.
$56.25) for one share of Hybridon Common Stock (subject to adjustment for stock
splits, stock dividends and the like). This option is
exercisable only during a 90-day period commencingexpires no later than 2001.
MethylGene submitted an IND in the United States and Canada in December
1998 and commenced Phase I clinical trials of its first compound, MG98, for the
treatment of cancer in March 1999.
OriGenix Technologies Inc.
In January 1999, Hybridon and three Canadian institutional investors
formed OriGenix to develop and market drugs for the treatment of infectious
diseases, with an initial focus on the earlierviral diseases. Hybridon owns approximately
49% of the date
five years after the closing ofOriGenix. If certain conditions are satisfied by OriGenix, the Canadian
investors'investors are committed to make an additional investment, at which time
Hybridon's ownership interest in MethylGene
or the date on which MethylGene ceases operations, and terminates sooner if
MethylGene satisfies certain conditions.OriGenix will be reduced to 40%.
Hybridon has granted to MethylGeneOriGenix worldwide exclusive worldwide licenses and
sublicenses in respectto antisense technology developed by Hybridon for the treatment of
certain technology relatinghuman papilloma virus and hepatitis B virus infections. Human papilloma viruses
("HPV") cause a variety of warts, including benign genital warts which, if
untreated, can lead to cervical cancer. Hepatitis B infections can lead to liver
cirrhosis and cancer of the MethylGene Fields.liver. In the future, OriGenix may negotiate with
Hybridon for additional targets. In addition, Hybridon and MethylGene have entered into a supply agreement
pursuant to which MethylGeneOriGenix is obligated to purchase
from Hybridon all required
formulated bulk oligonucleotides it requires at specified transfer prices.
The Company is
currently finalizing aHybridon anticipates that it will perform drug development advisory and other services
agreementfor OriGenix.
CORPORATE COLLABORATIONS
An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements or other strategic
alliances with third parties, primarily biotechnology and pharmaceutical
corporations, to develop certain products. Hybridon is a party to corporate
collaborations with Searle and Medtronic. Hybridon expects to retain the rights
to manufacture many of the products it may license pursuant to whichthese
collaborations.
G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a collaboration for
research and development of therapeutic antisense compounds. According to the
Company will assist Methylgenecollaboration agreement
11
as modified in preparing an IND for its first
compound.
ItApril 1998, targets can be selected from those in the fields of
cancer, cardiovascular disease and inflammation/immunomodulation (the "Searle
Field").
Hybridon and Searle are currently conducting research and development
relating to compounds targeting MDM2. In this project, Searle is anticipated that MethylGene will continuefunding certain
research and development efforts at Hybridon, and Searle and Hybridon have
committed personnel to qualify to receive
certain Canadian tax benefits with respect to the collaboration. The initial phase of research and
development activities will be conducted through the earlier of (i) the
achievement of certain milestones and (ii) January 31, 2000, subject to early
termination by Searle. The parties may extend the collaboration by mutual
agreement, including agreement on additional research funding to be made by
Searle.
In addition, Searle has the right to designate up to six additional
molecular targets in the Searle Field (the "Additional Targets") on terms
substantially consistent with the terms applicable to the initial molecular
target. Searle may exercise this right for each of the Additional Targets by
paying specified cash amounts (beyond specific research payments relating to the
particular Additional Target) and purchasing additional Common Stock from
Hybridon (at the then fair market value), totaling $10,000,000 per Additional
Target. If Searle designates all of the Additional Targets, Searle will pay
$24,000,000 in cash and purchase $36,000,000 of equity. If Searle has not
designated all of the Additional Targets by the time the initial molecular
target reaches a certain stage of preclinical development, Searle will be
required to purchase up to an additional $10,000,000 of Common Stock (at the
then fair market value) in order to keep its right to designate any of the
Additional Targets. This payment will be credited against the equity investment
payments made by Searle for any of the Additional Targets designated in the
future.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle elects to commercialize a product, Searle will fund
and perform preclinical tests and clinical trials of the product candidate and
will be responsible for regulatory approvals for, and marketing of, the product.
Hybridon has agreed to perform certain research and development work exclusively
with Searle. In addition, for each product candidate, Searle is required to make
milestone payments to Hybridon of up to $10,000,000 upon the achievement of
development milestones. Hybridon also will be entitled to royalties from net
sales of products resulting from the collaboration. As long as Hybridon
satisfies stated manufacturing capacities and capabilities, Hybridon will retain
manufacturing rights, and Searle will be required to purchase its requirements
of products from Hybridon on an exclusive basis at specified prices. Upon a
change in control of Hybridon, Searle would have the right to terminate
Hybridon's manufacturing rights, although the royalty payable to Hybridon from
net sales would be increased in such event.
If Searle designates all of the Additional Targets or if Hybridon fails
to satisfy certain requirements relating to its manufacturing capacities and
capabilities, Searle will have the right to require Hybridon to form a joint
venture with Searle for the development of products in the Searle Field (other
than products relating to molecular targets that have already been
12
designated by Searle) to which it carries onSearle will contribute $50,000,000 in Canada.
MANUFACTURING TECHNOLOGY AND THEcash and
certain intellectual property rights. Hybridon will also contribute certain
intellectual property and technology and, if the fair market value of such
technology is less that $50,000,000, Hybridon will, at its discretion, either
contribute the difference in cash or have its share of the first profits of the
joint venture reduced by the amount of such difference. Hybridon and Searle
would each own 50% of the joint venture, although Searle's ownership interest
could increase to 75% if the joint venture is established because of Hybridon's
failure to satisfy the requirements relating to its manufacturing capacities and
capabilities.
Under the collaboration Searle also purchased 200,000 shares of Common
Stock in Hybridon's initial public offering.
Medtronic, Inc.
In May 1994, Hybridon and Medtronic entered into a collaboration to test
a drug delivery device for the potential use of delivering Hybridon's antisense
oligonucleotides for the treatment of Alzheimer's disease. The agreement
provides that Hybridon is responsible for the development of, and will hold all
rights to, any drug developed in this collaboration, and Medtronic is
responsible for the development of, and will hold all rights to, any delivery
system developed in this collaboration. By mutual agreement, the parties may
extend this collaboration to other neurodegenerative disease targets. Hybridon
is not currently conducting any activities under this collaboration.
As part of the collaboration, Medtronic purchased a total of 131,667
shares of Hybridon's Common Stock.
HYBRIDON SPECIALTY PRODUCTS DIVISION
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24
The Company has developed a manufacturing technology platform which
integrates key elements of the manufacturing process to increase the purity of
oligonucleotide products, enhance the efficiency of the production process and
increase the scale of production. The Company has developed two separate
commercial scale oligonucleotide synthesizers. One of these machines was
developed in an internal program and the other in a collaboration with
Pharmacia. Both machines are designed with a capacity of up to 100 millimoles
(approximately 300 grams per batch), although the Company believes that these
machines may be able to exceed such capacity. Pharmacia has retained the right
to sell the machine developed under the collaboration to third parties, subject
to an obligation to pay Hybridon royalties on such third party sales. The
Company believes that its machines are the first commercial scale
oligonucleotide synthesizers designed for more advanced chemistries. In
addition, the Company has implemented proprietary purification processes, which
use water in place of chemical solvents, simplifying environmental compliance
and permitting purification of kilogram batches of oligonucleotides. The Company
has also developed proprietary chemical synthesis processes and novel reagents
used in the synthesis process, which the Company believes will further decrease
the cost of production of advanced oligonucleotides.(HSP)
In 1996, Hybridon formed the HSP Division to capitalize on this
technology and know-how and manufacture highly purified oligonucleotide compounds
both for Hybridon's internal use and for sale to third parties,
includingparties. Hybridon
believes the interest in investigating the potential of gene expression
modulation technologies will continue, and even increase, as the use of these
technologies for the development of new classes of drugs becomes more widely
understood. The Company's collaborative partners, on a custom contract basis. The
Companystrategy is to position HSP to take advantage of this
potential growth. There can be no assurance that such strategy will be
successful or that industry growth will be as anticipated. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Risk
Factors -- HSP's Results May Be Lower Than Currently Anticipated" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." However, HSP is attempting to minimize
this risk by manufacturing oligonucleotides for many applications at different
stages of development. HSP currently is manufacturing oligonucleotides for both
13
diagnostic and therapeutic applications. HSP's customers are developing over 20
oligonucleotide drugs.
HSP manufactures oligonucleotides at its 36,000 square foot leased
manufacturing facility, which the CompanyHybridon believes is the firstonly facility capable of manufacturing
large commercial-scale synthetic DNA production facility with a fully integrated manufacturing
technology platform, including large-scale synthesis, purification and
proprietary analytical support. The Companyoligonucleotides. HSP first began production of
oligonucleotide compounds for sale to third parties in June 1996 and had revenues of
approximately $1.1 million in 1996, and approximately $1.9 million in 1997. The Company's1997 and $2.8 million in
1998. HSP's principal customers include Genta/JBL Scientific, AronexLaJolla
Pharmaceuticals, Inc. and Gen-Probe,MethylGene, Inc.
HSP has developed a manufacturing technology platform which combines
multiple methods to improve the production process and increase the amount of
compounds produced in a single batch. HSP has developed two separate commercial
scale synthesizers. One of these machines was developed by Hybridon alone and
the other in collaboration with Pharmacia Biotech. Pharmacia has the right to
make and sell synthesizers based on the design developed in the collaboration
but must also pay Hybridon royalties on sales. Hybridon believes that its
synthesizers are the first commercial-scale oligonucleotide synthesizers
designed for advanced oligonucleotide chemistries. In order to strengthenaddition, HSP has
developed purification processes which use water in place of chemical solvents,
decreasing environmental impact and permitting purification of large amounts
(kilograms) of oligonucleotides. HSP has also developed processes and unique
chemicals used in the marketing of theprocess, which HSP Division's products, inbelieves may further lower its
production costs.
In 1996, the CompanyHybridon entered into a four-year sales and supply agreement
with the Applied Biosystems Division of Perkin-Elmer. Under the agreement,
Perkin-Elmer agreed to refer potential customers for the custom contract manufacture of
oligonucleotides to Hybridon,HSP, and Hybridon agreed to
purchase amidites from Perkin- ElmerPerkin-Elmer for the manufacture of oligonucleotides sold
to such customers andcustomers. Hybridon is also required to pay Perkin-Elmer a percentage of
the sales price paid by such customers. In addition, Perkin-Elmer licensed to
Hybridon its oligonucleotide synthesis patents.
The CompanyHSP is in discussions regardingtargeting three market areas for oligonucleotides: antisense and
non-antisense therapeutics, diagnostics and genetic research. Within each area
there is a possible joint venture with
respect
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25
to thelarge number of potential products. HSP Division, which the Company believes would enable it to maximize the
potentialis currently manufacturing
oligonucleotides for third party manufacturing by the HSP Division, while ensuring for
the Companydiagnostics, therapeutics and its collaborators a source of oligonucleotides. However, there
can be no assurance that the Company will enter into any joint venture of the
HSP Division or that the terms of any joint venture will be as anticipated by
the Company.genetic research.
The production of antisense compoundsoligonucleotides is similar in many respects to the
chemical synthesis used in the production ofto produce conventional pharmaceuticals, and in
contrast with typical biopharmaceuticals, does not involve any fermentation
processes or living cells. Moreover,drugs. However, unlike many
conventional drugs, antisense compounds targeted atused for different diseases can be manufacturedmade
with the same nucleotidechemical building blocks and using the same manufacturing processes
and equipment with minimal adjustments.changes. As a result, the knowledge and experience
that the CompanyHSP obtains in the manufacture ofmanufacturing one oligonucleotide compound is substantially
applicablecan be applied to
the manufacture of other oligonucleotide compounds for the treatment of other
diseasesdiseases. This also allows several different compounds to be manufactured
14
in one facility, potentially reducing capital expenditures required in the
future and results in other manufacturing efficiencies.
The Companyreducing the risks associated with building a plant for a single
designated drug compound.
HSP may need to further increase its manufacturing capacity through the purchase or construction of additional large-scaleby adding more
oligonucleotide synthesizers in order to satisfy its anticipated future requirements for its
product candidatesinternal and in order to manufacture oligonucleotides on a custom
contract basis for sale to third parties.third-party
requirements. In addition, in order to successfully commercialize its product candidatesdrugs or
achieve satisfactory marginsprofit on sales, the CompanyHSP may be required to reduce further the cost ofits
production of its
oligonucleotide compounds.costs. See "Item 7. Management's"Management's Discussion andAnd Analysis ofOf Financial
Condition andAnd Results ofOf Operations -- CertainRisk Factors That-- HSP's Results May Affect
Future Results -- Limited Manufacturing Capability.Be
Lower Than Currently Anticipated."
The CompanyHybridon believes that it is currently manufacturing oligonucleotides
in substantial compliance withaccording to FDA-required Good Manufacturing Practices (GMP). The FDA requirements for
manufacturing in compliance with GMP, although itshas not
formally inspected Hybridon's facility and procedures have
not been formally inspected by the FDA and theHybridon may need to
improve its procedures and documentation
followed may have to be enhanced in the future as the Company expands its
oligonucleotide production activities. Failureincreases. In 1997, HSP was
one of two biotechnology companies chosen to establish toparticipate in the FDA's
satisfactionBiotechnology PAI Pilot Initiative. This is a pilot program that allows FDA
regulatory officials to provide advice on compliance with GMP can result in the FDA denying authorization to
initiate or continue clinical trials, to receivestandards before
companies submit drug approval of a product or to
begin or to continue commercial marketing.
In addition, the Company's manufacturing processes are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of certain materials and waste products.
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26filings.
MARKETING STRATEGY
Hybridon plans to market the pharmaceutical productsdrugs it is developing either directly with
its own sales group or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. Hybridon's current
strategy with respect to these products in development is to build a
hospital-targeted direct sales group for products for market areas that can be
accessed with a small to medium size sales force. Implementation of this
strategy will depend on many factors, including the market potential of any such
products the Company develops as well as on the Company's financial resources.
The Company does not expect to establish a direct sales capability with respect
to such products until such time as one or more of such products approach
marketing approval. To market those products
that will serve a large, geographically diverse patient population, the CompanyHybridon
expects to enter into licensing, distribution or partnering agreements with
pharmaceutical and biotechnology companies that have large, established sales
organizations. To the
extent the Company enters into marketing arrangements with third parties, any
revenues received by the Company will be dependent on the efforts of such third
parties, and there can be no assurance that such efforts will be successful.
While the CompanyHybridon has developed general marketing strategies, it has
not begun the implementation ofto implement any of these strategies with respect to any of these
potential products.strategies. See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Risk Factors
- --Hybridon's Lack Of Marketing Experience Could Adversely Affect Its Ability To
Commercialize Its Drugs."
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon enters into collaborative research agreements relating tofor specific
disease targets and other research activities in order to augmentsupplement its
internal research capabilities and to obtain access to the specialized knowledge
or expertise of its collaborative partners. With respect to certain of the
Company's drug development programs, the Companyexpertise. In some cases Hybridon relies primarily upon outside
collaborators. Accordingly, termination of the Company'sa collaborative research agreements with any of these collaboratorsagreement
could result in the termination of the related research program.
In general, the Company'sHybridon's collaborative research agreements require
the
payment by Hybridon ofto pay various amounts into support of the research to be
conducted. The Companyresearch. Hybridon usually
provides the collaborator with selected
oligonucleotides,
15
which the collaborator then tests in his or her assay systems.tests. If the collaborator creates any invention
during the course of his or her efforts, solely or jointly with the Company,Hybridon,
Hybridon generally has an option to negotiate an exclusive, worldwide,
royalty-bearing license ofto the collaborator's
rights in the invention for the purpose of commercializing any product
incorporating such invention. Inventions developed solely by
Hybridon's scientists as part of the collaboration generally are owned
exclusively by Hybridon. Most of these collaborative agreements are non-exclusivenonexclusive
and can be cancelled on relatively short notice.
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27
Since July 1997, the Companyas part of its restructuring, Hybridon has allowed a
number of its collaborative research agreements to expire and has terminated
certain others. The Companyothers, but has however, maintained the research agreementsthose which it has determinedbelieves are appropriate to
support its current drug development programs.
DRUG DEVELOPMENT SERVICES
Hybridon's Drug Development Department has experience in the design and
conduct of preclinical studies and has prepared and submitted the reports and
other regulatory documents for Hybridon's three advanced chemistry antisense
compounds which have entered Phase I studies. This development expertise is also
being used through a contract with MethylGene under which Hybridon's Drug
Development Department has helped design and monitor the preclinical studies for
MethylGene's antisense compound, MG98, leading to MethylGene's submission of an
Investigational New Drug ("IND") application in Canada and the United States.
MethylGene compensated Hybridon for these services. Hybridon expects to perform
similar services for OriGenix.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates,Hybridon's products, processes and know-how
is important to Hybridon's business. Thus, the Company plans to
prosecuteFor that reason, Hybridon prosecutes and
enforce aggressively enforces its patents and proprietary technology. The
Company'sHybridon's policy
is to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
Hybridon seeks to establish a comprehensive proprietary position
through a "layered" patent strategy covering the Company's families of
oligonucleotide chemistries, the antisense sequences of the Company's
oligonucleotide compounds and the overall chemical compositions of these
oligonucleotide compounds. The Company believes that this approach may provide
it with at least three independent levels of protection. Hybridon also seeks to
protect its proprietary analytical and manufacturing processes. The patents and
patent applications owned or exclusively licensed by the Company also are
directed to many aspects of the Company's proprietary oligonucleotide production
and analysis technology and ribozyme technology. The Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
As of February 28,March 1, 1998, Hybridon owned or exclusively licensed 5562 issued
U.S. patents, seven9 issued foreign patents, 227 allowed U.S. patent applications, two2
allowed Europeanforeign applications and 6263 other U.S. and 10599 other non-U.S. patent
applications. The patents and applications owned or exclusively
licensed by the Company cover various chemically advanced
oligonucleotides, proprietary target sequences, specific preferred oligonucleotide products, methods
for making and purifying oligonucleotides, analytical methods and methods for
oligonucleotide-based therapeuticantisense treatment of various diseases. The U.S. patents owned or exclusively licensed by Hybridon expire at various dates
ranging from 2006 to 2015.
Under the terms of a license agreement with the Worcester Foundation
(the "Foundation License"),16
Hybridon is the worldwide, exclusive licensee under several U.S. issued
or allowed patents and various patent applications owned by University of
Massachusetts Medical Center (formerly the Worcester FoundationFoundation) ("U. Mass")
relating to oligonucleotides and their production and
use.hybrid or mixed backbone chemistries. Many of
these patents and patent applications have corresponding applications on file or
corresponding patents in other major industrial countries.
One of the issued U.S. patents (the "HIV Patent") and one of the issued
European patents licensed from the Worcester Foundation broadly claimU. Mass cover antisense
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28 oligonucleotides as
new compositions of matter for inhibitingstopping the replication of HIV. The other issued
U.S. patents include claims covering composition and uses of oligonucleotides
based on the Company's advanced chemistries, methods of oligonucleotide synthesis that are potentially applicable to large-scale
commercial production,
compositions of certain modified oligonucleotides that are useful for diagnostic
tests or assays and methods of purifying full-length
oligonucleotides after synthesis.oligonucleotides. The earliest
expiration of the patents licensed to the CompanyHybridon by the Worcester FoundationU. Mass is 2006, when the HIV
Patent expires.
The CompanyHybridon also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including two U.S. patents jointly
owned by the Worcester Foundation and the Mount Sinai Medical Center of New York
claiming the use of antisense oligonucleotides for the inhibition of influenza
viruses and two U.S. patent applications
owned by McGill University relating to oligonucleotides and DNA
methyltransferase. The CompanyHybridon and Massachusetts General Hospital ("MGH") jointly
own one issued U.S. patent directed to
compositions of antisense oligonucleotides applicable to Alzheimer's disease. The CompanyHybridon holds an
exclusive license to MGH's interests under such patent.
The CompanyHybridon is a non-exclusivenonexclusive licensee of certain patents held by the
NIHNational Institutes of Health ("NIH") relating to oligonucleotide
phosphorothioates and a non-exclusivenonexclusive licensee of an NIH patent covering the
phosphorothiolation of oligonucleotides. The field of each of these licenses
extends to a wide variety of genetic targets.
If
certain of the claims of the NIH patents non-exclusively licensed to Hybridon
are valid, certain of the Company's products in development would infringe these
patents in the absence of the license.
The U.S. Patent and Trademark Office ("the U.S. PTO"(the "PTO") has informed Hybridon
that certain otherwise allowable patent applications exclusively licensed by the CompanyHybridon from the Worcester FoundationU. Mass
have been submitted to the Board of Patent Appeals and Interferences to
determine whether an interference should be declared with issued U.S. patents
held by the NIH relating to oligonucleotide phosphorothioates.phosphoro-thioates. An interference
proceeding is an inter-
partiesa proceeding in the U.S. PTO to determine who is the first to invent a
claimed invention, and thus who is entitled to a patent for the claimed
invention.
McDonnell Boehnen Hulbert & Berghoff, the Company'sHybridon's U.S. patent counsel, is of the
opinion that the Worcester FoundationU. Mass patent application has a prima-facie case for priority
against the NIH for an invention that includes phosphorothioate-modified
oligonucleotides. However, there can be no assurance an interference canwill be
declared, or if declared, as to the outcome thereof. An
adverse outcome inIf Hybridon were to lose
the interference, would not affect the non-exclusiveits nonexclusive license from the NIH to Hybridon of the NIH
phosphorothioate patents.patents would not be affected.
The U.S. PTO has also declared a four-way interference involving two
additional U.S. patents relating to the Company'sHybridon's chimeric oligonucleotides which
Hybridon exclusively licenses from U. Mass. This interference also involves
patents owned by or exclusively licensed to Integrated DNA Technologies ("IDT"),
Isis Pharmaceuticals, Inc. and Gilead Sciences, Inc.
17
All parties have agreed to settle the Worcester Foundation. There can be no assurance asinterference, and the settlement agreement
has been filed with the PTO for approval. In connection with the settlement,
Hybridon has obtained a license to the
outcomecertain patents and patent applications owned
by IDT which broadly claim chemical modifications to oligonucleotides. Hybridon
has also granted a license to IDT to make, use and sell limited quantities of
this interference.
-28-
29oligonucleotides which incorporate certain of Hybridon's advanced chemistries.
Under theits licenses, to which it is a party, the CompanyHybridon is obligated to pay royalties on its net
sales by the Company of products or processes covered by a
valid claim of a patent or patent applicationthe licensed to it. The Company also
is requiredtechnology and in some
cases to pay a specified percentage of any sublicense income that the CompanyHybridon may receive.
These licenses impose various commercialization, sublicensing, insurance and
other obligations on the Company.Hybridon. Failure of the
CompanyHybridon to comply with these
requirements could result in termination of the license. The Foundation License also grants the Company a right of first refusal
to certain technology developed by the Worcester Foundation.
The patent positions of pharmaceutical and biotechnology firms,
including Hybridon, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Hybridon and its licensors
are
currently prosecutingprosecute their respective patent applications, with the U.S. Patent
and Trademark Office and certain foreign patent authorities, the CompanyHybridon does not know whether any of itsthe
applications or those of third parties under which
the Company has or may obtain a license will result in the issuance of anyissue as patents or, if any patents are issued, whether they
will provide significantadequate proprietary protection or will be circumvented or invalidated.protection. Since patent applications in the
U.S.United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, Hybridon cannot be certain that it,
or any licensor of patents to it, as the case may be, was the first creator of inventions claimed by
pending patent applications or that Hybridon or any licensor, as the case may be, was the first to
file patent applications for such inventions. See "Item 7. Management's"Management's Discussion andAnd
Analysis ofOf Financial Condition andAnd Results ofOf Operations -- CertainRisk Factors That--
Hybridon May Affect Future
Results --Be Unable To Obtain Or Enforce Patents; Its Patents and Proprietary Rights.May Not Provide
Adequate Protection."
Competitors of the CompanyHybridon's competitors and other third parties hold issued patents and
pending patent applications relating to antisense and other gene expression
modulation technologies, and it is uncertain whether these patents and patent
applications willand/or particular genetic
targets which could require the CompanyHybridon to alterchange its products or processes, pay
substantial licensing fees or cease certain activities.activities, including an issued
patent in Europe covering MDM2 (the "MDM2 Patent"). Hybridon is currently in
license negotiations with the holder of the MDM2 Patent. There can be no
assurance that Hybridon will be able successfully to obtain any such licenses at
a reasonable cost or that licenses to such intellectual property will not be
made available to competitors of Hybridon on an exclusive or nonexclusive basis.
Failure to obtain such licenses could have a material adverse effect on
Hybridon. See "Item 7. Management's"Management's Discussion andAnd Analysis ofOf Financial Condition andAnd
Results ofOf Operations -- CertainRisk Factors That-- Hybridon May Affect Future Results --Be Unable To Obtain Or
Enforce Patents; Its Patents and Proprietary Rights.May Not Provide Adequate Protection." In
particular, the Company is aware of aPreviously,
another European patent had been granted to a third party relating to certain
types of stabilized synthetic oligonucleotides for use as therapeutic agents for
selectively blocking the translation of a messenger RNA into a targeted protein
by binding with a portion of the messenger RNA to which the stabilized synthetic
oligonucleotide is substantially complementary. This European patent was revoked
in entirety in an opposition
18
proceeding before the European Patent Office in September 1995. The holder of
this patent has appealed such decision. -29-
30
Hybridon's practice is to requireThis appeal was dismissed on February 18,
1999.
Hybridon requires its employees, consultants, members
of its Scientific and Clinical Advisory Boards, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting relationships with
the Company.agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual during the course of the individual's
relationship with Hybridon is to be kept
confidential, and not disclosed to third
parties, subject to a right to publish certain information in the scientific
literature in certain circumstances and subject to other specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual shall beare the
exclusive property of the Company.Hybridon. There can beis no assurance, however, that these
agreements will provide meaningful protection for the Company'sHybridon's trade secrets or
adequate remedies in the event of unauthorized
use or disclosurebreach of such information.agreement.
Hybridon engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as the NIH, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patients, and relatedcertain technology.
Consistent with pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements
may provide that developments and results will be freely published, that
information or materials supplied by Hybridon will not be treated as
confidential and that Hybridon may be required to negotiate a license to
any such developments and results in order to commercialize products incorporating them.
There can be no assurance that the CompanyHybridon will be able successfully to obtain any
such license at a reasonable cost or that such developments and results will not
be made available to competitors of the CompanyHybridon on an exclusive or nonexclusive
basis. See "Item 1. Business"Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
TheHybridon's research, clinical development and production and marketing of the Company's products and its research
and development activities are subject to regulationregulated
for safety, effectiveness and quality by numerous governmental authorities in
the U.S.United States and other countries. The CompanyHybridon believes that it is in material
compliance with all applicable federal, state and foreign legal and regulatory
requirements under whichrequirements. However, it operates. However, there can be no assuranceis possible that such legal or regulatory requirements will not be amended or that new legal or regulatory requirements
will not be adopted, any one ofmay
change, which could have a material adverse effect on the Company'sHybridon's business or
results of operations.
FDA Approval
In the U.S., pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process of
completing clinical
-30-
31
trials and obtaining FDA approvals for a new drug is likely to take a number of
years and requires the expenditure of substantial resources. There can be no
assurance that any product will receive such approval on a timely basis, if at
all. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors That May Affect Future Results --
No Assurance of Regulatory Approval; Government Regulation."
The steps required before a new oligonucleotide-based pharmaceutical
product for use in humans may be marketed in the U.S. include (i) preclinical
tests, (ii) submission to the FDA of an IND application, which must become
effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the product, (iv) submission of a New Drug Application ("NDA") to the FDA,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies, to assess the potential safety and
effectiveness of the product. Compounds must be manufactured according to GMP
and preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding GLP. See "Item 1. Business -- Manufacturing." The
results of the preclinical tests are submitted to the FDA as part of an IND and
are reviewed by the FDA prior to the commencement of human clinical trials.
Unless the FDA objects to, or makes comments or raises questions concerning, an
IND, the IND will become effective 30 days following its receipt by the FDA.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers and to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board (an "IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety
(adverse effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have
-31-
32
an acceptable safety profile in Phase II evaluation, Phase III trials are
undertaken to further evaluate clinical effectiveness and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all, with respect to any of the Company's products subject to such testing.
Furthermore, the Company, an IRB or the FDA may suspend clinical trials at any
time if it is felt that the participants are being exposed to an unacceptable
health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. In any event, the
FDA may deny an NDA if applicable regulatory criteria are not satisfied.
Moreover, if regulatory approval of a product is granted, such approval may
require postmarketing testing and surveillance to monitor the safety of the
product or may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.Approvals
In addition to product approval,approvals by the CompanyFDA as described above, Hybridon
may be required to obtain a satisfactory inspection by the FDA covering
the Company'sHybridon's manufacturing facilities before a product manufactured by the CompanyHybridon
can be marketed in the U.S.United States. The FDA will review the Company'sHybridon's
manufacturing procedures and inspect its facilities and equipment for compliance
with GMP and other applicable rules and regulations. Any material
19
change by the CompanyHybridon in its manufacturing process, equipment or location would
necessitate additional FDA review and approval.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental regulatory authorities in
foreign countries must be obtained prior to the commencement of clinical trials
and subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be longer or
shorter than that required for FDA approval.
Under European Union ("EU") law, either of two approval procedures may
apply to the Company's products: a centralized procedure, administered by the
EMEA (the European Medicines Evaluation Agency); or a decentralized procedure,
which requires approval by the medicines agency in each EU Member State where
the Company's products will be marketed. The centralized procedure is mandatory
for certain biotechnology products and available at the applicant's option for
certain other products. Whichever procedure is used, the safety, efficacy and
quality of the
-32-
33
Company's products must be demonstrated according to demanding criteria under EU
law and extensive nonclinical tests and clinical trials are likely to be
required. In addition to premarket approval requirements, national laws in EU
Member States will govern clinical trials of the Company's products, adherence
to good manufacturing practice, advertising and promotion and other matters. In
certain EU Member States, pricing or reimbursement approval may be a legal or
practical precondition to marketing.
Other Regulation
In addition to regulations enforced by the FDA, the CompanyHybridon also is subject
to regulation under the Occupational Safety and Health Act and other present and
potential future federal, state or local regulations. Furthermore,In addition, because
the Company's research and development involves the controlled use ofHybridon uses hazardous materials, chemicals, viruses and various radioactive
compounds, the
Company's operations are subject toHybridon's must comply with U.S. Department of Transportation and
Environmental Protection Agency requirements and other federal, state and
foreign laws and regulations regarding hazardous waste disposal, air emissions
and wastewater discharge, including without limitation the Environmental
Protection Act, the Toxic Substances Control Act and the Resource Conservation
and Recovery Act.waste-water discharge. Although the CompanyHybridon believes that its procedures for handling
and disposing of such materials complyit complies with the
standards prescribed by applicable regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials cannot be completely eliminated.materials. In the
event of such an accident, the CompanyHybridon could be held liable for any damages that
result and anyresult. Any such liability could have a material adverse effect on the Company.Hybridon.
COMPETITION
The Company's products under development are expected to address
several different markets defined by the potential indications for which such
products are developed and ultimately approved by regulatory authorities. For
several of these indications, the Company'sHybridon's proposed products will be competing with products and therapies either currently existing or expected to be
developed, including antisense oligonucleotides developed
by third parties.parties for the same diseases. Competition among these products will be
based,affected by, among other things, on product efficacy, safety, reliability,
availability, price and patent position. An
important factor will beprotection. In addition, the timing of market introduction of the Company's or
competitive products. Accordingly, the relative speed withat which
Hybridon can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market is expected towill be
an important competitive factor. The Company'sHybridon's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient capital resources for the often substantial period between
-33-
34
technological conception andfunds to sustain it until commercial sales.sales of its drugs occur.
There are a number of companies, both privately and publicly held, that
are conducting research and development activities on technologies and products
aimed at therapeutic modulationregulation of gene expression. The Companyexpression, including antisense drugs.
Hybridon believes that the industry-wide interest in these technologies and
products will continue and will accelerate as the techniques which permit their application to drug
development become more widely understood. There can be no assuranceaccelerate. It is possible that the
Company'sHybridon's
competitors will not succeed in developing products based on
oligonucleotides or other technologies that are more effective than
any
which are being developed by the CompanyHybridon's or which would render the Company'sHybridon's technology and products obsolete and noncompetitive prioror
noncompetitive. One competitor of Hybridon has recently received FDA approval to
recovery bymarket an antisense therapeutic product for the Companytreatment of the research, development and commercialization expenses incurred
with respect to those products.CMV retinitis. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." Furthermore, because of the fundamental
differences between
gene expression modulation20
antisense and other technologies, there may be indicationsdiseases for which such other
technologies are superior to gene expression
modulation. The development by others of new treatment methods not based on gene
expression modulation technology for those indications for which the Company is
developing compounds could render the Company's compounds noncompetitive or
obsolete.
Competitors of the Company engaged in all areas of drug discovery in
the U.S. and other countries are numerous and include,antisense.
Hybridon has many competitors, including, among others, major
pharmaceutical and chemical companies, biotechnology firms, universities and
other research institutions. Many of these competitors have substantially
greater financial, technical and human resources than the Company.Hybridon. In addition,
many of these competitors have significantly greater experience than the CompanyHybridon in
undertaking preclinical studies and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. Accordingly, the Company'sHybridon's competitors may succeed in obtaining FDA or other
regulatory approvals for products more rapidly than the Company.Hybridon. Furthermore, if
the Company is permittedHybridon receives approval to commence commercial sales of products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited or no experience.
In its HSP Division operations, the Companyalso competes against a number of third parties, and thereparties. There is the
possibility of internal production by the
Company's customers.that Hybridon's customers could begin to produce their drugs
internally or could find other sources for their manufacturing needs. Many of
these third parties and customers have greater financial, technical and human
resources than the Company.Hybridon. Key competitive factors will include the price and
quality of the products as well as manufacturing capacity and ability to comply
with specifications and to fulfill orders on a timely basis. The CompanyHybridon may be
required to reduce the cost of its product offerings to meet competition. See
"Item 7. Management's"Management's Discussion andAnd Analysis ofOf Financial Condition andAnd Results ofOf
Operations -- CertainRisk Factors That May Affect Future Results -- Competition.Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon."
-34-
35
EMPLOYEES
As of March 30, 1998,31, 1999, Hybridon employed 7851 individuals full-time, of
whom 4020 held advanced degrees. Sixty-threeNineteen of these employees are engaged in
research and development activities and 15eight are employed in finance, corporate
development and legal and general administrative activities. In addition,
27twenty-four of these employees are employees of the HSP, Division, of whom eightfive are employed
in
process development and quality control. Many of the Company'sHybridon's management and professional employees
have had prior experience with pharmaceutical, biotechnology or medical products
companies. None of the Company'sHybridon's employees is covered by a collective bargaining
agreements,agreement, and management considers relations with its employees to be good.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
recognized expertise in gene expression modulation technology, antisense
oligonucleotides, oligonucleotide biochemistry, human genetics, medicine and
related fields who advise the Company about current and long-term scientific
planning, research and development. The Scientific Advisory Board holds
approximately three or four formal meetings annually. All members of the
Scientific Advisory Board are employed by employers other than the Company,
primarily academic institutions, and may have commitments to or consulting or
advisory agreements with other entities that may limit their availability to the
Company. These companies may also be competitors of Hybridon. Several members of
the Scientific Advisory Board have, from time to time, devoted significant time
and energy to the affairs of the Company. However, except for Drs. Zamecnik and
Wyngaarden, who are parties to consulting agreements with the Company, no
members are regularly expected to devote more than a small portion of their time
to Hybridon.
As part of its efforts to reduce expenditures, the Company plans to
reduce the size of the Scientific Advisory Board and rely in part on individual
consultants.
The following persons are currently members of the Scientific Advisory
Board:
Paul C. Zamecnik, M.D. (Chairman) is a founder of Hybridon and serves
as a director of the Company. Dr. Zamecnik has served as a Principal Scientist
of the Worcester Foundation and as the Collis P. Huntington Professor of
Oncologic Medicine Emeritus at the Harvard Medical School since 1979.
Daniel M. Brown, Sc.D., F.R.S. has been a Fellow of King's College,
University of Cambridge, since 1953, and currently serves as Vice-Provost of
King's College and as an Attached Scientific Worker in the Medical Research
Council Laboratory of Molecular Biology at the University of Cambridge. Dr.
Brown is also an Emeritus
-35-
36
Reader in Organic Chemistry at the University of Cambridge and became a Fellow
of the Royal Society in 1982.
Har Gobind Khorana, Ph.D. has served as a Sloan Professor in the
Departments of Biology and Chemistry at the Massachusetts Institute of
Technology since 1970. Dr. Khorana has been awarded numerous prestigious honors,
including the Nobel Prize in Medicine or Physiology in 1968 and the National
Medal of Science in 1987.
Roger E. Monier, Ph.D. has served as Director of Molecular Oncology at
the Institute Gustave Roussy in Paris since 1985. From 1980 to 1985, Dr. Monier
served as the Director of Life Sciences at the Centre Nationale de Recherches
Scientifiques in Paris. Dr. Monier was elected to the French Academy of Science
in 1992.
Peter Palese, Ph.D. has served as a Professor in the Department of
Microbiology at Mount Sinai School of Medicine in New York since 1978 and has
served as Chairman of the Department of Microbiology since 1987.
Thoru Pederson, Ph.D. is a Principal Scientist of Cell Biology at the
Worcester Foundation and has served as its President and Director since 1985.
Dr. Pederson is also a Professor of Biochemistry and Molecular Biology at the
University of Massachusetts Medical School. From February 1990 to November 1993,
Dr. Pederson served as a director of the Company.
Jerry A. Weisbach, Ph.D. is an independent consultant to biotechnology
and pharmaceutical companies. Dr. Weisbach served as Director of Technology
Transfer and as an Adjunct Professor at The Rockefeller University from 1988 to
1994. Dr. Weisbach served as Corporate Vice President of Warner-Lambert Company,
an international pharmaceutical company, from 1981 to 1987 and President of the
Parke- Davis Pharmaceutical Research Division of Warner-Lambert Company from
1979 to 1987.
James B. Wyngaarden, M.D. a director of the Company, served as the
Foreign Secretary of the National Academy of Sciences and the Institute of
Medicine of the National Academy of Sciences from 1990 to 1994. Dr. Wyngaarden
also served as the Director of the NIH from 1982 to 1989 and as a council member
of the Human Genome Organization from 1990 to 1993 and as its Director from 1990
to 1991.
Members of the Company's Scientific Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings. Members
of the Scientific Advisory Board also have received options to purchase Common
Stock of the Company under the Company's stock option plans.
CLINICAL ADVISORY BOARD
-36-
37
The Company's Clinical Advisory Board was formally established in
November 1993 to advise the Company with respect to clinical trials of the
Company's product candidates. The Clinical Advisory Board holds approximately
three or four formal meetings annually. The Clinical Advisory Board consists of
individuals with recognized expertise in the conduct of clinical trials and the
regulatory approval process. All members of the Clinical Advisory Board are
employed by employers other than the Company, primarily academic institutions,
and may have commitments to or consulting or advisory agreements with other
entities that may limit their availability to the Company. These companies may
also be competitors of Hybridon. Several members of the Clinical Advisory Board
have, from time to time, devoted significant time and energy to the affairs of
the Company. However, except for Drs. Wyngaarden, who is a director of and a
consultant to the Company, and Drs. Groopman and Weisbach, who are consultants
to the Company, no members are regularly expected to devote more than a small
portion of their time to Hybridon.
As part of its efforts to reduce expenditures, the Company plans to
reduce the size of the Clinical Advisory Board and rely in part on individual
consultants.
The following persons are currently members of the Clinical Advisory
Board:
Dr. Wyngaarden's (Chairman) background and experience are described
above under "Item 1. Business -- Scientific Advisory Board."
Robert M. Chanock, M.D. has served as an infectious disease
epidemiologist and laboratory virologist at the NIH since 1957. Prior to that
Dr. Chanock held academic appointments at the University of Cincinnati College
of Medicine and the Johns Hopkins University School of Hygiene and Public
Health. Dr. Chanock has been awarded numerous prestigious honors, including the
ICN International Prize in Virology in 1990, the Bristol-Myers Squibb Award for
Distinguished Achievement in Infectious Diseases Research in 1993 and the Albert
B. Sabin Foundation award.
Vincent T. DeVita, Jr., M.D. has served as Director of the Yale Cancer
Center since 1993. Dr. DeVita served as an attending physician and member of the
Program of Molecular Pharmacology and Therapeutics from 1988 to 1993, and as
Physician-in- Chief from 1988 to 1991, at Memorial Sloan Kettering Cancer
Center. From 1980 to 1988, Dr. DeVita served as Director of the National Cancer
Institute, NIH. In 1995, he was honored with the City of Medicine Award.
Jerome Groopman, M.D. has served as Chief of the Division of
Hematology/Oncology at the New England Deaconess Hospital since 1985. He has
also served as a Professor of Medicine at Harvard Medical School since 1993. Dr.
Groopman is a member of the AIDS Advisory Committee, the Biologics Committee of
the FDA, the AIDS Clinical Trials Group of the NIH and the AIDS Basic Science
-37-
38
Research Study Section A, NIAID.
Paul Meier, Ph.D. has served as Professor and Chairman of the
Department of Statistics and Division of Biological Sciences at Columbia
University since 1985. Dr. Meier has served as an advisor to the FDA on the
statistical analysis of clinical trials since 1991.
Dr. Weisbach's background and experience are described under "Item 1.
Business -- Scientific Advisory Board."
Members of the Company's Clinical Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings.
ITEM 2. PROPERTIES.
The Company's executive, administrative and research and development
facilities, comprising approximately 91,500 square feet (a portion of which is
subleased as described below), currently are located in Cambridge,
Massachusetts. These facilities are held under a lease which expires in 2012,
but may be extended at Hybridon's option for two additional five-year terms. The
lease provides for an annual rent of approximately $38.00 per square foot for
the first five years, approximately $42.00 per square foot for the second five
years and approximately $47.00 per square foot for the third five years.
A substantial portion of the Cambridge headquarters facility
(approximately 41,500 square feet of office and laboratory space) has been
subleased to a third party under an agreement extending to September 1, 1999.
The Company is evaluating several long term options for the Cambridge facility,
including a possible transfer of its leases or a sale of its ownership interest
in the Cambridge facility. In either case, such transaction would require the
Company to relocate its headquarters.
In addition, the Company leases additional space in Cambridge,
Massachusetts comprising approximately 26,000 square feet for a term expiring
April 30, 2007 at an annual rent of approximately $23 per square foot. The
Company is currently subleasing approximately 20,000 square feet of this
facility to a third party under a sublease expiring September 30, 2000.
The CompanyPROPERTIES
Hybridon leases its 36,000 square foot manufacturing facility in Milford,
Massachusetts under a lease which expires in 2004. The term of the lease may be
extended at Hybridon's option for two additional five-year terms.
21
In addition, Hybridon leases supplemental laboratory space in Cambridge,
Massachusetts comprising approximately 26,000 square feet for a term expiring
April 30, 2007 at an annual rent of approximately $23 per square foot. Hybridon
is currently subleasing approximately 20,000 square feet of this facility to its manufacturing operations, the Company conducts process and
analytical chemistry operations at this facility.
Effective March 31, 1998, the Company has terminated the lease for its
offices in Paris, France.
For a
description of various arrangements relating to the Cambridge
headquarters facility
-38-
39
and the Paris facility, see "Certain Relationships and Related Transactions --
Transactions with Pillar S.A. and Certain Affiliates" in the Company's 1998
Proxy Statement (as defined in "Item 10. Directors and Executive Officers of the
Registrant").third party under a sublease expiring September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS.
The CompanyPROCEEDINGS
Hybridon is not a party to any litigation that it believes could
have a material adverse effect on the CompanyHybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
AtHOLDERS
No matters were submitted to a Special Meetingvote of Stockholders held on November 18, 1997,security holders in the
Company's stockholders, by the vote specified below, approved an amendment to
the Company's Certificate of Incorporation to effect a reverse split of the
Company's Common Stock, pursuant to which each five shares of Common Stock then
outstanding were converted into one share of Common Stock.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
14,652,634 77,698 13,563 0quarter ended December 31, 1998.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
The executive officers and significant employees of the Company and
their ages as of
March 13, 199831, 1999 are as follows:
NAME AGE POSITION
---- --- --------
Executive Officers
E. Andrews Grinstead, III...... 52 Chairman of Board of Directors,
President and Chief Executive Officer
Sudhir Agrawal, D. Phil........ 44 Senior Vice President of Discovery,
Chief Scientific Officer and Director
Significant Employees
Robert G. Andersen............. 47 Vice President of Operations and
Planning and Treasurer
Jose E. Gonzalez, Ph.D......... 51 Vice President of Manufacturing and
General Manager, Hybridon Specialty
Products Division
Philippe Guinot, M.D., Ph.D.... 48 Vice President of Drug Development and
General Manager, Hybridon Europe
-39-
40
NAME AGE POSITION
---- --- --------
R. Russell Martin, M.D......... 62 Vice President of Drug Development
Jin-Yan Tang, Ph.D............. 52 Vice President of Production
Mark C. Wiggins................ 42 Vice President of Business Development
and MarketingEXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
E. Andrews Grinstead, III............. 53 Chairman of Board of Directors, President and
Chief Executive Officer
Sudhir Agrawal, D. Phil............... 45 Senior Vice President of Discovery, Chief
Scientific Officer and Director
22
SIGNIFICANT EMPLOYEES
NAME AGE POSITION
- ---- --- --------
Robert G. Andersen.................... 48 Vice President of Operations and Planning and
Treasurer
Judith Marquis, Ph.D, D.A, B.T........ 52 Vice President of Pre-Clinical Development
R. Russell Martin, M.D. .............. 63 Vice President of Drug Development
Jin-Yan Tang, Ph.D. .................. 55 Vice President of Production
Cheryl M. Northrup.................... 42 Vice President and General Counsel
Mr. Grinstead joined the Company in June 1991 and was appointed Chairman
of the Board and Chief Executive Officer in August 1991 and President in January
1993. He has served on the Board of Directors since June 1991. Prior to joining
the Company, Mr. Grinstead served as Managing Director and Group Head of the
life sciences group at Paine Webber, Incorporated, an investment banking firm,
from 1987 to October 1990; Managing Director and Group Head of the life sciences
group at Drexel Burnham Lambert, Inc., an investment banking firm, from 1986 to
1987; and Vice President at Kidder, Peabody & Co. Incorporated, an investment
banking firm, from 1984 to 1986, where he developed the life sciences corporate
finance specialty group. Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly and Company ("Eli Lilly"), an international
pharmaceutical company, from 1976 to 1984, most recently as General Manager of
Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical Operations
and at Lilly Corporate Staff as Administrator, Strategic Planning and
Acquisitions. SinceFrom 1991 until its merger with another company in 1998, Mr.
Grinstead has served as a director of EcoScience Corporation, a development stage
company engaged in the development of biopesticides, and has served since 1991
as a director of Pharmos Corporation, a development stage company engaged in the
development of novel pharmaceutical compounds and drug delivery systems. Mr.
Grinstead also serves as a director of Meridian Medical Technologies, Inc., a
pharmaceutical and medical device company. Mr. Grinstead was appointed to The
President's Council of the National Academy of Sciences and the Institute of
Medicine in January 1992 and the Board of the Massachusetts Biotech Council in
1997. Since 1994, Mr. Grinstead has served as a member of the Board of Trustees
of the Albert B. Sabin Vaccine Foundation, a charitable foundation dedicated to
disease prevention. Mr. Grinstead received an A.B. from Harvard College in 1967,
a J.D. from the University of Virginia School of Law in 1974 and an M.B.A. from
the Harvard Graduate School of Business Administration in 1976.
Dr. Agrawal joined the Company in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993 and Senior Vice President of Discovery in
March 1994. He has served on the Board of
23
Directors since March 1993. Prior to joining the Company, Dr. Agrawal served as
a Foundation Scholar at the Worcester Foundation from 1987 through 1991. Dr.
Agrawal served as a Research Associate at
the Medical
-40-
41 Research Council Laboratory of
Molecular Biology in Cambridge, England, from 1985 to 1986, studying synthetic
oligonucleotides. Dr. Agrawal received a B.Sc. in chemistry, botany and zoology
in 1973, an M.Sc. in organic chemistry in 1975 and a D. Phil. in chemistry in
1980 from Allahabad University in India.
Mr. Andersen joined the Company and was appointed Vice President of
Systems Engineering and Management Information Systems in November 1996 prior to
being appointed Vice President of Operations and Planning in 1997 and Treasurer
of the Company in January 1998. Prior to joining the Company, Mr. Andersen
served in a variety of positions at Digital Equipment Corporation, a computer
company, from 1986 to 1996, most recently as Group Manager of the Applied
Objects Group. From 1978 to 1986, Mr. Andersen served in a variety of positions
at United Technologies Corporation, an aviation technology company, most
recently as Director of Quality. Mr. Andersen received his B.E.E. in Electrical
Engineering from The City College of New York in 1972 and a M.S. from
Northeastern University in 1978.
Dr. Gonzalez joined the Company and was appointed Vice President of
Manufacturing in August 1995 and was appointed General Manager, Hybridon
Specialty Products Division, in September 1997. Prior to joining the Company,
Dr. Gonzalez served as Vice President of Manufacturing Operations at Enzon
Corporation, a biotechnology company, from 1993 to 1995. From 1977 to 1993, Dr.
Gonzalez served in a variety of positions at The Upjohn Company, a
pharmaceutical company, most recently as Associate Director of Bioprocess
Development. Dr. Gonzalez received a B.S. in chemistry from the University of
Miami in 1969 and a Ph.D. in biochemistry from Purdue University in 1974.
Dr. Guinot joined the Company and was appointed Vice President of
European Drug Development and General Manager of Hybridon Europe in September
1995. Prior to joining the Company, Dr. Guinot served as a consultant to the
Laboratoire Francais du Fractionnemant et des Biotechnologies (the "LFB") from
1994 to 1995, where he was responsible for conducting audits of all of the LFB's
research and development programs. From 1981 to 1994, Dr. Guinot served in a
variety of positions at the Beaufour-Ipsen Group, a group of affiliated
pharmaceutical companies, most recently as General Manager of the Institute
Henri Beaufour where he was responsible for the planning, strategy, budget and
coordination of the Beaufour-Ipsen Group's product development efforts. In
addition, Dr. Guinot has served as an Adjunct Professor of Medicine at the
University of California, Davis since 1992, an Adjunct Professor of Physiology
at New York Medical College since 1991 and Consultant Physician in Internal
Medicine at Broussais Hospital in Paris. Dr. Guinot received an M.D. from the
University of Paris in 1975 and a Ph.D. in biophysics from Clermont Ferrand in
1994.
Dr. Martin joined the Company and served as Vice President of Clinical
Research from April 1994 to February 1997 prior to being appointed Vice
President of
-41-
42 Drug Development in February 1997. Prior to joining the Company,
Dr. Martin served in a variety of positions at Bristol Myers Squibb from 1983 to
1994, most recently as Vice President of Clinical Research (Infectious
Diseases). During such period, he served as an Adjunct Associate Professor of
Medicine and Associate Clinical Professor at Yale University School of medicine
from 1987 to 1994, Clinical Professor at University of Connecticut School of
Medicine from 1986 to 1993 and Adjunct Professor of Medicine at Baylor College
of Medicine from 1993 to 1994. Prior to joining Bristol Myers Squibb, Dr. Martin
served as Professor of Medicine, Microbiology and Immunology at Baylor College
from 1975 to 1983. Dr. Martin received an A.B. in American studies from Yale
University in 1956 and an M.D. from the Medical College of Georgia in 1960.
Dr. Marquis joined the Company in April, 1995, and served as Director of
Drug Safety Evaluation until January, 1998 when she was appointed Vice President
of Preclinical Development. Prior to joining the Company, Dr. Marquis served as
Director of Preclinical Development at Procept, Inc., from 1993 to 1995, and
Director of Life Sciences Research at Arthur D. Little, Inc., from 1989 to 1993.
Prior to joining the pharmaceutical industry, Dr. Marquis spent 16 years in
medical research and education at Tufts University School of Medicine. Dr.
Marquis received a B.S. in Biology from Trinity College of Vermont in 1973 and a
Ph.D. in physiology and biophysics from the University of Vermont School of
Medicine. She is board certified in toxicology and a former president of the
American Board of Toxicology.
24
Ms. Northrup joined the Company in 1997 and was appointed Vice
President and General Counsel in June 1998. Ms. Northrup served as Corporate
Counsel to ImmuLogic Pharmaceutical Corporation from 1996 to 1997 and as a
Director of the Wallace Law Registry from 1994 to 1996. Ms. Northrup also served
as Director of Legal Services of the Boston Five Cents Savings Bank from 1992
until 1994 and as Associate General Counsel to American Finance Group in 1990.
Prior to joining American Finance Group, Ms. Northrup was an Associate from 1981
to 1990 and a Partner from 1990 to 1991 of Peabody & Brown, a law firm in
Boston, Massachusetts. Ms. Northrup received her A.B. degree from Smith College
in 1978 and a J.D. degree from Boston College Law School in 1981.
Dr. Tang joined the Company in 1991 and served as Senior Research
Scientist from 1991 to 1993, Director of Oligonucleotide Chemistry from 1993 to
1994 and Executive Director of Process Chemistry from 1994 to April 1995 prior
to being appointed Vice President of Process Development in April 1995. In
November of 1997, Dr. Tang was appointed Vice President of Production. Prior to
joining the Company, Dr. Tang served as a Visiting Fellow at the Worcester
Foundation from 1988 to 1991. He also served as a Visiting Professor at the
University of Colorado in 1988. Dr. Tang received a B.S. in biochemistry from
Shanghai University of Sciences and Technology in 1965 and a Ph.D. from the
Shanghai Institute of biochemistryBiochemistry in 1978.
Mr. Wiggins joined the Company and was appointed Vice President of
Business Development and Marketing in November 1996. Prior to joining the
Company, Mr. Wiggins served in a variety of positions at Schering-Plough
Corporation, a pharmaceutical company, from 1986 to 1996, most recently as the
Director of Business Development. From 1980 to 1986, Mr. Wiggins held various
marketing positions at Ortho Pharmaceuticals, Inc., a pharmaceutical company,
and Pfizer, Inc., a pharmaceutical company. Mr. Wiggins received his B.S. in
Finance from Syracuse University in 1978 and a M.B.A. from the University of
Arizona in 1980.
-42-25
43
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.MATTERS
(a) Market Information
------------------
From January 24, 1996 until December 2, 1997, the Company'sHybridon's Common Stock
was traded on the Nasdaq National Market under the symbol "HYBN." Prior to
January 24, 1996, there was no established public trading market for the
Company'sHybridon's
Common Stock.
On December 2, 1997, the Company'sHybridon's Common Stock was delisted from the
Nasdaq National Market and began being quoted on the NasdaqNASD OTC Bulletin Board.
Prices reflected on the NasdaqNASD OTC Bulletin Board may reflect inter-dealer prices,
without retail mark-up, mark-downs or commissions and may not necessarily
represent actual transactions.
On December 10, 1997 the CompanyHybridon effected a one-for-five reverse stock
split of its Common Stock. As a result of the reverse stock split, each five
shares of Common Stock was automatically converted into one share of Common
Stock, with cash paid in lieu of any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the NasdaqNASD OTC Bulletin
Board since January 24, 1996 and as adjusted to reflect the December 1997
reverse stock split.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996).................. $71.250 $43.750
Second Quarter.................................Quarter............................... 59.375 25.625
Third Quarter..................................Quarter................................ 59.375 33.125
Fourth Quarter.................................Quarter............................... 43.125 26.250
1997
- ----
First Quarter..................................Quarter................................ $43.125 $28.125
Second Quarter.................................Quarter............................... 35.625 25.000
Third Quarter..................................Quarter................................ 28.125 7.500
Fourth Quarter.................................Quarter............................... 4.859 2.609
26
1998
- ----
First Quarter................................ 3.359 1.000
Second Quarter............................... 2.75 1.609
Third Quarter................................ 2.516 1.125
Fourth Quarter............................... 3.25 1.125
1999
- ----
First Quarter................................ 1.953 1.000
-43-
44
The reported closing bid price of the Common Stock on the NasdaqNASD OTC
Bulletin Board on MarchApril 13, 19981999 was $2.4375$1.1875 per share.
(b) Holders
-------
The number of stockholdersCommon Stockholders of record on MarchApril 13, 19981999 was 297.351.
(c) Dividends
---------
The Companydividend rate of Hybridon's Series A convertible preferred stock
(the "Series A Preferred Stock") is 6.5% per annum, payable semi-annually in
arrears. These dividends may be paid either in cash or in additional shares of
Series A Preferred Stock, at the discretion of Hybridon.
Hybridon has never declared or paid cash dividends on its capital stock
and the Company does not expect to pay any cash dividends on its Common Stock or any cash
dividends on the Series A Preferred Stock in the foreseeable future. The
indentureIndenture under which the CompanyHybridon issued $50.0 million of the 1997its 9% Convertible Subordinated Notes (the
"9% Notes") on April 2, 1997 limits the Company'sHybridon's ability to pay dividends or make
other distributions on its Common Stock or to pay cash dividends on the Series A
Preferred Stock. As of December 31,1998, $1.3 million in aggregate principal
amount of the 9% Notes remained outstanding.
In addition, the CompanyHybridon is currently prohibited from paying cash dividends
under a credit
facility with a commercial bank (the "Bank Credit Facility").$6,000,000 secured loan, which is owned by affiliates of two members of
Hybridon's Board of Directors. See Note 7(b) to the Consolidated Financial
Statements.
(d) Recent Sales of Unregistered Securities
---------------------------------------
During the quarterly period ended December 31, 1997,1998, the Company did not
sell any securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act").
-44-amended.
27
45
ITEM 6. SELECTED FINANCIAL DATA.DATA
The selected financial data presented below for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the Company's
Consolidated Financial Statements that have been audited by Arthur Andersen LLP,
independent public accountants. This financial data should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Consolidated Financial Statements and the Notes
thereto and the other financial information appearing elsewhere in this Annual
Report on Form 10-K.
Years Ended December 31,
--------------------------------------------------------------------
1993-----------------------------------------------------------------------
1994 1995 1996 1997 -------- -------- -------- -------- --------1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Research and development ............ $ 917development................... $ 1,032 $ 1,186 $ 1,419 $ 945 $ 1,100
Product revenue ..................... --and service revenue................ -- -- 1,080 1,877 3,254
Royalty income ...................... --income............................. -- -- 62 48 --
Interest income ..................... 267income............................ 135 219 1,447 1,079 -------- -------- -------- -------- --------
1,184148
------- ------- ------- ------- -------
1,167 1,405 4,008 3,949 4,502
Operating Expenses
Research and development ............ 16,168development................... 20,024 29,685 39,390 46,828 20,977
General and administrative .......... 4,372administrative................. 6,678 6,094 11,347 11,026
Interest ............................ 38011,027 6,573
Interest................................... 69 173 124 4,536 Restructuring .......................2,932
Restructuring.............................. -- -- -- 11,020 --
------- ------- ------- ------- -------
Total operating expenses.............. 26,771 35,952 50,861 73,410 30,482
------- ------- ------- ------- -------
Loss from operations............................ (25,604) (34,547) (46,853) (69,461) (25,980)
Extraordinary item:
Gain on exchange of 9% convertible -- -- -- -- 11,020
-------- -------- -------- -------- --------
Total operating expenses ... 20,920 26,771 35,952 50,861 73,410
-------- -------- -------- -------- --------8,877
subordinated notes payable................. ------- ------- ------- ------- -------
Net Loss .................................. $(19,736)Loss........................................ (25,604) (34,547) (46,853) (69,461) (17,104)
Accretion of preferred stock dividends.......... -- -- -- -- 2,689
------- ------- ------- ------- -------
Net loss to common stockholders................. $(25,604) $(34,547) $(46,853) $(69,461) $(19,793)
======== ======== ======== ======== ========
Basic and Diluted Netnet loss per common share:
Loss per Common
Share(1) .................................. (55.80)share before extraordinary item... $(70.77) $(94.70) $ (10.24) $ (13.76) $ (2.19)
Extraordinary Item......................... - - - - 0.75
------- ------- ------- ------- -------
Net loss per share......................... (70.77) (94.70) (10.24) (13.76) (1.44)
Accretion of preferred stock dividends..... - - - - (.23)
------- ------- ------- ------- -------
Net loss per share applicable to common
shareholders............................... $ (70.77) $ (94.70) $ (10.24) $ (13.76) $ (1.67)
======== ======== ======== ======== ================== ========= =========
Shares Used in Computing Basic and Diluted Net
Loss per Common Share(1)....... 354Share........................... 362 365 4,576 5,050 11,859
======== ======== ======== ======== ========
Pro Forma Net Loss per Common Share(1) .... (11.71) (11.04) $ (11.02) $ (9.67) $ (13.76)
======== ======== ======== ======== ========
Shares Used in Computing Pro Forma Net
Loss per Common Share(1)................... 1,686 2,320 3,135 4,843 5,050
======== ======== ======== ======== ========
-45-
46
December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(In thousands)
========== ========= =========
Balance Sheet Data:
Cash, cash equivalents and short-term
investments(2) ......................... $ 8,767 $ 3,396 $ 5,284investments..................................... $3,396 $5,284 $ 16,419 $ 2,202 5,608
Working capital (deficit) .................. 8,357....................... (1,713) 210 8,8888,891 (24,100) (5,614)
Total assets ............................... 15,243assets.................................... 11,989 19,618 41,537 35,072 16,536
Long-term debt, and capital lease
obligations, net of current portion ..... 79portion.......... 1,522 1,145 9,032 3,282 6,473
9% Convertible Subordinated
Notes Payable............................... --Payable................................... -- -- -- 50,000 1,306
Accumulated Deficit accumulated in the
development stage ........................ (42,190) (67,794) (102,341) (149,194) (218,655) (238,448)
Total stockholders' equity (deficit) ....... 12,178............ 4,774 12,447 22,855 (46,048) -------- -------- --------- -------- ---------2,249
(1) Computed on the basis described in Note 2(b) of Notes to Consolidated
Financial Statements attached as APPENDIX A hereto.
(2) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
-46-28
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.OPERATIONS
GENERAL
The CompanyHybridon is engaged in the discovery and development of genetic
medicines based on antisense technology. The CompanyHybridon commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, development ofdeveloping its manufacturing capabilities, and organizational efforts, including recruitment of scientific and management
personnel, and raising
capital. To date, the Company has not received revenue
from the sale of biopharmaceutical products developed by it. In order to commercialize its owntherapeutic products, the CompanyHybridon will need
to address a number of technological challenges and comply with comprehensive
regulatory requirements. Accordingly, it is not possible to predict the amount of funds that will be
required or the length of time that will pass before the Company receives
revenues from sales of any of these products. All revenues received by the
CompanyHybridon to date have been
derived from collaborative agreements, interest on invested funds and revenues
from the custom contract manufacturing of synthetic DNA and reagent products by
the Company's HSP Division.
The CompanyHSP.
Hybridon has very limited cash resources and substantial obligations to
lenders, equipment lessors,its real estate landlords, trade creditors, and trade creditors. The
Company'sothers. Hybridon's
ability to continue operations in 19981999 depends on its success in raisingobtaining new
funds. If the CompanyHybridon is unable to raiseobtain substantial additional new funding beginning in April 1998,by the
end of May 1999, it will be required to terminate its operations or seek relief
under applicable bankruptcy laws bylaws. Hybridon is currently seeking debt or equity
financing in an amount sufficient to support its operations through the end of
April 1998.1999, and in connection therewith, is in negotiations with several parties to
obtain such financing.
In the Report of Independent Public Accountants set forth in Appendix A
attached to this Annual Report on Form 10-K, Arthur Andersen LLP, the Company'sHybridon's
independent public accountants, states that there is substantial doubt about
the
Company'sHybridon's ability to continue as a going concern.
As part of its efforts to seek new funding, in January 1998, the
Company commenced a private offering (the "1998 Unit Financing") of up to 400
units, each unit (a "Unit") consisting of a Note Due 2007 (the "1998 Unit
Notes") in the original principal amount of $100,000 and warrants to purchase
Common Stock. The Company is offering the Units at a price of $100,000 per Unit.
As of March 30, 1998, the Company had sold 48 Units for an aggregate purchase
price of $4.8 million. There can be no assurance as to whether the Company will
be able to sell any additional Units or as to the timing of the Company's sale
of additional Units. See "1998 Financing Activities" below.
The CompanyHybridon has incurred cumulative losses from inception through -47-
48
December
31, 19971998 of approximately $218.7$238.4 million. The CompanyHybridon implemented a restructuring
plan in the second half of 1997, which it expects will
significantly reduce the Company'sreduced Hybridon's
operating expenses and cost requirements in 1998 from 1997 levels. However, the CompanyHybridon expects that its
research and development expenses will continue to be significant in 19981999 and future years
as it pursues its core drug development programs and expects to continue to
incur operating losses and have significant capital requirements that it will
not be able to satisfy with internally generated funds.
The Company continues to
explore opportunities to reduce operating expenses in an effort to conserve its
cash resources.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting
the foregoing,For example, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
are based on management's current expectations and involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance or achievements of Hybridon to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. There are a number of important factors that could
cause the Company'sHybridon's actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth below under the caption "Certain Factors That May Affect Future Results."Risk Factors."
29
RESTRUCTURING PLAN
During the second half of 1997, the CompanyHybridon implemented a restructuring
plan to reduce expenditures on a phased basis over the balance of 1997 and into
the first half of 1998 in an effort to conserve its cash
resources. As part of this restructuring plan, in addition to terminating the clinical development of
GEM 91, the CompanyHybridon reduced or suspended selected programs unrelated to its core advanced
chemistry antisense drug development programs, including its ribozyme
program. In connection with the reduction and suspension of programs, the
Company has accrued termination fees related to research contracts and has
incurred restructuring charges relating to programs that have been suspended or
canceled.programs. In addition, the Companyin 1997, Hybridon
terminated the employment of 84a substantial number of employees at its Cambridge
and Milford, Massachusetts and Paris, France facilities in the second half of 1997 and substantially
reduced operations at its Paris, France office and terminated
ten employees at that locationoffice. In December 1999, Hybridon began
the final process of terminating all operations in August 1997. As partEurope.
In 1997 Hybridon subleased a portion of the restructuring, the
Company reviewed all outside testing, public relations, travel and entertainment
and consulting arrangements and terminated or renegotiated variouseach of these
arrangements.
As part of the restructuring, the Company subleased one facilityits facilities in
Cambridge, Massachusetts and(including a substantial portion of its corporateformer
headquarters). In June 1998, Hybridon relocated its headquarters located at 620 Memorial Drive,from Cambridge,
Massachusetts.Massachusetts to its facility in Milford, Massachusetts and subsequently sold
its interest in Charles River Building Limited Partnership, which owned the
former Cambridge headquarters. In connection with this transaction and the
termination of the Cambridge lease in 1998, the Company received $6,163,000 in
cash, which included the return of a portion of its security deposit for its
Cambridge headquarters and the reclassification on the Company's balance sheet
of $660,000 from restricted cash to cash and cash equivalents. The Company incurred
expenses relatingCambridge
facility was re-leased in September 1998 to a third party, subject to a sublease
to a portion of the premises. As a result of these subleases for broker fees and renovation expenses
incurred in preparing the Memorial Drive spaceactions, Hybridon was
relieved of its substantial lease obligations for the new tenant. In addition,Cambridge facility,
subject to a continuing liability for any defaults which may arise under the
Company has accrued the estimated lease loss of subleasing the remaining
space at its corporate
-48-
49
headquarters. The Company has accrued the remaining lease costs prior to
terminating the lease for its offices in Paris, France effective March 31, 1998.
Because of the significant costs involved in terminating employees,
subleasing its facilities, terminating research contracts, suspending or
cancelling research programs and substantially reducing operations, the Company
did not begin to experience a material decrease in its expenditure rate until
the fourth quarter of 1997. The Company recorded a restructuring charge of $11.0
million for the actions that occurred in 1997.sublease.
RESULTS OF OPERATIONS
Years ended December 31, 1996, 1997 1996 and 19951998
Revenues
The CompanyHybridon had total revenues of $4.0 million in 1996, $3.9 million in
1997, $4.0and $4.5 million in 1998. During 1996, 1997 and $1.4 million in 1995. During 1997, 1996 and 1995, the Company1998, Hybridon received
revenues from research and development collaborations of $945,000, $1.4 million, $0.9
million and $1.2$1.1 million, respectively. Research and development collaboration
revenues decreased in 1997 from 1996 because of the cancellation by Roche of its
collaboration with Hybridon and the resulting elimination of research funding which the Company had
been receiving under the Company's collaboration with Roche in 1996 and 1995,
was terminated by
Roche as of March 31, 1997.Roche. Research and development collaboration revenues increased in 19961998 from
1995 because collaboration
revenues in 1996 included revenues earned1997, primarily due to Hybridon receiving certain payments under a collaborativeits license
agreement with Searle, which the Company entered intoMethylGene, Inc.
Product and service revenues were $1.1 million in January 1996.
Revenues from the custom contract manufacturing of synthetic DNA and
reagent products by the HSP Division were1996, $1.9 million in
1997 and $1.1$3.3 million in 1996.1998. The increase in revenues in 1997 over those in
1996 resulted from a full year of operations for the HSP, Division, which commenced operations
in the third quarter of 1996. This increase in revenues in 1997 was significantly lower than the
Company had anticipated. As of December 31, 1997, the1998, HSP Division had a backlog of $1,200,000. The Company$0.9
million. Hybridon anticipates filling this backlog in the first half of 1998.1999.
The increase in revenues in 1998 was primarily the result of an expansion by HSP
in the customer base and increased sales to certain existing customers, and was
also due in part to Hybridon receiving $0.4 million in service revenue from
MethylGene.
30
Revenues from interest income were $1.4 million in 1996, $1.1 million in
1997 $1.4and $0.1 million in 1996 and $219,000 in 1995.1998. The decrease in interest income in 1997 from
1996, and in 1998 from 1997 was the result of lower cash balances available for
investment in 1997 than in
1996. The increase in interest income in 1996 from 1995 was the result of
substantially higher cash balances available for investment as a result of the
Company's initial public offering, which was completed on February 2, 1996.each year.
Research and Development Expenses
-49-
50
During 1996, 1997 1996 and 1995, the Company1998, Hybridon expended $39.4 million, $46.8
million $39.4
million and $29.7$21.0 million, respectively, on research and development activities.
The increases in research and development expenses in 1997 andfrom 1996
reflected increasing expenses related primarily to ongoing clinical trials of
the
Company'sHybridon's product candidates, including (a) clinical trials of two different
formulations of GEM 132, which were first initiated during the third quarter of
1996 and the first quarter of 1997, (b) clinical trials of GEM 92, which were
initiated in the third quarter of 1997 and (c) clinical trials of GEM 91, which
were initiated in France in October 1993 and in the U.S. in May 1994, and were
terminated in July 1997. Clinical expenses related to GEM 91 decreased
significantly during the second half of 1997 after the Company elected to terminateHybridon terminated
development of this compound. Research and development expenses also increased
in 1997 andover 1996 due to significant increases in preclinical expenses incurred
to meet the filing requirements to initiate the domestic clinical trials of Hybridon's
product candidates in the Company's product
candidates.United States.
The decrease in research and development expenses in 1998 reflects
Hybridon's restructuring that commenced during the second half of 1997. The
restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, termination of the clinical development of GEM 91 and the
reduction or suspension of selected programs unrelated to Hybridon's core
advanced chemistry antisense drug development program. The restructuring
resulted in significant reductions in employee-related expenses, clinical and
outside testing, consulting, materials and lab expenses.
The facilities expense related to the research and development area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts and decreased significantly in 1998 as a
result of the relocation in July 1998 from Cambridge to Milford, Massachusetts.
Hybridon's facility costs in 1998 related to research and development were also
reduced by the income received from subleasing its underutilized Cambridge
facilities.
Research and development salaries and related costs remained at
approximately the same level in 1997 as 1996 because of the costs involved in
terminating employees in 1997. Research and development salaries and related
costs increased significantlydecreased in 1996 over 1995 as1998 from 1997 due to the substantial reduction in the number
of employees engaged in research and development increased to 206 at December 31, 1996 from
124 at December 31, 1995.in 1998.
Patent expenses also remained at approximately the same level in 1998 as
1997 asand 1996, as the Company limitedHybridon continued to limit the scope of patent protection
that it sought as part of its effort to conserve its cash resources. Patent expenses increased in
1996 as compared to 1995, as the Company continued to develop aresources, while
prosecuting and maintaining key patents and patent portfolio
both domestically and internationally.applications.
31
General and Administrative Expenses
The CompanyHybridon incurred general and administrative expenses of $11.3 million
in 1996, $11.0 million in 1997 $11.3and $6.6 million in 1996,1998.
The decrease in general and $6.1 millionadministrative expenses in 1995, respectively.1998 resulted
primarily from Hybridon's restructuring program initiated during the second half
of 1997 and its effect on employee-related and consulting expenses and net
facilities costs.
The facilities expense related to the general and administrative area
increased significantly in 1997 over 1996 as a result of the relocation of the
corporate offices to Cambridge, Massachusetts. However, as a result of the
implementation of the restructuring plan in the second half of 1997, such
increase was offset by decreases in -50-
51
general and administrative salaries and
related costs and in consulting expenses in the second half of 1997. As part of1997, which
carried over into 1998. Hybridon's facilities expense related to the restructuring, approximately 11 general and
administrative positionsarea decreased significantly in 1998 as a result of its
relocation to Milford, Massachusetts. Facility costs in 1998 were eliminated.also reduced
by the income received from subleasing underutilized Cambridge facilities.
General and administrative expenses related to business development, public
relations and legal expenses decreased in 1998 from 1997, but remained at
approximately the same level in 1997 as 1996.
The increase in general and administrative expenses in 1996 from 1995
was primarily attributable to an increase in expenses for business development
activity, public relations and legal expenses incurred primarily as a result of
being a public company and salaries and related costs.
Interest Expense
Interest expense was $0.1 million in 1996, $4.5 million in 1997 $124,000and $2.9
million in 19961998. The decrease in interest expense in 1998 is mainly attributable
to the exchange of approximately $48.7 million of the 9% Convertible
Subordinated Notes ("the 9% Notes"), issued in the second quarter of 1997, for
Series A Preferred Stock on May 5, 1998. In addition, the outstanding balance of
borrowings to finance the purchase of property and $173,000equipment was reduced in 1995.May
1998, resulting in a reduction in interest expense.
The increase in interest expense in 1997 from 1996 reflected an increase
in the Company'sHybridon's debt outstanding associated with the Company's
issuance of $50,000,000 of 1997the 9% Notes and
interest incurred on borrowings to finance the purchase of property and
equipment.
The decrease in interest expense
in 1996 from 1995 reflected a decrease in the outstanding balance of borrowings
to finance the purchase of property and equipment.
Restructuring Charge
In connection with the implementationAs a part of theits restructuring plan, in the
second half of 1997, the CompanyHybridon recorded aan $11.0 million
restructuring charge of $11.0
million for the actions that occurred in 1997. The Company made cash payments
of approximately $1.5 million in 1997 to provide for (i) the termination costs of certain
research programs and expectsother contracts, (ii) the loss of certain leased
facilities (net of sublease income and other contracts), (iii) severance,
benefits and related costs for 95 terminated employees and (iv) the write down
of assets to make additional cash
payments of approximately $3.7 million in 1998 in connection with the
restructuring.net realizable value.
Net Loss
As a result of the above factors, the CompanyHybridon incurred net losses before
extraordinary items of $46.9 million in 1996, $69.5 million in 1997 $46.9and $26.0
million in 1996 and $34.51998. Hybridon had extraordinary income of $8.9 million in 1995.1998
resulting from the exchange of 9% Notes for Series A Preferred Stock in the
second quarter of 1998. In accordance with Statement of Financial Accounting
("SFAS") No.15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the Company recorded an extraordinary gain of approximately $8.9
32
million related to the exchange. The extraordinary gain represents the
difference between the carrying value of the 9% Notes tendered for exchange and
the fair value of the Series A Preferred Stock issued upon the exchange, as
determined by the per share sales price of such stock sold in May 1998 in the
private offering described below. As a result of this transaction, Hybridon
reduced its net loss before preferred stock dividends to $17.1 million in 1998.
Hybridon had an accretion of preferred stock dividends of $2.7 million at
December 31, 1998 to reflect the 1998 portion of dividends payable to the
holders of Series A Preferred Convertible Stock, resulting in a net loss to
common stockholders of $19.8 million for 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
FromSince inception, Hybridon has incurred significant losses which it has
funded through December 31, 1997, the Company financed its
operations, including capital expenditures, through a public offering of common
stock, private placementsissuance of equity securities, debt issuances, sales by HSP,
and the 1997 9% Notes and the
exercise of stock options and warrants with aggregate gross proceeds totalling
$212.6 million, as well as through bank and other borrowings of $10.1 million,
capital leases of $5.6
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52
million, research and development collaborations and milestone payments from corporate
collaborators totalling $5.5 million and sales of synthetic DNA and reagent
products by the HSP Division totalling $3.0 million. Through December 31, 1997,
the Company utilized approximately $179.0 million to fund operating activities
and $29.3 million to finance capital expenditures, including leasehold
improvements at the Company's Cambridge, Massachusetts corporate headquarters
and at its manufacturing facility in Milford, Massachusetts.licensing arrangements.
During the year ended December 31, 1997, the Company1998, Hybridon utilized approximately
$51.1$21.5 million to fund operating activities and approximately $7.5
million$472,000 for
capital expenditures. The primary use of cash for operating activities was to
fund the Company's cash operatingHybridon's loss before extraordinary items of $63.4$26.0 million. Capital
expenditures during 19971998 included amounts expended for the build-out and
equipping of the Company'sHybridon's corporate headquarters and primary research and
development laboratories in Cambridge, Massachusetts and of its leased manufacturing facility in Milford,
Massachusetts. The CompanyHybridon expects to purchase a minimal amount of capital
equipment in 19981999 as part of its effort to conserve cash resources.
Cash Resources
The CompanyHybridon had cash and cash equivalents of $2.2$5.6 million at December 31,
1997. Since such1998. However, since that date, the Company has received $4.8 million in gross
proceeds from the 1998 Unit Financing. However, the CompanyHybridon has expended substantially allthe majority of thesuch cash
resources that it had available at December 31,
1997 and that it received subsequent to that date and continues to have substantial obligations to lenders, equipment lessors, real estate
landlords, trade creditors and trade creditors.others. On March 30, 1998, the Company's1999, Hybridon's obligations
included $50.0$1.3 million principal amount of 1997 9% Notes, $4.8a $6.0 million principal amount of 1998
Unit Notes, a $5.0 million Note payable to Silicon Valley Bank (the "Bank"),
$3.2loan with
Forum Capital Markets, LLC and others, as described below, $0.5 million of capital leasesnotes
payable and approximately $7.7$2.4 million of accounts payable. Because of
the Company'sHybridon's financial condition, many trade creditors are only willing to provide
the CompanyHybridon with products and services on a cash on delivery basis.
The Company'sHybridon's ability to continue operations in 19981999 depends on its success
in raisingobtaining new funds in the 1998 Unit Financingimmediate future. Hybridon is currently seeking
debt or otherwise. The
Company believes that ifequity financing in an amount sufficient to support its operations
through the Company raises approximately an additional $25.0
millionend of 1999, and in gross proceeds from the 1998 Unit Financing by April 30, 1998, and at
least $40 million principal amount of 1997 9% Notes are exchanged for preferred
stock of the Company pursuantconnection therewith, is in negotiations with
several parties to the 1998 Unit Financing, thenobtain such $25 million,
together with the committed collaborative research and development payments from
Searle for 1998 and anticipated sales of DNA products and reagents to third
parties by the HSP Division and margins on such sales, will be adequate to fund
the Company's capital requirements through 1998.financing. However, there can be no assurance
that the CompanyHybridon will receiveobtain any additional proceeds from the 1998
Unit Financingfunds or as to the timing thereof or obtain funds from other sources.thereof. If the Company
is unable to obtain substantial additional new funding in April
1998, it willby the end of May 1999,
Hybridon may be required to further curtail significantly one or more of its
core drug development programs, obtain funds through arrangements with
collaborative partners or others that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own or terminate its operations or seek relief under
applicable bankruptcy laws bylaws. It is also possible that Hybridon's creditors may
seek to commence involuntary bankruptcy proceedings against the end of April 1998.
-52-Company.
33
53
Even if the CompanyHybridon obtains sufficient cash to fund its operations in 1998,1999,
it will be required to raise substantial additional funds through external
sources, including through collaborative relationships and public or private
financings, to support its operations beyond 1998.1999. Except for research and
development funding from Searle under Hybridon'sits collaborative agreement with Searle
(which is subject to early termination in certain circumstances), Hybridon has
no committed external sources of capital, and, as discussed above, expects no
product revenues for several years from sales of the therapeutic products that
it is developing (as opposed to sales of DNA products and reagents manufactured
on
a custom contract basisand sold by the HSP Division)HSP).
No assurance can be given that additional funds will be available to
fund the Company's operations for the balance of 19981999 or in future years, or, if available,
that such funds will be available on acceptable terms. If additional funds are
raised by issuing equity securities, further dilution to then existing
stockholders will result. Additionally, the terms of any such additional
financing may adversely affect the holdings or rights of then existing
stockholders.
If adequate funds are not available, the Company may be required to
curtail significantly one or more of its core drug development programs, obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products which the Company would otherwise pursue on its own or
terminate operations or seek relief under applicable bankruptcy laws. It is also
possible that creditors of the Company may seek to commence involuntary
bankruptcy proceedings against the Company.
The Company'sHybridon's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties by the
HSP Division
and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, theHybridon's
ability of the Company to establish and maintain collaborative academic and commercial
research, development and marketing relationships, theits ability of the
Company to obtain
third-party financing for leasehold improvements and other capital expenditures
and the costs of manufacturing scale-up and commercialization activities and
arrangements.
1998 Unit FinancingFINANCING ACTIVITIES
On January 22,February 6, 1998, Hybridon commenced an offer to the Company commencedholders of the 1998 Unit Financing.
For a description of this financing, see
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54
"1998 Financing Activities" below.
1997
9% Notes to exchange the 9% Notes for Series A Preferred Stock and certain
warrants of Hybridon. On April 2, 1997, the Company issued $50.0May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of accrued interest tendered such principal and
accrued interest to Hybridon for 510,505 shares of Series A Preferred Stock and
warrants to purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share.
On May 5, 1998, Hybridon completed a private offering of equity
securities raising total gross proceeds of approximately $26.7 million from the
1997 9%issuance of 9,597,476 shares of common stock, 114,285 shares of Series A
Preferred Stock and warrants to purchase 3,329,486 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of approximately $5.9
million of accounts payable, capital lease obligations and other obligations
into common stock. Hybridon incurred approximately $1.6 million of cash expenses
related to the private offering and issued 597,699 shares of common stock and
warrants to purchase 1,720,825 shares of common stock at $2.40 per share to the
placement agents. In addition, Hybridon is obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see Note 15(c) of the Notes to Consolidated Statements.
34
Credit Facility
In December 1996, Hybridon entered into a five year $7,500,000 note
payable with a maturity datebank. The note contained certain financial covenants that
required Hybridon to maintain minimum tangible net worth and minimum liquidity
and prohibited the payment of Aprildividends. The note was payable in 59 equal
installments of $62,500 commencing on February 1, 2004. Under the terms1997 with a balloon payment of
the 1997 9% Notes, the
Company isthen remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make semiannual interest payments oncertain prepayments of principal during 1998, the
outstanding principal balance of the Notes on April 1 and October 1 of each year during
which the 1997 9% Notes are outstanding.loan at November 16, 1998 was approximately
$2.8 million. The outstanding principal balance of
the 1997 9% Notes will become due on the maturity date. The Company made the
first interest payment of $2.3 million at the beginning of October 1997. On
February 6, 1998, in connection with the 1998 Unit Financing, the Company
commenced an exchange offer to the holders of the 1997 9% Notes offering to
issue to such holders shares of Series A Convertible Preferred Stock and
warrants to purchase shares of Common Stock in exchange for such Notes, as
described below under the caption "1998 Financing Activities". In addition, as
of March 30, 1998, holders of approximately $42.0 million of the outstanding
aggregate principal amount of the 1997 9% Notes have agreed to defer the
interest payment due to them on April 1, 1998 to October 1, 1998.
Bank Facility
In December 1996, the Company entered into a five-year $7.5 million
credit facility with the Bank to finance the leasehold improvements of the
Company's manufacturing facility. The Bank Credit Facility is payable in equal
monthly payments of $62,500 plus interest with a balloon payment of $3.8 million
due on January 1, 2002. The Bank Credit Facility contains certain financial
covenants that
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55
require the Company to maintain minimum tangible net worth (as defined) and
minimum liquidity (as defined) and prohibits the payment of dividends. The
Companylender has secured its obligations to the Bank with a lien on all of its
assets. If, at specified times, the Company's minimum liquidity is less than
$15.0 million, $10.0 million or $5.0 million, the Company is required to make
prepayments of the Bank Credit Facility equal to 25%, 50% and 100%,
respectively, of the then outstanding balance due under the Bank Credit
Facility. On January 15, 1998 the Bank granted the Company a waiver of
compliance with the minimum liquidity requirement at December 31, 1997, January
31, 1998 and February 28, 1998. As part of this waiver certain terms of the Bank
Credit Facility were amended to increase the interest rate on the Borrower's
obligations under the Bank Credit Facility to the institution's prime rate plus
5%. Prior to the amendment interest was payable at the lesser of (i) such
financial institution's prime rate plus 1%, or (ii) such financial institution's
LIBOR rate plus 3.5%. On March 30, 1998 the Bank granted the CompanyHybridon a waiver of compliance with the
minimum tangible net worth requirement at December 31, 19971998 and March 31, 19981999
and the minimum liquidity requirement at March 31, 1998. AsApril 15, 1999.
Effective November 20, 1998, Forum Capital Markets, LLC ("Forum") and
certain investors associated with Pecks Management Partners Ltd. ("Pecks"; Forum
and Pecks collectively, the "Lender") purchased the loan from the bank. Forum
and Pecks are affiliates of March 30, 1998,two members of Hybridon's Board of Directors. In
connection with this purchase, the Lender lent an additional $3.2 million to
Hybridon so as to increase the outstanding principal balanceamount of the Bank Credit Facility
is approximately $5.0 million. For an additional descriptionnote to
$6,000,000. In addition, the terms of the Bank Credit
Facilitynote payable were amended as follows:
(i) the maturity was extended to November 30, 2003;
(ii) the interest rate was decreased to 8%;
(iii) interest is payable monthly in arrears, with the principal due in
full at maturity;
(iv) the note payable is convertible, at the Lender's option, in whole
or in part, into shares of common stock of Hybridon at a
conversion price equal to $2.40 a share;
(v) the threshold of the minimum liquidity covenant was reduced from
$4,000,000 to $2,000,000; and
(vi) the note payable may not be prepaid, in whole or in part, at any
time prior to December 1, 2000.
The other terms of the note payable were unchanged.
For further information about this loan, see "Note 6(a)Note 7 of the Notes to Consolidated
Financial Statements."
Equipment Leases
In 1997, the Company financed the purchase of furniture for the
Cambridge facility through a lease line transaction of approximately $1.2
million. These borrowings are payable in 60 monthly payments of approximately
$26,000.
In 1996, the Company financed the purchase of manufacturing equipment
and other equipment at the Milford manufacturing facility through a
sale/leaseback transaction of approximately $1.7 million under a $2.9 million
lease line with a leasing company in the fourth quarter of 1996. These
borrowings are payable in 48 monthly payments ranging from $36,000 to $50,000.
In June 1997, the Company used the remaining $1.2 million under the lease line
to finance the purchase of equipment through a sale/leaseback transaction. These
borrowings are payable in 48 monthly payments ranging from $24,000 to $34,000.
Facility Leases
The Company entered into a lease for its corporate headquarters and
primary research and development laboratories in Cambridge, Massachusetts and
moved its operations to this facility in the first quarter of 1997. The
Company's facilities costs increased significantly upon occupying the Cambridge
facility. As part of the lease agreement, the Company elected to treat $5.5
million of payments to the landlord (primarily related to tenant improvements)
as contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord. All other expenses
incurred to equip and build-out the facility in excess of $5.5 million are
included in leasehold improvements and are not exchangeable for a partnership
interest under the lease. The Cambridge landlord is an affiliate of three
directors of the Company. The Company also is a party to leases for its
facilities in
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56
Milford, Massachusetts and the ancillary facility in Cambridge, Massachusetts,
under which it has significant payment obligations. Effective March 31, 1998,
the Company has terminated the lease for its office space in Paris, France. As
discussed in Note 15 to the Consolidated Financial Statements, at December 31,
1997 the Company had facility lease commitments amounting to approximately
$59.6 million.
As of December 31, 1997, the Company1998, Hybridon has future operating lease commitments
of approximately $7.7 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 1998, Hybridon had approximately $206$220.0 million and
$3.4$3.9 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may
limit the Company'sHybridon's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period.
The
CompanyHybridon has completed several financings since the effective date of the Tax
Act,
35
which, as of December 31, 1997,1998, have resulted in ownership changes in excess of
50%, as defined under the Tax Act.
1998 FINANCING ACTIVITIES
On January 22, 1998,Act and which will limit Hybridon's ability to
utilize its net operating loss carryforwards.
YEAR 2000
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the Company commencedyear 1999. Hybridon's
exposure to this year 2000 ("Y2K") problem comes not only from its own internal
computer systems and microprocessors, but also from the 1998 Unit Financing
referred to above undersystems and
microprocessors of its key suppliers, including utility companies and payroll
services.
Hybridon believes that all of its internal systems will be Y2K compliant
by the caption "General." The 1998 Unit Notes bear interest
at a rate of 14% per annum; provided that if the 1998 Unit Financing is
terminated before the Mandatory Conversion Event (as defined below) has
occurred, the interest rate shall increase to 18% per annum. The Company is
required to make semi-annual interest payments on the outstanding principal
balanceend of the 1998 Unit Notes on April 1third quarter of 1999. Hybridon is currently evaluating all of
its internal computer systems and October 1 of each year during
which such 1998 Unit Notes are outstanding, with the first such payment being
due on April 1, 1998, which interest payment obligation may be satisfied through
the issuance of additional 1998 Unit Notes valued at their principal amount. The
Company plans to satisfy the interest payment due April 1, 1998 by issuing 1998
Unit Notes. The outstanding principal balancemicroprocessors in light of the 1998 Unit NotesY2K problem.
As part of this process, Hybridon has conducted an inventory of its automated
instruments and other computerized equipment and is contacting applicable
vendors for information regarding Y2K compliance. Hybridon will become
due on December 31, 2007. The 1998 Unit Notes are secured by substantially all
of the Company's assets, subject to the lien on the Company's assets held by the
Bank, are subordinate to the Company's existing indebtedness to the Bank, are
senior to approximately 80% of the 1997 9% Notesthen upgrade or
otherwise modify its internal computer systems and microprocessors, to the
extent providednecessary. Testing of all its internal computer systems and
microprocessors was completed in the first quarter of 1999. Hybridon does not
expect the cost of bringing all Hybridon's systems and microprocessors into Y2K
compliance will be material. Approximately 50% of Hybridon's systems either have
been found compliant or have already been brought into compliance.
Hybridon's Y2K compliance efforts are in addition to other planned
information technology ("IT") projects. While these efforts have caused and may
continue to cause delays in other IT projects, Hybridon does not expect that any
of these delays will have a subordination agreement executedsignificant effect on Hybridon's business or that
any of Hybridon's other IT projects will be canceled or postponed to pay for the
Y2K upgrades.
With regard to potential supplier Y2K problems, Hybridon has compiled a
list of its critical suppliers, and has sent and received back a Y2K
questionnaire from each of them in order to permit Hybridon to ascertain the Y2K
compliance status of each. Hybridon has not yet uncovered any key supplier Y2K
problems that could have a material effect on its business. If through continued
monitoring of these suppliers Hybridon becomes aware of any such problems and is
not satisfied that those problems are being adequately addressed, it will take
appropriate steps to find alternative suppliers.
It has been acknowledged by certain holders ofgovernmental authorities that Y2K problems
have the 1997 9% Notes and,
except as otherwise provided in this sentence, rank on a parity with the 1997 9%
Notes.
The 1998 Unit Notes are not convertible at the option of the holder,
but will automatically convert into a new issue of Series B Convertible
Preferred Stock of the Company if the aggregate net proceedspotential to disrupt global economies, that no business is immune from
the 1998 Unit
Financing exceeds $20.0 millionpotentially far-reaching effects of Y2K problems, and the holders of at least 80% of the
aggregate principal amount of the 1997 9% Notes have exchanged such Notes for a
new issue of Series A Convertible Preferred Stock of the Company pursuantthat it is difficult
to the exchange offer (the "Exchange Offer") described in the following paragraph
(such two conditions, the "Mandatory Conversion Event"). The Series B
Convertible Preferred Stock underlying the 1998 Unit Notes would rank as to
liquidation junior to the Series A Convertible Preferred Stock issuable in the
Exchange Offer.
Each Unit includes warrants to purchase 15% (or, in certain
circumstances, 20%) of the number of shares of Common Stock underlying the
Series B Convertible Preferred Stock underlying the 1998 Unit Notes included in
such Unit and may include additional warrants in certain circumstances described
below. The Series B Convertible Preferred Stock, if issued, and warrants are
convertible into, and exercisable for, Common Stock at a conversion or exercise
price equal to the lowest of (i) 80% of the average closing bid price of the
Company's Common Stock for the 30 consecutive trading days immediately preceding
any closing in the 1998 Unit Financing or (ii) 80% of the average closing bid
price of the Company's Common Stock for the five consecutive trading dates
immediately preceding any closing in the 1998 Unit Financing; provided, however,predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that if on the termination date of the 1998 Unit Financing the Company has not
received least $20,000,000 in net proceeds from the 1998 Unit Financing or the
holders of less than $40,000,000 in principal amount of the 1997 9% Notes accept
the Exchange Offer, holders of UnitsY2K problems will be entitled to receive additional
warrants to purchase, at an exercise price of $0.001 per share, a number of
shares of Common Stock equal to 100% of the Common Stock then issuable upon
conversion of the Series B Convertible Preferred Stock then issuable upon
conversion of the 1998 Unit Notes purchased by such investors, in which case the
1998 Unit Notes will not be convertible into equity securities. If the market
price of the Common Stock is less than 125% of the conversion price of the
Series B Preferred Stock on the one-year anniversary of the final closing date
of the 1998 Unit Financing, the conversion price of the Series B Convertible
Preferred Stock will be further adjusted (the "Series B Reset") to the greater
of (a) the market price of the Common Stock at such time divided by 1.25 and (b)
50% of the conversion price of the Series B Convertible Preferred Stock at such
time, and holders of the Series B Convertible Preferred Stock will also be
entitled to receive additional warrants to purchase a number of shares of Common
Stock equal to 50% of the additional number of shares of Common Stock issuable
upon conversion of the Series B Convertible Preferred Stock following the Series
B Reset.
On February 6, 1998, the Company commenced an Exchange Offer to the
holders of its 1997 9% Notes to exchange such 1997 9% Notes for Series A
Convertible Preferred Stock and certain warrants of the Company. In the Exchange
Offer, each $1,000 of principal amount and accrued but unpaid interest on the
1997 9% Notes may be exchanged, upon the terms and subject to the conditions set
forth in the Exchange Offer documents, for 10 shares of Series A Convertible
Preferred Stock, stated value $100 per share, and warrants to purchase such a
number of shares of Common Stock of the Company equal to 15% of the number of
shares of Common Stock into which such Series A Convertible Preferred Stock
would be convertible at 212.5% of the initial conversion price of the Series B
Convertible Preferred Stock (the "Stated Price"). Such Series A Convertible
Preferred Stock would have a liquidation preference of $100 per share plus
accrued but unpaid dividendsmaterial effect on
Hybridon's business even if Hybridon takes all appropriate measures to ensure
that it and would bear a dividend of the 6.5% per annum,
payable on April 1 and October 1 of each year in cash or additional Series A
Preferred Stock, at the option of the Company. The conversion price would be $35
per share of Common Stock through April 1, 2000 and the Stated Price thereafter,
which conversion price would be reset upon the occurrence of any Series B Reset
to 212.5% of the re-set Series B conversion price. Exchanging holders of 1997 9%
Notes will be granted the right to designate a nominee to the Board of
Directors of the Company (the "Designated Director"). There can be no assuranceits key suppliers are Y2K compliant.
It is possible that the Exchange Offerconclusions reached by Hybridon from its
analysis to date will be successful.
On March 30, 1998, the Company amended its Exchange Offerchange, which could cause Hybridon's Y2K cost estimates
and target completion dates to provide
that the terms of the Series A Convertible Preferred Stock and warrants issuable
in the Exchange Offer would be revised as described below if the following
conditions (the "Equity Conditions") had been met no later than the date the
Company accepts for exchange in the Exchange Offer at least $40 million
principal amount of 1997 9% Notes: (i) the Company consummates an offering, the
size of which is acceptable to the Designated Director, of units consisting of
Common Stock priced (the "Common Stock Offering Price") at the greater of $2.00
and 85% of the Market Price (as defined below) of the Common Stock and warrants
to purchase a number of shares of Common Stock equal to 25% of such Common Stock
sold at an exercise price equal to 120% of the Common Stock Offering Price (the
"120% Exercise Price"); (ii) the Company consummates an offering, with gross
proceeds of at least $10 million, of Units consisting of shares of preferred
stock having the same terms as the preferred stock issuable in the amended
Exchange Offer, and warrants with the same 25% coverage as the warrants issuable
in the amended Exchange Offer, as described in the following paragraph, but at
the 120% Exercise Price (which shares are expected to be sold at a 30% discount
from stated value); and (iii) all 1998 Note Units previously sold and accrued
interest thereon are exchanged for Common Stock and warrants to purchase a
number of shares of Common Stock equal to 30% of the Common Stock issued in such
1998 Note Unit exchange, such Common Stock and Warrants to be valued, and to
have the terms, described in clause (i) above. "Market Price" means the average
reported closing bid price of the Common Stock for the five consecutive trading
days immediately preceding the closing date.
The amended Exchange Offer provides that if the Equity Conditions are
met, (a) the conversion terms of the Series A Convertible Preferred Stock will
be revised as follows: (i) the conversion price will be 212.5% of the Common
Stock Offering Price described above, (ii) such Series A Convertible Preferred
Stock will not be convertible for one year following the closing; and (iii) such
Series A Convertible Preferred Stock will have no conversion price reset
mechanism and (b) the warrant coverage will increase from 15% to 25% of the
number of shares of Common Stock underlying the Series A Convertible Preferred
Stock (such warrants being exercisable at 212.5% of the Common Stock Offering
Price) and will not have any conversion price reset provisions.
The Company intends to use its best efforts to achieve the Equity
Conditions, although no assurance can be given that such attempt will be
successful. If the same cannot be accomplished in a timely manner, the Company
will continue to proceed with the original financing plan.
CERTAINchange.
36
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
Hybridon May Never Generate Revenues From Sales Of Its Drugs
Hybridon's business is at an early stage of development, and has not yet
generated any revenues from the commercial sale of its drugs. Due to the various
risks inherent in its business and described in the following risk factors,
Hybridon may never generate revenues from sale of its drugs, and may never
become profitable. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Results Of Operations" and " -- Liquidity
And Capital Needs; UncertaintyResources."
Hybridon Has A History Of Operating Losses, And Anticipates Future Losses
Hybridon has never earned a profit and has incurred substantial net
operating losses. These losses were caused by lack of revenues from drug sales
to offset research and development and administrative costs. Hybridon expects to
incur operating losses for at least the next several years, as it plans to spend
substantial amounts on research and development, including preclinical studies
and clinical trials, and, if it obtains necessary regulatory approvals, on sales
and marketing efforts. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Results Of Operations" and " -- Liquidity
And Capital Resources."
Hybridon May Determine That One Or More Drugs In Development Are Commercially
Impractical And Cannot Be Sold Commercially
Before a drug is sold commercially, it must go through an expensive and
time-consuming testing process. Hybridon's drugs are at various stages in this
process, and Hybridon may at any stage determine that one or more of these drugs
cannot be successfully developed. A drug may, for instance, be ineffective, have
undesirable side effects, or demonstrate other therapeutic characteristics that
prevent or limit its commercial use, or may prove too costly to produce in
commercial quantities. If Hybridon determines that a drug cannot be successfully
developed, Hybridon would not be able to generate revenues from sale of that
drug.
Seeking Regulatory Approval Of Drugs Is Time-Consuming And Expensive; Failure To
Obtain Approval Of A Drug Would Prevent Hybridon From Selling That Drug; Failure
To Comply With Ongoing Regulatory Requirements Could Cause Hybridon To Be
Subject To Penalties
Hybridon is subject to extensive regulation by numerous governmental
authorities in the U.S. and abroad. Obtaining regulatory approval of a drug can
take several years --exactly how long depends upon the type, complexity, and
novelty of the drug -- and is
37
typically very expensive. The regulations that Hybridon must comply with may
change, and may even become more burdensome to Hybridon.
Even if Hybridon is satisfied that a drug is safe and effective, the
regulatory authorities may not agree, as data from preclinical studies and
clinical trials can generally be interpreted in different ways. Hybridon will
need the approval of regulatory agencies in order to sell a drug. If they are
unwilling to grant that approval, Hybridon will not be able to generate revenues
from sale of that drug.
Approval of a drug does not end the involvement of regulatory
authorities. Hybridon and its approved drugs will be subject to continued review
and periodic inspection. Approval of a Hybridon drug may be subject to
restrictions that limit how Hybridon may market that drug. Restrictions may be
imposed on the price at which Hybridon may sell its drugs. If Hybridon fails to
comply with any regulations, it may be subject to fines, suspension of
regulatory approvals, drug recalls, and other penalties.
Delays In Patient Enrollment Could Increase The Cost Or Duration Of Hybridon's
Clinical Studies
Clinical trials are very costly and time-consuming. How quickly Hybridon
is able to complete a clinical study depends upon several factors, including the
size of the patient population, how easily patients can get to the site of the
clinical study, and the criteria for determining which patients are eligible to
join the study. Delays in patient enrollment could delay completion of a
clinical study and increase its costs, and could also delay the commercial sale
of the drug that is the subject of the clinical trial.
Hybridon Must Secure Additional Funding; Risk of Insolvency
The CompanyFunding To Avoid Terminating Operations Or
Filing For Bankruptcy; It May Not Be Able To Secure Sufficient Additional
Financing
Hybridon has very limited cash resources and substantial obligations to
lenders, equipment lessors,its real estate landlords, trade creditors and trade creditors. The
Company commenced the 1998 Unit Financing in January 1998 and to date has
received aggregate gross proceeds of approximately $4.8 million at closings held
in the first quarter of 1998. The Company'sothers. Hybridon's
ability to continue operations in 19981999 depends on its success in raisingobtaining new
funds in the 1998 Unit Financing or
otherwise. The Company believes that if it raises approximately an additional
$25.0 million in gross proceeds from the 1998 Unit Financing by April 30, 1998,
and at least $40 million principal amount of 1997 9% Notes are exchanged for
preferred stock of the Company pursuant to the 1998 Unit Financing, then such
$25 million, together with the committed collaborative research and development
payments from Searle for 1998 and anticipated sales of DNA products and reagents
to third parties by the HSP Division and margins on such sales, will be adequate
to fund the Company's capital requirements through 1998. However, there can be
no assurance that the Company will receive any additional proceeds from the 1998
Unit Financing or obtain funds from other sources.funds. If the CompanyHybridon is unable to obtain substantial additional new funding in April 1998,by the
end of May 1999, it will be requiredforced to terminate its operations or seek relief
under applicable -56-
57
bankruptcy laws by the end of April 1998.laws. See "Item 7. Management's"Management's Discussion andAnd Analysis ofOf
Financial Condition andAnd Results ofOf Operations -- LiquidityGeneral" and Capital"-- Cash
Resources."
The CompanyIn their report on Hybridon's December 31, 1998 financial statements,
Arthur Andersen LLP, Hybridon's independent public accountants, states that
there is substantial doubt about Hybridon's ability to continue as a going
concern.
Hybridon anticipates that, even if it obtains sufficient cash to fund
its operations in 1998,1999, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings, to support the Company'sHybridon's operations beyond 1998. No assurance can be given that additional financing will be available, or,
if available, that it will be available on acceptable terms. If additional funds
are raised by issuing equity securities, further dilution to then existing
stockholders will result. Additionally, the terms of any such additional
financing may adversely affect the holdings or rights of then existing
stockholders.1999.
If adequate funds are not available, the CompanyHybridon may be requiredforced to (1) further
curtail significantly one or more of its research, drug discoveryrecovery or development
programs, or(2) obtain funds through arrangements with collaborative partners or
others that may require the CompanyHybridon to relinquish rights to certain of its
technologies, productdrug
38
candidates or products whichdrugs, (3) terminate operations, or (4) seek relief under
applicable bankruptcy laws.
Additional Financing May Cause Stockholder Dilution
If Hybridon raises additional funds by issuing equity securities, the
Company would otherwise
pursueownership interest of existing stockholders will be diluted. In addition,
Hybridon may grant future investors rights superior to those of existing
stockholders.
If Hybridon Defaults Under Its Loan, It Could Be Forced To Terminate Operations
Or File For Bankruptcy
Hybridon is a party to a substantial loan. The lenders may accelerate
the repayment date of the loan in the event of default by Hybridon. If Hybridon
does default on its own, sell the HSP Division orloan, and the lenders accelerate the repayment date, the
lenders could foreclose on Hybridon's assets, and this could force Hybridon to
terminate operations or seek relief under applicable bankruptcy laws. ItHybridon
cannot guarantee that it will not default on the loan. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- 1998
Financing Activities."
The "Penny Stock" Rules Will Likely Have An Adverse Effect On Your Liquidity And
Hybridon's Ability To Raise Additional Capital
Since the Common Stock is also possiblenot listed on a national securities exchange
or on a qualified automated quotation system, it is subject to the "penny stock"
provisions of Rule 15g-9 under the Securities Exchange Act of 1934, as amended,
which impose additional sales practice requirements on broker-dealers that creditorssell
such securities. Prior to any transaction covered by this rule, the
broker-dealer must receive from the purchaser a written consent to the
transaction, and must reasonably determine that transactions in penny stocks are
suitable for the purchaser, and that the purchaser is capable of evaluating the
Company may seek to commence involuntary bankruptcy proceedings against the
Company.
The Company's future capitalrisks of transactions in penny stocks. These requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties
manufactured on a custom contract basis by the HSP Division and the margins on
such sales, the time and costs involved in obtaining regulatory approvals, the
costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the ability of the Company to establish
and maintain collaborative academic and commercial research, development and
marketing relationships, the ability of the Company to obtain third-party
financing for leasehold improvements and other capital expenditures and the
costs of manufacturing scale-up and commercialization activities and
arrangements.
Early Stage of Development; Technological Uncertainty
The Company's potential pharmaceutical products are at various stages
of research, preclinical testing or clinical development. There are a number of
technological challenges that the Company must successfully address to complete
any of its development efforts. To date, most of the Company's resourceslikely have been dedicated to applying oligonucleotide chemistry and cell biology to the
research and development of potential pharmaceutical products based upon
antisense technology.
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58
As in most drug discovery programs, the results of in vitro, tissue culture and
preclinical studies by the Company may be inconclusive and may not be indicative
of results that will be obtained in human clinical trials. In addition, results
attained in early human clinical trials by the Company may not be indicative of
results that will be obtained in later clinical trials. Neither the Company, nor
to its knowledge, any other company has successfully completed human clinical
trials of a product based on antisense technology, and there can be no assurance
that any of the Company's products will be successfully developed.
The success of any of the Company's potential pharmaceutical products
depends in part on the molecular target on the genetic material chosen as the
site of action of the oligonucleotide. There can be no assurance that the
Company's choice will be appropriate for the treatment of the targeted disease
indication in humans or that mutations in the genetic material will not result
in a reduction in or loss of the efficacy or utility of a Company product.
Uncertainty Associated with Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of
its pharmaceutical products under development, the Company must undertake
extensive and costly preclinical studies and clinical trials to demonstrate that
such products are safe and efficacious. The results from preclinical studies and
early clinical trials are not necessarily predictive of results that will be
obtained in later stages of testing or development, and there can be no
assurance that the Company's clinical trials will demonstrate the safety and
efficacy of any pharmaceutical products or will result in pharmaceutical
products capable of being produced in commercial quantities at reasonable cost
or in a marketable form.
In July 1997, the Company discontinued the development of GEM 91, its
first- generation antisense drug for the treatment of AIDS and HIV infection,
based on a review of data from an open label Phase II clinical trial of patients
with advanced HIV infection. In the Phase II trial, three of the nine subjects
tested experienced decreases in platelet counts that required dose interruption.
In addition, a review of the data showed inconsistent responses to the treatment
and failed to confirm the decrease in cellular viremia observed in an earlier
clinical trial. The Company had devoted significant funding and development
efforts in GEM 91, and GEM 91 was the Company's most advanced product candidate.
Although the Company is conducting clinical trials on certain
oligonucleotide compounds and is developing several oligonucleotide compounds on
which it plans to file IND applications with the FDA and equivalent filings
outside of the U.S., there can be no assurance that necessary preclinical
studies on these compounds will be completed satisfactorily or that the Company
otherwise will be able to make its intended filings. Further, there can be no
assurance that the Company will be
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59
permitted to undertake and complete human clinical trials of any of the
Company's potential products, either in the U.S. or elsewhere, or, if permitted,
that such products will not have undesirable side effects or other
characteristics that may prevent or limit their commercial use.
The rate of completion of the Company's human clinical trials, if
permitted, will be dependent upon, among other factors, the rate of patient
enrollment. Patient enrolment is a function of many factors, including the size
of the patient population, the nature of the protocol, the availability of
alternative treatments, the proximity to clinical sites and eligibility criteria
for the study. Delays in planned patient enrollment might result in increased
costs and delays, which could have a material
adverse effect on the Company. The
Company ormarket liquidity of Hybridon's securities, and therefore
on Hybridon's ability to raise funds, the FDA or other regulatory agencies may suspend clinical trials atability of broker-dealers to sell
Hybridon's securities, and the ability of purchasers to sell any time if the subjects or patients participating in such trials are being
exposed to unacceptable health risks.
History of Operating Losses and Accumulated Deficit
The Company has incurred net losses since its inception. At December
31, 1997, the Company's accumulated deficit was approximately $218.7 million.
Such losses have resulted principally from costs incurredtheir
Hybridon securities in the Company's
research and development programs and from general and administrative costs
associated with the Company's development. No revenues have been generated from
sales of pharmaceutical products developed by the Company and no revenues from
the sale of such products are anticipated for a number of years, if ever. The
Company expects to incur additional operating losses over the next several years
and expects cumulative losses to increase significantly as the Company's
research and development and clinical trial efforts expand. The Company expects
that losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial. Although the HSP Division has begun to generate revenues
from the sale of synthetic DNA products and reagents manufactured by it on a
custom contract basis, there can be no assurance that demand for and margins on
these products will not be lower than anticipated. In 1997, revenues generated
from the sale of synthetic DNA products and reagents were significantly lower
than anticipated. The Company's ability to achieve profitability is dependent in
part on obtaining regulatory approvals for its pharmaceutical products and
entering into agreements for drug discovery, development and commercialization.
There can be no assurance that the Company will obtain required regulatory
approvals, enter into any additional agreements for drug discovery, development
and commercialization or ever achieve drug sales or profitability.secondary market.
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents and Proprietary Rights
The Company'sMay Not Provide
Adequate Protection
Hybridon's success will depend in partto a large extent on its ability to develop
patentable products(1)
obtain U.S. and foreign patent protection for drug candidates and processes, (2)
preserve trade secrets and (3) operate without infringing the proprietary rights
of third parties. Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under such patents are still developing. As a result, Hybridon's ability to
obtain and enforce patent protection forpatents that protect its products
both in the U.S.
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60
and in other countries. The Company has filed and intends to file applications
as appropriate for patents covering both its products and processes. However,
the patent positions of pharmaceutical and biotechnology firms, including
Hybridon, are generallydrugs is uncertain and involveinvolves
complex legal and factual questions.
No assurance can39
To obtain a patent on an invention, one must be giventhe first to invent it
or the first to file a patent application for it. Hybridon also cannot be
completely sure that the inventors of subject matter covered by its patents will issue from any pending or
futureand
patent applications owned by or licensed to Hybridon. Since patent
applications in the U.S. are maintained in secrecy until patents issue, and
since publication of discoveries in the scientific or patent literature tend to
lag behind actual discoveries by several months, the Company cannot be certain
that it waswere the first creator of inventions covered by pending patent
applicationsto invent, or that it was the first to file patent
applications for, suchthose inventions. Further, there canFurthermore, that Hybridon owns or licenses
pending or future patent applications does not mean that patents based on those
applications will ultimately be no assurance that the claims allowedissued. Existing or future patents may be
challenged, infringed, invalidated, found to be unenforceable, or circumvented
by others. Hybridon's rights under any issued patents will be sufficiently broad to protect the Company's technology.may not provide sufficient
protection against competing drugs or otherwise cover commercially valuable
drugs or processes. See "Business -- Patents, Trade Secrets and Licenses."
Hybridon Could Become Involved In addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide competitive advantages to the
Company.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to competitors or others nor breaching the
technology licenses upon which the Company's products might be based. The
Company's licenses of patents and patent applications impose various
commercialization, sublicensing, insurance and other obligations on the Company.
Failure of the Company to comply with these requirements could result in
termination of the applicable license. The Company is aware of patents and
patent applications belonging to competitors, and it is uncertain whether these
patents and patent applications will require the Company to alter its products
or processes, pay licensing fees or cease certain activities.Time-Consuming And Expensive Patent
Litigation; Adverse Decisions In particular,
competitors of the Company and other third parties may hold pending patent
applications relating to antisense and other gene expression modulation
technologies which may result in claims of infringement against the Company or
other patent litigation. There can be no assurance that the Company will be able
successfully to obtain a license to any technology that it may require or that,
if obtainable, such technology can be licensed at a reasonable cost or on an
exclusive basis.Patent Litigation Could Cause Hybridon To Incur
Additional Costs And Experience Delays In Bringing New Drugs To Market
The pharmaceutical and biotechnology industries have been characterized
by extensivetime-consuming and extremely expensive litigation regarding patents and other
intellectual property rights. Litigation, which could result in substantial cost to the Company,Hybridon may be necessaryrequired to enforce any patents issuedcommence, or licensedmay be
made a party to, the Company and/orlitigation relating to
determine the scope and validity of other parties' proprietary rights. The
Companyits
intellectual property rights, or the intellectual property rights of others.
Such litigation could result in adverse decisions regarding the patentability of
Hybridon's inventions and products, or the enforceability, validity, or scope of
protection offered by its patents. Such decisions could make Hybridon liable for
substantial money damages or could bar Hybridon from the manufacture, use, or
sale of certain products, resulting in additional costs and delays in bringing
drugs to market. Hybridon may not have sufficient resources to bring any such
proceedings to a successful conclusion.
Hybridon also will havemay be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office which could result(or similar proceedings in
substantial cost to
the Company, to determine the priority of inventions. Furthermore, the Company
may have to participate at substantial costforeign countries) and in International Trade Commission proceedings to abate importationaimed at
preventing the importing of products whichdrugs that would compete unfairly with products of the Company.
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61
Hybridon
engages in collaborations, sponsored research agreementsdrugs. Such proceedings could cause Hybridon to incur considerable costs.
Hybridon's Trade Secrets And Other Unpatented Proprietary Information May Become
Available To Others
Trade secrets and other agreements with academic researchers and institutions and government
agencies. Under the terms of such agreements, third parties may have rightsunpatented proprietary information plays an
important role in certain inventions developed during the course of the performance of such
collaborations and agreements.
The Company relies on trade secrets and proprietary know-how which itHybridon's business. Hybridon seeks to protect this
information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. There can be no assurance thatIf any of these agreements will
notis
breached, Hybridon may be breached, that the Company would havewithout adequate remedies for any breach or
that the Company'sremedies. Also, Hybridon's trade
secrets will not otherwisemay become known or be independently developed by competitors. AttractionThis
could have a material adverse effect on Hybridon's business, and Retention ofHybridon may
need to engage in costly and time-consuming litigation to protect its
proprietary rights.
The Loss Of Key Employees and Scientific Collaborators;
Employment Agreements
The Company is highly dependentMembers Of Management Could Be Damaging
Hybridon depends on the principal members of its management and
scientific staff, including E. Andrews Grinstead III, the
Company'sHybridon's Chairman of the
Board, President and its Chief Executive Officer, and Sudhir Agrawal, the Company'sHybridon's
Senior Vice President of Discovery
40
and its Chief Scientific Officer, theOfficer. The loss of whosetheir services could have a
material adverse effect on the Company. The Company has executed Employment Agreements with
Messrs. Grinstead and Agrawal. Mr. Grinstead's agreement provides for an
employment term ending on June 30, 2001 (unless sooner terminated in accordance
with the provisions of the agreement), and Mr. Agrawal's agreement provides for
an employment term ending on June 30, 2000 (unless sooner terminated in
accordance with the agreement). For further information, see "Compensation of
Executive Officers" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 15, 1998.Hybridon.
Hybridon May Not Be Able To Meet Its Personnel Needs; This Could Result In
Delays Or Additional Costs
From June 30, 1997, to March 30, 1998,31, 1999, the number of employees of
the
Company hasHybridon decreased from 213 to 78.51. As a result, the CompanyHybridon has lost significant
expertise, and will be required tomust recruit and retain new personnel
in order to perform its operations. In addition, any growth or expansion of the
Company will require recruiting and retaining qualified scientific personnel to perform research and development work. There can be no assurance that under
either circumstancemaintain its
current level of operations, while expansion would require a further increase in
scientific personnel. In addition, expansion by Hybridon would likely result in
the Company willneed for additional management personnel. Hybridon may not be able to
attract and retain such personnel on acceptable terms, given the competition for
experienced scientists and management among numerous pharmaceutical,
biotechnology and health care companies, universities, and non-profit research
institutions. In addition, the Company's
growth and expansion into areas and activities requiring additional expertise,
such as clinical testing, governmental approvals, production and marketing,
would be expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. The failure to acquire such services orrecruit and retain personnel could result in delays
in commercializing drugs, and could cause Hybridon to develop such expertise could have a
material adverse effect on the Company.
-61-
62incur additional costs.
Hybridon Relies On Relationships With Research Institutions And Corporate
Partners, And Would Be Harmed By A Lack Of, Or The Company'sTermination Of, Such
Relationships
Hybridon's success will depend in part on its continued ability to
develop and maintain relationships with independent researchers and leading
academic and research institutions. The competition for such relationships is
intense, and thereHybridon can begive no assuranceassurances that the Companyit will be able to develop and
maintain such relationships on acceptable terms. The CompanyHybridon has entered into a
number of such collaborative relationships relating to specific disease targets
and other research activities in order to augment its internal research
capabilities and to obtain access to the specialized knowledge or expertise of
its collaborative partners.expertise. The
loss of any suchof these collaborative relationshiprelationships could have ana material adverse
effect on the Company's ability to conductHybridon's research and development program.
Similarly, strategic alliances with corporate partners, primarily
pharmaceutical and biotechnology companies, may help Hybridon develop and
commercialize drugs. Various problems can arise in strategic alliances. A
partner responsible for conducting clinical trials and obtaining regulatory
approval may fail to develop a marketable drug. A partner may decide to pursue
an alternative strategy or alternative partners. A partner that has been granted
marketing rights for a certain drug within a geographic area may fail to market
the drug successfully. Consequently, Hybridon's current strategic alliance or
those it enters into in the area targeted by such collaboration.
Risks Associated withfuture may not be scientifically or commercially
successful. Hybridon Specialty Products Divisionmay not able to negotiate advantageous strategic alliances
in the future. The absence of, or failure of, strategic alliances could harm
Hybridon's efforts to develop and commercialize its drugs.
HSP's Results May Be Lower Than Currently Anticipated
Through itsHSP, Hybridon Specialty Products Division, the Company manufactures oligonucleotide compounds on a custom contract basis for third
parties.sale to
others. The results of operations of the HSP Division will be dependent upondepend on the demand for and margins on these
products. Demand for such products was
significantlydrugs, which may be lower than anticipated in 1997. TheHybridon anticipates. HSP's results of operations of the
HSP Divisionwill also may be
affected by the price and availability of raw materials.
It is possible that41
Hybridon Faces Intense Competition, And Hybridon's manufacturing capacity may not be
sufficient for production of oligonucleotides both for the Company's internal
needs and for saleProducts Could Be Rendered
Obsolete; Many Of Hybridon's Competitors Have Greater Resources And Experience
Than Hybridon
Many companies are attempting to third parties. The Company's manufacturing facility must
comply with GMP and other FDA regulations. See "Certain Factors That May Affect
Future Results -- Limited Manufacturing Capability."
The Company believes that it is currently manufacturing
oligonucleotides in substantial compliance with FDA requirements for
manufacturing in compliance with GMP, although its facility and procedures have
not been formally inspected by the FDA and the procedures and documentation
followed may havedevelop drugs similar to be enhanced in the future as the Company expands its
oligonucleotide production activities. Failurethose Hybridon
proposes to establish to the FDA's
satisfaction compliance with GMP can result in the FDA denying authorization to
initiate or continue clinical trials, to receive approval of a product or to
begin or to continue commercial marketing.
The Company will be competing against a number of third parties, as
well as the possibility of internal production by the Company's customers, in
connection with the operations of the HSP Division. Manydevelop. Some of these third partiesdrugs are likely to have greater financial, technical and human resources than the
Company. Key competitive factors will include the price and quality of the
products as well as manufacturing capacity and ability to comply with
specifications and to fulfill orders on a timely basis. The Company may be
required to reduce the cost of its product offerings to meet competition. See
"Certain Factors That May Affect Future Results -- Competition." Failure to
manufacture oligonucleotide compounds in accordance with the purchaser's
specifications could expose the Company to breach of contract and/or product
liability claims from the purchase or the purchaser's customers. The
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63
Company has limited experience in sales, marketing and distribution and is
relying in part upon the efforts of a third party, Perkin-Elmer, in connection
with the marketing and sale of products by the HSP Division. See "Certain
Factors That May Affect Future Results -- Absence of Sales and Marketing
Experience."
Need to Establish Collaborative Commercial Relationships; Dependence on Partners
Hybridon's business strategy includes entering into strategic alliances
or licensing arrangements with corporate partners, primarily pharmaceutical and
biotechnology companies, relating to the development and commercialization of
certain of its potential products. Although the Company is party to a corporate
collaboration with Searle, a subsidiary of Monsanto Company, in the field of
inflammation/immunomodulation and Medtronic relating to Alzheimers, there can be
no assurance that these collaborations will be scientifically or commercially
successful, that the Company will be able to negotiate additional
collaborations, that such collaborations will be available to the Company on
acceptable terms or that any such relationships, if established, will be
scientifically or commercially successful. For example, in 1997, Roche
terminated the collaborative relationship with the Company that was established
in 1992 without selecting any compounds for further development.
The Company expects that under certain of its collaborations, the
collaborative partner will have the responsibility for conducting human clinical trials, and the submission for regulatoryone has
received FDA approval of the product candidate with
the FDA and certain other regulatory agencies. Should the collaborative partner
fail to develop a marketable product, the Company's business may be materially
adversely affected. There can be no assurance that the Company's collaborative
partners will not be pursuing alternative technologies or developing alternative
compounds either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
targeted by these collaborative programs. The Company's business will also be
affected by the performance of its corporate partners in marketing any
successfully developed products within the geographic areas in which such
partners are granted marketing rights. The Company's plan is to retain
manufacturing rights for many of the products its may license pursuant to
arrangements with corporate partners. However, there can be no assurance that
the Company will be able to retain such rights on acceptable terms, if at all,
or that the Company will have the ability to produce the quantities of product
required under the terms of such arrangements.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity
for the Company's Securities.
Since the Common Stock is not listed on a national securities exchange
or on a qualified automated quotation system, it is subject to Rule 15g-9 under
the Securities
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64
Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers that sell such securities. Rule
15g-9 defines a "penny stock" to be any equity security that has a market price
(as therein defined) of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions including the
securities being quoted on the Nasdaq National Market or SmallCap Market. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale.
The foregoing required penny stock restrictions would not apply to the
Company's securities if the Company's Common Stock was listed on the Nasdaq
National Market or SmallCap Market or met certain minimum net tangible assets or
average revenue criteria. The Company's securities, however, do not qualify for
exemption from the penny stock restrictions. There can be no assurance that the
Common Stock will qualify for listing on the Nasdaq National Market or SmallCap
Market in the foreseeable future, if at all. In any event, even if the Company's
securities are exempt from such restrictions, the Company would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Securities and Exchange
Commission (the "Commission") the authority to restrict any person from
participating in a distribution of penny stock, if the Commission finds that
such a restriction would be in the public interest.
The market liquidity for the Company's securities is likely to be
materially adversely affected by these requirements.commercialized. In addition, such rulesthere are likely to adversely affect the Company's ability to raise funds and the ability
of broker-dealers to sell the Company's securities in the secondary market.
No Assurance of Regulatory Approval; Government Regulation
The Company's preclinical studies and clinical trials, as well as the
manufacturing and marketing of the potential products being developed by it and
the products sold by the HSP Division, are subject to extensive regulation by
numerous federal, state and local governmental authorities in the U.S. Similar
regulatory requirements exist in other
countries where the Company intends to
test and market its drug candidates. Satisfaction of these requirements, which
include demonstrating to the satisfaction of the FDA and foreign regulatory
agencies that the product is both safe and effective, typically takes several
years or more and can vary substantially based upon the type, complexity and
novelty of the product. There can be no assurance that such testing will show
any product to be safe or efficacious. Preclinical studies of the Company's
product development candidates are subject to Good Laboratory Practices ("GLP")
requirements and the manufacture of any products by the Company, including
products developed by the Company and products manufactured for third parties on
a custom contract basis by the HSP Division, will be subject to GMP requirements
prescribed by the FDA.
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The regulatory process, which includes preclinical studies, clinical
trials and post-clinical testing of each compound to establish its safety and
effectiveness, takes many years and requires the expenditure of substantial
resources. Delays may also be encountered and substantial costs incurred in
foreign countries. There can be no assurance that, even after the passage of
such time and the expenditure of such resources, regulatory approval will be
obtained for any drugs developed by the Company. Data obtained from preclinical
and clinical activities are subject to carrying interpretations which could
delay, limit or prevent regulatory approval by the FDA or other regulatory
agencies. The Company, an independent Institutional Review Board (an "IRB"), the
FDA or other regulatory agencies may suspend clinical trials at any time if the
participants in such trials are being exposed to unacceptable health risks.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Failure to
comply with applicable regulatory requirements can, among other things, result
in fines, suspension of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecutions. FDA policy may
change and additional government regulations may be established that could
prevent or daily regulatory approval of the Company's potential products.
Even if initial regulatory approvals for the Company's product
candidates are obtained, the Company, its products and its manufacturing
facilities would be subject to continual review and periodic inspection.
Moreover, additional government regulations from future legislation or
administrative action may be established which could prevent or delay regulatory
approval of the Company's products or further regulate the prices at which the
Company's proposed products may be sold. The regulatory standards for
manufacturing are applied stringently by the FDA. In addition, a marketed drug
and its manufacturer are subject to continual review and any subsequent
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or manufacturer, including withdrawal of
the product from the market and withdrawal of the right to manufacture the
product.
All of the foregoing regulatory matters also will be applicable to
development, manufacturing and marketing undertaken by any strategic partners or
licensees of the Company.
Competition
There are many companies, both private and publicly traded, that are
conducting research and development activities on technologies and products
similar to or competitive with the Company's antisense technologies and proposed
products. For example, many other companies are actively seeking to develop
products, including antisense oligonucleotides, with disease targets similar to
those being pursued by the Company. Some of these competitive products are in
clinical trials.
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The Company believes that the industry-wide interest in investigating the
potential of gene expression modulation technologies will continue and will
accelerate as the techniques which permit the design the development of drugs
based on such technologies become more widely understood. There can be no
assurance that the Company's competitors will not succeed in developing products
based on oligonucleotides or other technologies, existing or new, which are more
effective than any that are being developed by the Company, or which would
render Hybridon's antisense technologies obsolete and noncompetitive. Moreover,
there currently are commerciallyalready available products for the treatment of many of the disease targets being pursued by the Company.
Competitorsdiseases that
Hybridon's proposed drugs would treat. Any of the Company engaged in all areas ofthese drugs may prove more
effective than those that Hybridon proposes to develop, and may gain or maintain
greater market acceptance.
Furthermore, biotechnology and drug discoveryrelated pharmaceutical technologies have
undergone and continue to be subject to rapid and significant change. Hybridon
expects that the technologies associated with biotechnology research and
development will continue to develop rapidly. Hybridon's future will depend in
the U.S. and other countries are numerous and include, among
others, pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions.large part on its ability to compete with these technologies. Any compounds,
drugs or processes that Hybridon develops may become obsolete before it recovers
expenses incurred in developing those drugs.
Many of the Company'sHybridon's competitors have substantially greater financial,
technical, and human resources than the Company.
In addition, many of these competitorsHybridon, and have significantly greater
experience than the CompanyHybridon in undertaking preclinical studies, and human clinical trials, seeking
regulatory approval of new pharmaceutical productsdrugs, and obtaining FDA and other regulatory approvals of
products for use in health care. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience. Accordingly, the Company's competitors may succeed in
obtaining FDA or other regulatory approvals for products or in commercializing
such products more rapidly than the Company.
Limitednew drugs.
Hybridon's Manufacturing Capability While the Company believes that its existing production capacity will
be sufficient to enable it to satisfy its current research needs and to support
the Company's preclinical and clinical requirements for oligonucleotide
compounds, the Company will need to purchase additional equipment to expand its
manufacturing capacity in order to satisfy its future requirements (subject to
obtaining regulatory approvals) for commercial production of its product
candidates. In addition, the HSP Division is using the Company's existing
production capacity to custom contract manufacture synthetic DNA products for
commercial sale. As a result, depending on the level of sales by the HSP
Division, and the successMay Be Adversely Affected By Problems With
Suppliers
Certain of the Company's product development programs,
Hybridon's manufacturing capacityraw materials that Hybridon requires to manufacture
oligonucleotides are available from only a few suppliers, namely those with
access to the appropriate patented technology. The number of suppliers is
unlikely to increase in the near future. Hybridon may not be sufficient for production for both
its internal needs and sales to third parties. In addition, in order
successfully to commercialize its product candidates or achieve satisfactory
margins on sales, the Company may be required to reduce further the cost of
production of its oligonucleotide compounds, and there can be no assurance that
the Company will be able to do so.
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The manufacture of the Company's products is subject to GMP
requirements prescribed by the FDA or other standards prescribed by the
appropriate regulatory agency in the country of use. To the Company's knowledge,
therapeutic products based on chemically-modified oligonucleotides have never
been manufactured on a commercial scale. There can be no assurance that the
Company will be able to manufacture products in timely fashion and at acceptable
quality and price levels, that it or its suppliers can manufacture in compliance
with GMP or other regulatory requirements or that it or its suppliers will be
able to manufacturesecure an
adequate supply of product. The Company has in the past
relied in part, and may in the future rely, upon third party contractors in
connection with the manufacture of some compounds. Reliance on such third
parties entails a number of risks, including the possibility that such third
partiesthese materials at an acceptable price. Also, due to
regulatory restrictions or other problems, Hybridon's suppliers may fail to
perform on an effective or timely basis or fail to abide by
regulatory or contractual restrictions applicable to the Company.
There are three sourcesprovide materials of supply for the nucleotide building blocks
used by the Company in its current oligonucleotide manufacturing process. This
process is covered by issued patents either held by or licensed to these three
companies. Therefore, these companies are likely the sole suppliers to Hybridon
of these nucleotide building blocks. There can be no assurance that nucleotide
building blocks will be obtainable at acceptable costs, if at all. The inability
of Hybridon to obtain these nucleotide building blocks from one of these
suppliers, or to obtain them at an acceptable cost, could have a material
adverse effect on Hybridon.
Absence of Sales andquality.
Hybridon's Lack Of Marketing Experience The Company expects eventually to market and sell certainCould Adversely Affect Its Ability To
Commercialize Its Drugs
Direct marketing of any of its prospective products directly and certain of its products through co-marketing
or other licensing arrangements with third parties. The Company has limited
experience in sales, marketing and distribution, and does not expect to
establish a sales and marketing plan or direct sales capability with respect to
the products being developed by it until such time as one or more of such
products approaches marketing approval, if at all. In addition, although the
Company does have a limited direct sales capability with respect to the sales of
custom contract manufactured DNA products to third parties by the HSP Division,
the Company has entered into a sales and marketing arrangement with Perkin-Elmer
with respect to such products and is reliant in part on the efforts of
Perkin-Elmer to promote these products.
In order to market the products being developed by it directly, the
Company will be required to developproposed drugs would require a
substantial marketing staff and sales force with technical expertise and with supportingsupported by a distribution capability.
There can be no assurancesystem.
Given that the Company willHybridon currently has little experience in sales, marketing, or
distribution, Hybridon might not be able to build suchundertake direct marketing of its
drugs in a marketing staff or sales force, that the cost of establishing such a marketing
staff or sales force will be justifiable in light of any product revenues or
that the Company's direct sales and marketing efforts will be successful. In
addition, if the Company succeeds in
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68
bringing one or more products to market, it may compete with other companies
that currently have extensive and well-funded marketing and sales operations.
There can be no assurance that the Company's marketing and sales efforts would
enable it to compete successfully against such other companies. To the extent
the Company enters into co-marketcost-effective manner. The alternative -- co-marketing or other
licensing arrangements any revenues
received by-- would allow Hybridon to avoid the Company will be dependentsignificant cost
involved in partdirect marketing, but would require Hybridon to rely on the efforts
of third
parties and there can be no assurance that such efforts will be successful.
No Assurance of Market Acceptance
Pharmaceutical products, if any, resulting from the Company's research
and development programs are not expected to be commercially available for a
number of years. There can be no assurance that, if approved for marketing, such
products will achieve market acceptance. The degree of market acceptance will
depend upon a number of factors, including the receipt of regulatory approvals,
the establishment and demonstration in the medical community of the clinical
efficacy and safety of the Company's products and their potential advantages
over existing treatment methods and reimbursement policies of government and
third-party payors. There is no assurance that physicians, patients, payors or
the medical community in general will accept or utilize any products that may be
developed by the Company.others.
42
Hybridon Could Be Subject To Product Liability Exposure and Insurance
The useClaims For Which It Is Not Fully
Insured
Hybridon risks being the target of any of the Company's potential productsproduct liability claims alleging
that its drugs harm subjects or patients. Such claims could be asserted in
connection with Hybridon drugs used in clinical trials and the commercial sale of any products, including the products being developedas well as those sold
commercially. Hybridon is covered against such claims by it and the DNA products and reagents manufactured and sold on a custom
contract basis by the HSP Division, may expose the Company to liability claims.
These claims might be made directly by consumers, health care providers or by
pharmaceutical and biotechnology companies or others selling such products.
Hybridon has product liability
insurance coverage, and such coverage is subjectpolicy (subject to various deductibles. Such coverage isdeductibles), but such policies are
becoming increasingly expensive, and no
assurance can be given that the Company willexpensive. Hybridon may not be able to maintain or obtain such
insurance at reasonable cost or in sufficient
amountscoverage to protect the Company
againstit from incurring significant losses due to product
liability claims that could have a material adverse effect
on the Company.claims.
Hybridon Uses Hazardous Materials, And Could Be Held Liable For Damages In The
Company's research and development and manufacturingEvent Of Accidental Contamination Or Injury
Hybridon's activities involvesinvolve the controlled use of hazardous materials, chemicals,
viruses, and various radioactive compounds. Although the CompanyHybridon believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state, and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely eliminated. In the event
of such an accident, the CompanyHybridon could be held liable for any damages that result and any such
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69
liability could have a material adverse effect on the Company.
Uncertainty of Pharmaceutical Pricing and Adequateresult.
Restrictions On Third-Party Reimbursement The Company'sCould Adversely Affect Hybridon's
Ability To Commercialize Its Drugs
Hybridon's ability to commercialize its pharmaceutical productsdrugs successfully will depend in
part on the extent to which appropriate
reimbursement levelsvarious third parties are willing to reimburse
patients for the costcosts of such productsHybridon's drugs and related treatment are
obtained fromtreatments. These third
parties include government authorities, private health insurers, and other
organizations, such as health maintenance organizations ("HMOs").organizations. Third-party payors are
increasingly challenging the prices charged for medical products and services.
There can be no assurance that any ofAccordingly, if less costly drugs are available, third-party payors may not
authorize or may limit reimbursement for Hybridon's drugs, even if they are
safer or more effective than the Company's potential products
will be considered cost-effective or that adequate third-party reimbursement
will be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on its investment. Alsoalternatives. In addition, the trend towardstoward
managed health care in the U.S.healthcare and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reduce government insurance programs may allcould result in lower
pricesreimbursement and reduced demand for the Company's products.
The costHybridon's drugs. Cost containment measures
that health careinstituted by healthcare providers are institutingand any general healthcare reform could
affect the Company'sHybridon's ability to sell its productsdrugs and may have a material adverse effect
on the Company.
Uncertainty of Health Care Reform Measures
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) have proposedHybridon. Hybridon may be forced to reduce its prices; this would in turn
adversely affect profitability.
Hybridon cannot predict what additional legislation or are reportedly
considering proposing a variety of reformsregulation
relating to the health care systems in the
U.S.industry or third-party coverage and abroad. The Company cannot predict what health care reform legislation,
if any, willreimbursement
may be enacted in the U.S.future, or elsewhere. Significantwhat effect such legislation or regulation
might have on its business. In particular, Hybridon may be forced to reduce its
prices; this would in turn adversely affect profitability.
The Market Price Of Hybridon's Securities Is Likely To Be Volatile
The market price of the securities of biotechnology companies such as
Hybridon is highly volatile. The market price of Hybridon's securities could be
influenced by the results of preclinical studies and clinical trials by Hybridon
or its competitors, fluctuations in
43
Hybridon's operating results, announcements by Hybridon or its competitors of
technological innovations or new commercial therapeutic products, changes in
governmental regulation, developments in patent or other proprietary rights of
Hybridon or its competitors, public concern as to the health care systemsafety of drugs developed
by Hybridon, and general market conditions.
Hybridon Does Not Anticipate Paying Dividends On Common Stock In The Foreseeable
Future
Hybridon has never paid any cash dividends on the Common Stock and does
not anticipate paying any in the U.S.foreseeable future. Furthermore, the Indenture
pursuant to which the 9% Notes were issued limits Hybridon's ability to pay
dividends or elsewhere are likely to have a substantial
impact over timesmake other distributions on the mannerCommon Stock, and Hybridon is
currently prohibited under the terms of its $6,000,000 secured loan from paying
cash dividends. Whether Hybridon is ultimately able to pay cash dividends on the
Common Stock depends on Hybridon's future earnings, operating and financial
condition, and capital requirements, and on general business conditions.
Hybridon's Ability To Utilize Its Net Operating Losses And Tax Credits Is Likely
To Be Severely Restricted
Hybridon has substantial net operating loss and tax credit carryforwards
for federal income tax purposes. These carryforwards will expire beginning on
December 31, 2005. The Tax Reform Act of 1986 limits the annual use of net
operating loss and tax credit carryforwards following certain ownership changes.
The securities offerings conducted by Hybridon will severely restrict Hybridon's
ability to utilize its net operating losses and tax credits in any particular
year. Additionally, because the U.S. tax laws limit the time during which net
operating loss and tax credit carryforwards may be applied against future
taxable income and tax liabilities, respectively, Hybridon may never be fully
able to use its net operating loss and tax credits for federal income tax
purposes.
Hybridon May Be Adversely Affected By Year 2000 Compliance Related Problems
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the Company conductsyear 1999. Hybridon's
exposure to this Y2K problem comes not only from its business. Such
changes couldown internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key suppliers, including utility companies and payroll services. While
Hybridon believes that all of its internal systems will be Y2K compliant by the
end of the third quarter of 1999, and is taking appropriate measures to ensure
that its suppliers are Y2K compliant, it is nevertheless possible that Y2K
problems will have a material adverse effect on the Company. The existence of
pending health care reform proposals could have a material adverse effect on the
Company's ability to raise capital. Furthermore, the Company's ability to
commercialize its potential products may be adversely affected to the extent
that such proposals have a material adverse effect on the business, financial
condition and profitability of other companies that are prospective corporate
partners with respect to certain of the Company's proposed products.
Concentration ofHybridon's business. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Year
2000."
44
Stock Ownership byBy Hybridon's Directors and ExecutiveAnd Officers The Company'sMay Delay Or Prevent A
Change Of Control
Hybridon's directors and executive officers and their affiliates
beneficially own a significant percentage of the Company'sHybridon's outstanding Common Stock
and Convertible Preferred Stock. As a result, these stockholders, if acting
together, may have the ability to influence the outcome of corporate actions
requiring stockholder approval. This concentration of ownership may have the
effect of delaying or preventing a change in control of the
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70
Company.Hybridon.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Historically, Hybridon's primary exposures have been related to
nondollar-denominated operating expenses in Europe. As of December 31, 1998,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
ITEM. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA
All financial statements required to be filed hereunder are filed as
APPENDIX A hereto, are listed under Item 14(a), and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.DISCLOSURE
None.
45
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF THE REGISTRANT.COMPANY
The response to this item is contained in part under the caption
"Executive Officers and Significant Employees of the Company" in Part I of this
Annual Report on Form 10-K and in part in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 15, 19988, 1999 (the "1998"1999 Proxy
Statement"), under the caption "Proposal 1--Election"Election of Directors," which section is
incorporated herein by this reference. The 1999 Proxy Statement will be filed
with the Securities and Exchange Commission (the "Commission") not later than
120 days after the fiscal year covered by this Annual Report on Form 10-K.
Officers are elected on an annual basis and serve at the discretion of
the Board of Directors.
ITEM 11. COMPENSATION OF EXECUTIVE COMPENSATION.OFFICERS
The response to this item is contained in the 19981999 Proxy Statement under
the caption "Proposal 1--Election"Election of Directors," which section is incorporated herein by
this reference. The 1999 Proxy Statement will be filed with the Commission not
later than 120 days after the fiscal year covered by this Annual Report on Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.MANAGEMENT
The response to this item is contained in the 19981999 Proxy Statement under
the caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference. The 1999 Proxy Statement will
be filed with the Commission not later than 120 days after the fiscal year
covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.TRANSACTIONS
The response to this item is contained in the 19981999 Proxy Statement under
the caption "Certain Relationships and Related Transactions," which section is
incorporated herein by this reference. -70-The 1999 Proxy Statement will be filed
with the Commission not later than 120 days after the fiscal year covered by
this Annual Report on Form 10-K.
46
71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.8-K
(a) The following documents are filed as APPENDIX A hereto and are
included as part(1) Financial Statements. Reference is made to the Index to Consolidated
Financial Statements under Item 8 of this Annual Report on Form
10-K:
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b)10-K.
(2) The Company is not filing any financial statement schedules as part
of this Annual Report on Form 10-K because they are not applicable
or the required information is included in the financial statements
or notes thereto.
(c)(3) The list of Exhibits filed as a part of this Annual Report on Form
10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(d) REPORTS ON FORM(b) Reports on Form 8-K. The followingDuring the fourth quarter of 1998, the Company did
not file any reports on Form 8-K wereForms 8-K.
(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed
during the last quarteridentified.
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Company's fiscalRegistrant, as amended.
3.2(2) Amended and Restated By-Laws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Preferred Stock.
3.4(3) Form of Certificate of Designation of Series B Preferred Stock.
4.1(2) Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.
4.2(4) Indenture dated as of March 26, 1997 between Forum Capital Markets
LLC and the Registrant.
4.3(7) Certificate of Designation of Series A Preferred Stock, par value
$.01 per share, dated May 5, 1998.
4.4(7) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(7) Class D Warrant Agreement dated May 5, 1998.
47
+10.1(2) License Agreement dated February 21, 1990 and restaged as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2(2) Patent License Agreement dated September 21, 1995 between the
Registrant and National Institutes of Health.
+10.3(2) Patent License Agreement effective as of October 13, 1994 between
the Registrant and McGill University.
+10.4(2) License Agreement effective as of October 25, 1995 between the
Registrant and the General Hospital Corporation.
+10.5(2) License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6(2) Collaborative Study Agreement effective as of December 30, 1992
between the Registrant and Medtronic, Inc.
+10.7(2) System Design and Procurement Agreement dated as of December 16,
1994 between the Registrant and Pharmacia Biotech, Inc.
10.8(2) Lease dated March 10, 1994 between the Registrant and Laborer's
Pension/Milford Investment Corporation for space located at 155.
Fortune Boulevard, Milford, Massachusetts, including Note in the
original principal amount of $750,000.
10.9(2) Registration Rights Agreement dated as of February 21, 1990 between
the Registrant, the Worcester Foundation for Biomedical Research,
Inc. and Paul C. Zamecnik.
10.10(2) Registration Rights Agreement dated as of June 25, 1990 between the
Registrant and Nigel L. Webb.
10.11(2) Registration Rights Agreement dated as of February 6, 1992 between
the Registrant and E. Andrews Grinstead, III.
10.12(2) Registration Rights Agreement dated as of February 6, 1992 between
the Registrant and Anthony J. Payne.
++10.13(2) 1990 Stock Option Plan, as amended.
++10.14(2) 1995 Stock Option Plan.
++10.15(2) 1995 Director Stock Plan.
++10.16(2) 1995 Employee Stock Purchase Plan.
48
10.17(2) Form of Warrant originally issued to Pillar Investment Limited to
purchase shares of Common Stock issued as placement commissions in
connection with the sale of shares of Series F Convertible Preferred
Stock and in consideration of financial advisory service, as
amended.
10.18(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1994, as amended.
10.19(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1995.
10.20(2) Form of Warrant issued to Pillar Investment Limited to purchase
shares of Common Stock issued as placement commissions in connection
with the sale of Units pursuant to the Series G Agreement.
++10.21(5) Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.22(2) Indemnification Agreement dated as of February 6, 1992 between the
Registrant and E. Andrews Grinstead, III.
++10.23(6) Employment Agreement dated March 1, 1997 between the Registrant and
Dr. Sudhir Agrawal.
++10.24(2) Consulting Agreement dated as of February 21, 1990 between the
Registrant and Dr. Paul C. Zamecnik.
10.25(2) Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
+10.26(6) Research, Development and License Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
+10.27(6) Manufacturing and Supply Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.28(6) Registration Rights Agreement dated as of January 24, 1996 between
the Registrant and G.D. Searle & Co.
10.29(5) Loan and Security Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
10.30(7) First Amendment to Loan and Security Agreement dated March 30, 1998
between Hybridon, Inc. and Silicon Valley Bank.
10.31(8) Second Amendment to Loan and Security Agreement dated May 19, 1998,
effective as of April 30, 1998, between Hybridon, Inc. and Silicon
Valley Bank.
49
10.32(9) Third Amendment to Loan and Security Agreement dated September 18,
1998 between Hybridon, Inc. and Silicon Valley Bank.
10.33(9) Fourth Amendment to Loan and Security Agreement dated October 30,
1998, effective as of September 29, 1998 between Hybridon, Inc. and
Silicon Valley Bank.
10.34 Fifth Amendment to Loan and Security Agreement dated December 4,
1998 between Hybridon, Inc. and Silicon Valley Bank.
10.35(5) Warrant issued to Silicon Valley Bank to purchase 65,000 shares of
Common Stock dated as of December 31, 1996.
10.36(5) Registration Rights Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
+10.37(5) Supply and Sales Agreement dated as of September 1, 1996 between the
Registrant and P.E. Applied Biosystems.
10.38(2) Registration Rights Agreement dated as of March 26, 1997 between
Forum Capital Markets LLC and the Registrant.
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum Capital
Markets LLC and the Registrant.
+10.40(6) Amendment No. 1 to License Agreement, dated as February 21, 1990 and
restated as of September 8, 1993, by and between the Worcester
Foundation for Biomedical Research, Inc. and the Registrant, dated
as of November 26, 1996.
10.41(10) Letter Agreement dated May 12, 1997 between the Registrant and
Pillar S.A. amending the Consulting Agreement dated as of March 1,
1994 between the Registrant and Pillar S.A.
10.42(10) Amendment dated July 15, 1997 to the Series G Convertible Preferred
Stock and Warrant Purchase Agreement dated as of September 9, 1994
among the Registrant and certain purchasers, as amended.
10.43(1) Consent Agreement dated January 15, 1998 between Silicon Valley Bank
and the Registrant relating to the Silicon Agreement.
10.44(11) Letter Agreement between the Registrant and Forum Capital Markets
LLC and Pecks Management Partners Ltd. for the purchase of the Loan
and Security Agreement with Silicon Valley Bank.
10.45(7) Financial Advisory Agreement between Registrant and Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar Investments
Ltd. dated as of January 15, 1998.
50
+++10.47 Licensing Agreement dated March 12, 1999 by and between Hybridon,
Inc. and Integrated DNA Technologies, Inc.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31, 1998
- ------------------------------------------------
(1) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
On November 19, 1997,(2) Incorporated by reference to Exhibits to the Company filed aRegistrant's
Registration Statement on Form S-1 (File No. 33-99024).
(3) Incorporated by reference to Exhibit 9(a)(1) to the Registrant's
Schedule 13E-4 dated February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated October 18, 1997, announcing thatApril 2, 1997.
(5) Incorporated by reference to Exhibits to the Company
planned to commence a private offering of up to $50.0 million
of its Common Stock.
On December 10, 1997, the Company filed a CurrentRegistrant's Annual
Report on Form 8-K, dated10-K for the year ended December 3, 1997, announcing that, effective31, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1998.
(8) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1998.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
(11) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-69649).
+ Confidential treatment granted as ofto certain portions, which
portions are omitted and filed separately with the close of businessCommission.
51
++ Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to the Annual Report on Form 10-K for the
year ended December 2, 1997,31, 1997.
+++ Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Company's
Common Stock was delisted from the Nasdaq National Market and
the Company's Common Stock would be quoted on the OTC Bulletin
Board commencing on December 3, 1997.
-71-Commission.
52
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HYBRIDON, INC.
By:authorized, on this
15th day of April 1999.
Hybridon, Inc.
/s/ E. Andrews Grinstead, III
-----------------------------------------------------------------
E. Andrews Grinstead, III
Chairman of the Board, President and
Chief Executive Officer
Date: March 30, 1998POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Hybridon, Inc., hereby
severally constitute and appoint E. Andrews Grinstead, III and Robert G.
Andersen, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such capacities
to enable Hybridon, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature TitleSignatures Titles Date
--------- ----- ----
/s/ E. Andrews Grinstead, III Chairman, of the Board, March 30, 1998Chief Executive April 15, 1999
- ----------------------------- PresidentOfficer and Chief ExecutiveDirector
E. Andrews Grinstead, III Officer and Director (Principal
Executive Officer)
/s/ Robert G. Andersen Treasurer (Principal Financial March 30, 1998April 15, 1999
- ----------------------------- Financial and Accounting Officer)
Robert G. Andersen /s/Officer)
Senior Vice President and
- ----------------------------- Director
Sudhir Agrawal, Director March 30, 1998
- -----------------------------
Sudhir Agrawal
/s/ Mohamed El-Khereiji Director March 30, 1998
- -----------------------------
Mohamed El-Khereiji
/s/ Youssef El-Zein Director March 30, 1998
- -----------------------------
Youssef El-Zein
/s/ Nasser Menhall Director March 30, 1998
- -----------------------------
Nasser MenhallD. Phil.
/s/ James B. Wyngaarden
Director March 28, 1998
- ----------------------------- Director April 14, 1999
James B. Wyngaarden, Ph.D.
- ----------------------------- Director
Nasser Menhall
/s/ Paul C. Zamecnik Director March 30, 1998April 15, 1999
- -----------------------------
Paul C. Zamecnik, -72-Ph.D.
/s/ Youssef El-Zein Director April 15, 1999
- -----------------------------
Youssef El-Zein
73
Appendix/s/ Arthur W. Berry Director April 15, 1999
- -----------------------------
Arthur W. Berry
/s/ Harold L. Purkey Director April 15, 1999
- -----------------------------
Harold L. Purkey
/s/ Camille Chebeir Director April 15, 1999
- -----------------------------
Camille Chebeir
/s/ H.F. Powell Director April 15, 1999
- -----------------------------
H.F. Powell
/s/ Mohamed El-Khereij Director April 15, 1999
- -----------------------------
Mohamed El-Khereij
54
APPENDIX A
INDEX
PAGE
Report of Independent Public AccountantsREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997CONSOLIDATED BALANCE SHEETS F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1997, and for the period from
inception (May 25, 1989) to December 31, 1997CONSOLIDATED STATEMENTS OF OPERATIONS F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
period from inception (May 25, 1989) to December 31, 1997CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997, and for the period from
inception (May 25, 1989) to December 31, 1997 F-6
Notes to Consolidated Financial StatementsCONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hybridon, Inc.:
We have audited the accompanying consolidated balance sheets of Hybridon, Inc.
(a Delaware corporation in the development stage)corporation) and subsidiaries as of December 31, 19961997 and 1997,1998, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997 and for the period from inception
(May 25, 1989) to December 31, 1997.1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hybridon, Inc. and subsidiaries
as of December 31, 1996 and 1997 and 1998 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997,
and for the period from inception (May 25, 1989) to December 31, 19971998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Since inception, the Company
has incurred significant losses which it has funded through the issuance of debt
and equity securities debt issuances and through research and development collaborations and
licensing agreements. As of December 31, 1997, the Company had a working
capital deficit of $(24.1) million and a stockholders' deficit of $(46.0)
million. Subsequent to December 31, 1997, the Company has raised $4.8 million
through the equity financing discussed in Note 1, as of March 30, 1998. The Company expects such resources to fund operations
through March 1998.May 1999. There is substantial doubt about the Company's ability to
continue as a going concern. See Note 1 for management's plans. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
See Note 1 for management's plans./s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 18, 1998February 19, 1999 (except with
respect to the matters
discussedmatter disclosed
in Note 1 and Note 6(a)7(b) as to which the date
is March 30, 1998)April 15, 1999)
F-2
75
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
ASSETS
DECEMBERDecember 31,
1996 1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 12,633,7422,202,202 $ 2,202,202
Short-term investments 3,785,146 --5,607,882
Accounts receivable 573,896 529,702 1,175,441
Prepaid expenses and other current assets 1,545,324 1,005,825 ------------- -------------110,827
--------------- ---------------
Total current assets 18,538,108 3,737,729 ------------- -------------6,894,150
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 9,257,516 16,027,734 11,127,035
Laboratory and other equipment 5,884,861 6,770,402
Equipment under capital leases 2,904,688 4,879,190
Office equipment 1,496,639 1,947,818
Furniture and fixtures 499,957 645,264
Construction-in-progress 2,193,400 45,409
------------- -------------
22,237,06114,288,083 11,432,435
--------------- ---------------
30,315,817 Less--Accumulated22,559,470
Less-Accumulated depreciation and amortization 6,596,293 11,085,013 ------------- -------------
15,640,76813,788,979
--------------- ---------------
19,230,804 ------------- -------------8,770,491
--------------- ---------------
OTHER ASSETS:
Restricted cash 437,714 3,050,982
Notes receivable from officers 317,978 247,250
Deferred financing costs and other assets 1,152,034 3,354,767 612,374
Note receivable from officer 247,250 258,650
Restricted cash 3,050,982 -
Investment in real estate partnership 5,450,000 5,450,000
------------- -------------
7,357,726-
--------------- ---------------
12,102,999 ------------- -------------
$ 41,536,602871,024
--------------- ---------------
$ 35,071,532 ============= =============$ 16,535,665
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ 1,308,511 $ 7,868,474 $ 6,070,951
Accounts payable 4,064,419 8,051,817 2,368,163
Accrued expenses 4,190,766 11,917,298 Deferred revenue 86,250 --
------------- -------------4,068,679
--------------- ---------------
Total current liabilities 9,649,946 27,837,589 ------------- -------------12,507,793
--------------- ---------------
LONG-TERM DEBT, AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 9,031,852 3,282,123 ------------- -------------473,094
--------------- ---------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE -- 50,000,000 ------------- -------------1,306,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 1011 and 15)16)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value-
Authorized--5,000,000Authorized-5,000,000 shares
Series A convertible preferred stock-
Designated-1,500,000 shares
Issued and outstanding--None -- --outstanding-641,259 shares at December 31, 1998 - 6,413
(Liquidation preference of $65,168,048 at December 31, 1998)
Common stock, $.001 par value-
Authorized--100,000,000Authorized-100,000,000 shares
Issued and outstanding--5,029,315outstandingC5,059,650 and 5,059,65015,304,825 shares at December 31,
19961997 and 1997,1998, respectively 5,029 5,060 15,305
Additional paid-in capital 173,247,476 173,695,698 Deficit accumulated during the development stage (149,193,775)241,632,024
Accumulated deficit (218,655,101) (238,447,837)
Deferred compensation (1,203,926) (1,093,837) ------------- -------------(957,127)
--------------- ---------------
Total stockholders' (deficit) equity (deficit) 22,854,804 (46,048,180) ------------- -------------
$ 41,536,6022,248,778
--------------- ---------------
$ 35,071,532 ============= =============$ 16,535,665
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
76
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989) TO
YEARS ENDED DECEMBERYears Ended December 31, DECEMBER 31,
1995
1996 1997 19971998
REVENUES:
Product and service $ 1,080,175 $ 1,876,862 $ 3,253,879
Research and development $ 1,186,124 $ 1,419,389 $ 945,000 $ 5,499,263
Product revenue -- 1,080,175 1,876,862 2,957,0371,099,915
Royalty and other income -- 62,321 48,000 110,321-
Interest income 218,749 1,446,762 1,079,122 3,220,739
------------ ------------148,067
------------- ------------- 1,404,873-------------
4,008,647 3,948,984 11,787,360
------------ ------------4,501,861
------------- ------------- -------------
OPERATING EXPENSES:
Research and development 29,684,707 39,390,525 46,827,915 165,459,81520,977,370
General and administrative 6,094,085 11,346,670 11,026,748 47,816,6166,572,502
Interest 172,757 124,052 4,535,647 6,146,0302,932,362
Restructuring -- --- 11,020,000 11,020,000
------------ -------------
------------- ------------- 35,951,549-------------
Total operating expenses 50,861,247 73,410,310 230,442,461
------------ ------------30,482,234
------------- ------------- -------------
Loss before extraordinary item (46,852,600) (69,461,326) (25,980,373)
EXTRAORDINARY ITEM:
Gain on exchange of 9% convertible subordinated - - 8,876,685
notes payable ------------- ------------- -------------
Net Loss (46,852,600) (69,461,326) (17,103,688)
ACCRETION OF PREFERRED STOCK DIVIDENDS - - 2,689,048
------------- ------------- -------------
Net loss $(34,546,676) $(46,852,600)applicable to common stockholders $ (46,852,600) $ (69,461,326) $(218,655,101)
============ ============$ (19,792,736)
============= ============= Basic and Diluted Net=============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss per Common Share $ (94.70)share before extraordinary item $ (10.24) $ (13.76) ============ ============$ (2.19)
Extraordinary item 0.75
- -
------------- ------------- -------------
Net loss per share (10.24) (13.76) (1.44)
Accretion of preferred stock dividends - - (.23)
------------- ------------- -------------
Net loss per share applicable to common
stockholders $ (10.24) $ (13.76) $ (1.67)
============= Shares Used in Computing Basic and Diluted
Net Loss per Common Share 364,810============= =============
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER COMMON SHARE 4,575,555 5,049,840 ============ ============11,859,350
============= Pro Forma Net Loss per Common Share (Note 2(b)) $ (11.02) $ (9.67) $ (13.76)
============ ============ =============
Shares Used in Computing Pro Forma Net Loss
per Common Share (Note 2(b)) 3,134,854 4,843,414 5,049,840
============ ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
77
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
NUMBER OF NUMBER OFConvertible Series A Convertible Common Stock
Preferred Stock Preferred Stock
Number of $.01 Par Number of $.01 Par Number of $.001 PAR
SHARES $.01 PAR VALUE SHARES VALUEPar
Shares Value Shares Value Shares Value
Initial Issuance of Common Stock -- $ -- 133,700 $ 134
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 175,000 1,750 -- --
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 129,629 1,296 -- --
Issuance of common stock -- -- 133,460 133
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1990 304,629 3,046 267,160 267
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 104,000 1,040 -- --
Repurchase of common stock -- -- (52,500) (53)
Deferred compensation related to restricted stock
awards -- -- -- --
Amortization of deferred compensation -- -- -- --
Compensation expense related to stock option grants -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1991 408,629 4,086 214,660 214
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 184,000 1,840 -- --
Issuance of common stock related to restricted stock
awards -- -- 100,053 100
Issuance of common stock related to the exercise of
stock options -- -- 34,615 35
Issuance of warrants -- -- -- --
Deferred compensation related to stock options and
restricted stock awards -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1992 592,629 5,926 349,328 349
Issuance of Series D convertible preferred stock in
exchange for convertible promissory notes payable,
including accrued interest, net of cash issuance
costs of $113,955 378,351 3,784 -- --
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 275,862 2,759 -- --
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 407,800 4,078 -- --
Issuance of common stock related to the exercise of
stock options -- -- 8,725 9
Reduction in deferred compensation due to stock
option termination prior to vesting -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT DEFERRED EQUITY
CAPITAL STAGE COMPENSATION (DEFICIT)
Initial Issuance of Common Stock $ 535 $ -- $ -- $ 669
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 855,250 -- -- 857,000
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 1,736,801 -- -- 1,738,097
Issuance of common stock 534 -- -- 667
Net loss -- (1,110,381) -- (1,110,381)
----------- ----------- ----------- -----------
Balance, December 31, 1990 2,593,120 (1,110,381) -- 1,486,052
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 2,575,763 -- -- 2,576,803
Repurchase of common stock (210) -- -- (263)
Deferred compensation related to restricted stock
awards 2,328,764 -- (2,328,764) --
Amortization of deferred compensation -- -- 727,738 727,738
Compensation expense related to stock option grants 669,433 -- -- 669,433
Net loss -- (6,648,899) -- (6,648,899)
----------- ----------- ----------- -----------
Balance, December 31, 1991 8,166,870 (7,759,280) (1,601,026) (1,189,136)
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 4,577,869 -- -- 4,579,709
Issuance of common stock related to restricted stock
awards 122,644 -- -- 122,744
Issuance of common stock related to the exercise of
stock options 3,303 -- -- 3,338
Issuance of warrants 2,776,130 -- -- 2,776,130
Deferred compensation related to stock options and
restricted stock awards 2,249,428 -- (2,249,428) --
Amortization of deferred compensation -- -- 1,332,864 1,332,864
Net loss -- (14,694,693) -- (14,694,693)
----------- ----------- ----------- -----------
Balance, December 31, 1992 17,896,244 (22,453,973) (2,517,590) (7,069,044)
Issuance of Series D convertible preferred stock in
exchange for convertible promissory notes payable,
including accrued interest, net of cash issuance
costs of $113,955 9,596,767 -- -- 9,600,551
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 9,935,988 -- -- 9,938,747
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 18,288,318 -- -- 18,292,396
Issuance of common stock related to the exercise of
stock options 26,679 -- -- 26,688
Reduction in deferred compensation due to stock
option termination prior to vesting (290,287) -- 290,287 --
Amortization of deferred compensation -- -- 1,124,839 1,124,839
Net loss -- (19,736,365) -- (19,736,365)
----------- ----------- ----------- -----------
F-5
78
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
NUMBER OF NUMBER OF $.001 PAR
SHARES $.01 PAR VALUE SHARES VALUE
BALANCE, DECEMBER 31, 1993 1,654,642 16,547 358,053 358
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 116,900 1,169 -- --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 318,302 3,183 -- --
Issuance of common stock related to the exercise of
stock options -- -- 4,800 5
Cancellation of warrants -- -- -- --
Reduction in deferred compensation due to stock
option termination prior to vesting -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 2,089,844 20,899 362,853 363
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 1,106,591 11,066 -- --
Issuance of common stock related to the exercise of
stock options -- -- 5,880 6
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 3,196,435 $ 31,965 - $ - 368,733 $ 369
Issuance of common stock related to initial
public offering, net of issuance costs of
$5,268,756 -- --- - - - 1,150,000 1,150
Conversion of convertible preferred stock
to common stock (3,196,435) (31,965) - - 3,371,330 3,371
Issuance of common stock related to the
exercise of stock options -- --- - - - 57,740 58
Issuance of common stock related to the
exercise of warrants -- --- - - - 81,512 81
Deferred compensation related to grants
of common
stock options to nonemployees -- -- -- --- - - - - -
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --- - - - - -
Net loss -- -- -- --- - - - - -
----------- ---------- ----------- ---------- ----------- ---------------------
BALANCE, DECEMBER 31, 1996 -- --- - - - 5,029,315 5,029
Issuance of common stock related to the
exercise of stock options -- --- - - - 25,005 26
Issuance of common stock related to the
exercise of warrants -- --- - - - 330 ---
Issuance of common stock for services
rendered -- --- - - - 5,000 5
Deferred compensation related to grants
of common
stock options to nonemployees -- -- -- --- - - - - -
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --- - - - - -
Net loss -- -- -- --- - - - - -
----------- ---------- ----------- ---------- ----------- ---------------------
BALANCE, DECEMBER 31, 1997 -- $ --- - - - 5,059,650 $ 5,060
=========== =========== =========== ===========
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT DEFERRED EQUITY
CAPITAL STAGE COMPENSATION (DEFICIT)
BALANCE, DECEMBER 31, 1993 55,453,709 (42,190,338) (1,102,464) 12,177,812
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 5,764,154 -- -- 5,765,323
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 11,722,072 -- -- 11,725,255
Issuance of common stock related to the exercise of
stock options 13,395 -- -- 13,400
Cancellation of warrants (68,000) -- -- (68,000)
Reduction in deferred compensation due to stock
option termination prior to vesting (14,062) -- 14,062 ---
Amortization of deferred compensation -- -- 764,228 764,228
Net loss -- (25,604,161) -- (25,604,161)
-------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1994 72,871,268 (67,794,499) (324,174) 4,773,857
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 41,842,632 -- -- 41,853,698
Issuance of common stock related to the exercise of
stock options 41,494 -- -- 41,500
Amortization of deferred compensation -- -- 324,174 324,174
Net loss -- (34,546,676) -- (34,546,676)
-------------- -------------- -------------- --------------Additional Accumulated Deferred Total
Paid-in Deficit Compensation Stockholders'
Capital Equity (Deficit)
BALANCE, DECEMBER 31, 1995 114,755,394 (102,341,175) --$114,755,394 $(102,341,175) $ - $ 12,446,553
Issuance of common stock related to initial
public offering, net of issuance costs of
$5,268,756 52,230,094 -- --- - 52,231,244
Conversion of convertible preferred stock
to common stock 28,594 -- -- ---- - -
Issuance of common stock related to the
exercise of stock options 1,089,618 -- --- - 1,089,676
Issuance of common stock related to the
exercise of warrants 3,176,660 -- --- - 3,176,741
Deferred compensation related to grants
of common
stock options to nonemployees 1,967,116 --- (1,967,116) ---
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- --- - 763,190 763,190
Net loss --- (46,852,600) --- (46,852,600)
-------------- -------------- -------------------------- ------------- ----------- ------------
BALANCE, DECEMBER 31, 1996 173,247,476 (149,193,775) (1,203,926) 22,854,804
Issuance of common stock related to the
exercise of stock options 86,300 -- --- - 86,326
Issuance of common stock related to the
exercise of warrants 9,075 -- --- - 9,075
Issuance of common stock for services
rendered 146,869 -- --- - 146,874
Deferred compensation related to grants
of common
stock options to nonemployees 205,978 --- (205,978) ---
Amortization of deferred compensation relating- - 316,067 316,067
Net loss - (69,461,326) - (69,461,326)
------------ ------------- ----------- ------------
BALANCE, DECEMBER 31, 1997 173,695,698 (218,655,101) (1,093,837) (46,048,180)
F-5
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Convertible Series A Convertible Common Stock
Preferred Stock Preferred Stock
Number of $.01 Par Number of $.01 Par Number of $.001 Par
Shares Value Shares Value Shares Value
Issuance of Series A convertible preferred stock
and attached warrants in exchange for
conversion of 9% convertible -- -- 510,504 5,105 -- --
subordinated notes payable and accrued interest
Issuance of common stock and attached
warrants in exchange for conversion of -- -- -- -- 3,217,154 3,217
accounts payable and other obligations
Issuance of Series A convertible preferred stock -- -- 114,285 1,143 -- --
Issuance of Common Stock to Placement Agent -- -- -- -- 597,699 598
Issuance of common stock and attached
warrants in exchange for conversion -- -- -- -- 3,157,322 3,157
of convertible notes payable, net of
issuance costs of $566,167
Issuance of common stock and attached
warrants, net of issuance costs of -- -- -- -- 3,223,000 3,223
$1,069,970
Issuance of common stock for services -- -- -- -- 50,000 50
rendered
Deferred compensation related to grants
of common stock options to nonemployees, -- -- 316,067 316,067-- -- -- --
net of terminations
Issuance of warrants in connection with -- -- -- -- -- --
notes payable
Accretion and issuance of Series A
convertible preferred -- -- 16,470 165 -- --
stock dividends
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- (69,461,326) -- (69,461,326)
-------------- -------------- -------------- ---------------- -- -- --
------- -------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 19971998 -- $ 173,695,698-- 641,259 $ (218,655,101)6,413 15,304,825 $ (1,093,837)15,305
======= ======== ========== ========== ========== ==========
Additional Accumulated Deferred Total
Paid-in Capital Deficit Compensation Stockholders'
Equity
(Deficit)
Issuance of Series A convertible preferred stock
and attached warrants in exchange for
conversion of 9% convertible 39,924,887 -- -- 39,929,992
subordinated notes payable and accrued interest
Issuance of common stock and attached
warrants in exchange for conversion of 5,931,341 -- -- 5,934,558
accounts payable and other obligations
Issuance of Series A convertible preferred stock 7,998,817 -- -- 7,999,960
Issuance of Common Stock to Placement Agent 1,194,800 -- -- 1,195,398
Issuance of common stock and attached
warrants in exchange for conversion 4,230,676 -- -- 4,233,833
of convertible notes payable, net of
issuance costs of $566,167
Issuance of common stock and attached
warrants, net of issuance costs of 6,873,453 -- -- 6,876,676
$1,069,970
Issuance of common stock for services 93,700 -- -- 93,750
rendered
Deferred compensation related to grants
of stock options to nonemployees, 109,734 -- (109,734) --
net of terminations
Issuance of warrants in connection with 85,433 -- -- 85,433
notes payable
Accretion and issuance of Series A
convertible preferred 2,688,883 (2,689,048) -- --
stock dividends
Amortization of deferred compensation -- -- 246,444 246,444
Net loss -- (17,103,688) -- (17,103,688)
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ (46,048,180)
============== ============== ============== ==============241,632,024 $(238,447,837) $ (957,127) $ 2,248,778
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
79
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989)
YEARS ENDED DECEMBERYears Ended December 31, TO DECEMBER 31,
1995
1996 1997 1997
1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(34,546,676) $(46,852,600) $(69,461,326) $(218,655,101)$(17,103,688)
Adjustments to reconcile net loss to net cash used in
operating activities-activitiesB
Extraordinary gain on exchange of 9% convertible -- -- (8,876,685)
subordinated notes payable
Depreciation and amortization 2,023,553 2,393,751 4,488,719 11,186,4544,057,286
Issuance of common stock for services rendered -- -- 146,874 146,874
Compensation on grant93,750
Amortization of stock options,
warrants and restricted stock 324,174deferred compensation 763,190 316,067 8,123,798
Amortization of discount on convertible
promissory notes payable -- -- -- 690,157246,444
Amortization of deferred financing costs -- 479,737 160,813
Noncash portion of restructuring charge -- 479,737 696,469
Write-down of assets related to
restructuring1,255,000 -- -- 600,000 600,000
Noncash interest on convertible
promissory notes payable -- -- -- 260,799
Changes in assets and liabilities-liabilitiesB
Accounts receivable -- (573,896) 44,194 (529,702)(645,739)
Prepaid expenses and other current assets (769,562) (593,797) 539,499 (1,005,825)
Notes894,998
Note receivable from officers 8,446officer (9,845) 70,728 (247,250)(11,400)
Accounts payable and accrued2,010,981 3,987,398 (3,059,002)
Accrued expenses 483,585 2,747,122 11,713,930 19,969,116736,141 7,071,532 1,565,806
Deferred revenue -- -- (86,250) --
Amounts payable to related parties (80,351) (12,500) -- (200,000)
------------ ------------ ------------ -------------
Net cash used in operating activities (32,556,831) (42,138,575) (51,147,828) (178,964,211)(22,677,417)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments -- (3,785,146) 3,785,146 --
Purchases of property and equipment (4,889,624) (8,902,989) (7,509,755) (29,312,465)
Investment in(471,949)
Proceeds from sale of property and equipment -- -- 714,400
(Investment in) sale of real estate partnership (1,698,448) (3,751,552) -- (5,450,000)5,450,000
------------ ------------ ------------
-------------
Net cash used in(used in) provided by investing activities (6,588,072) (16,439,687) (3,724,609) (34,762,465)5,692,451
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred stock 41,853,698 -- -- 96,584,1547,999,960
Proceeds from issuance of common stock related to stock 1,089,676 86,326 --
options and restricted stock grants 41,500 1,089,676 86,326 1,260,928
Net proceeds from issuance of common stock -- 52,231,244 -- 52,355,324
Repurchase of common stock -- -- -- (263)6,876,676
Proceeds from notes payable -- 7,500,000 -- 9,450,0006,000,000
Proceeds from issuance of convertible promissory notes payable -- -- 50,000,000 59,191,744
Proceeds from long-term debt -- -- -- 662,1074,233,833
Proceeds from issuance of common stock related to stock warrants -- 3,176,741 9,075 3,185,816--
warrants
Proceeds from sale/leaseback of fixed assets -- 1,722,333 1,205,502 4,001,018--
Payments on long-term debt and capital
leases (537,977) (446,163) (1,564,268) (3,365,880)
(Increase) decrease(7,296,646)
Decrease (increase) in deferred financing costs 251,921 (2,820,790) (400,000)
Decrease (increase) in restricted cash and other assets (44,912) 401,990 (2,474,948) (4,139,131)
(Increase) decrease in deferred financing
costs (278,927) 251,921 (2,820,790) (3,256,939)2,976,823
------------ ------------ ------------ -------------
Net cash provided by financing activities 41,033,382 65,927,742 44,440,897 215,928,87820,390,646
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,888,479 7,349,480 (10,431,540) 2,202,2023,405,680
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,395,783YEAR 5,284,262 12,633,742 --2,202,202
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,284,262YEAR $ 12,633,742 $ 2,202,202 $ 2,202,2025,607,882
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
80
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware on
May 25, 1989. The Company is engaged in the discovery and development of
novel genetic medicines based primarily on antisense technology.
The Company is in the development stage. Since inception, the Company has devoted substantially all of its efforts
toward product research and development, its custom contract manufacturing
business (Hybridon Specialty Products or HSP) and raising capital.
Management anticipates that substantially all future revenues will be
derived from the sale of proprietary biopharmaceutical products under
development or to be developed in the future, and custom contract
manufacturing of synthetic DNA products and reagent products (by the Hybridon Specialty Products
Division (HSPD))HSP), as
well as from research and development revenues and fees and royalties
derived from licensing of the Company's technology. Accordingly, although
the Company has begun to generate revenues from its custom contract
manufacturing business, the Company is dependent on the proceeds from
possible future sales of debt and equity securities debt financings and research and
development collaborations in order to fund future operations. There is
substantial doubt concerning its ability to continue as a going concern.
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $5.6 million. The Company expects such resources to fund
operations through May 1999. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The Comapny is curently seeking debt or equity financing in an amount
sufficient to support its operations through the end of 1999, and in
connection therewith, is in negotiations with several parties to obtain
such financing. If the Company is unable to obtain this sufficient amount
of additional funding in May 1999, it will be forced to terminate its
operations or seek relief under applicable bankruptcy law by the end of
May 1999.
On December 3, 1997, the Company was delisted from the Nasdaq Stock
Market, Inc. (NASDAQ) because the Company was not in compliance with the
continued listing requirements of the NASDAQ National Market. The Company
is currently trading on the NASDAQNASD OTC Bulletin Board.
As of December 31, 1997, the Company had a working capital deficit of
$(24.1) million and a stockholders' deficit of $(46.0) million. Although
the Company has raised approximately $4.8 million in gross proceeds from
the 1998 Unit Financing, subsequent to December 31, 1997, the Company
continues to have very limited cash resources and substantial obligations
to lenders. The Company's ability to continue operations in 1998 depends
on its success in raising new funds. There is substantial doubt
concerning the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. If the Company is
unable to obtain a substantial amount of additional funding in April
1998, it will be required to terminate its operations or seek relief
under applicable bankruptcy law by the end of April 1998. Management's
plans to obtain additional financing are described below.
On January 22, 1998, the Company commenced a private placement (the 1998
Unit Financing) of units consisting of notes (the 1998 Unit Notes) and
warrants to issue common stock. The 1998 Unit Financing is being offered
through Pillar Investments Ltd., an entity with which two directors of the Company are affiliated and which is a significant shareholder of the
Company (the placement agent), as the Company's placement agent, on a
best effort basis. As consideration for these services, Pillar
Investments Ltd., will receive fees consisting of 9% of the gross
proceeds of the 1998 Unit Financing, a non-accountable expense allowance
equal to 4% of the gross proceeds of the 1998 Unit Financing and warrants
to purchase common stock. The 1998 Unit Notes bear interest at a rate of
14% per annum; provided that if the 1998 Unit Financing is terminated
before the Mandatory Conversion Event (as defined below) has occurred,
the interest rate shall increase to 18% per annum. The Company is
required to make semi-annual interest payments on the outstanding
principal balance of the 1998 Unit Notes on April 1 and October 1 of each
year during which such 1998 Unit Notes are outstanding, with the first
such payment being due on April 1, 1998, which interest payment
obligation may be satisfied through the issuance of additional 1998 Unit
Notes valued at their principal amount. The Company plans to satisfy the
interest payment due April 1, 1998 by issuing 1998 Unit Notes. The
outstanding principal balance of the 1998 Unit Notes will become due on
December 31, 2007. The 1998 Unit Notes are secured by substantially all
of the Company's assets, subject to the lien on the Company's assets held
by the Bank, are subordinate to the Company's existing indebtedness to
the Bank, are senior to approximately 80% of the 9.0% Convertible
Subordinated Notes ( the 9% Notes, see Note 6(d)) to the extent provided
in a subordination agreement executed by certain holders of the 9% Notes
and, except as otherwise provided in this sentence, rank on a parity with
the 9% Notes.
The 1998 Unit Notes are not convertible at the option of the holder, but
will automatically convert into a new issue of Series B Convertible
Preferred Stock of the Company if the aggregate net proceeds from the
1998 Unit Financing exceeds $20.0 million and the holders of at least 80%
of the aggregate principal amount of the 9% Notes have exchanged such
Notes for a new issue of Series A Convertible Preferred Stock of the
Company pursuant to the exchange offer (the Exchange Offer) described in
the following paragraph (such two conditions, the Mandatory Conversion
Event). The Series B Convertible Preferred Stock underlying the 1998
Unit Notes would rank as to liquidation junior to the Series A
Convertible Preferred Stock issuable in the Exchange Offer.
Each Unit includes warrants to purchase 15% (or, in certain
circumstances, 20%) of the number of shares of common stock underlying
the Series B Convertible Preferred Stock underlying the 1998 Unit Notes
included in such Unit and may include additional warrants in certain
circumstances described below. The Series B Convertible Preferred Stock,
if issued, and warrants are convertible into, and exercisable for, common
stock at a conversion or exercise price equal to the lowest of (i) 80% of
the average closing bid price of the Company's common stock for the 30
consecutive trading days immediately preceding any closing in the 1998
Unit Financing or (ii) 80% of the average closing bid price of the
Company's common stock for the five consecutive trading dates immediately
preceding any closing in the 1998 Unit Financing; provided, however, that
if on the termination date of the 1998 Unit Financing the Company has not
received at least $20,000,000 in net proceeds from the 1998 Unit
Financing or the holders of less than $40,000,000 in principal amount of
the 9% Notes accept the Exchange Offer, holders of Units will be entitled
to receive additional warrants to purchase, at an exercise price of
$0.001 per share, a number of shares of common stock equal to 100% of the
common stock then issuable upon conversion of the Series B Convertible
Preferred Stock then issuable upon conversion of the 1998 Unit Notes
purchased by such investors, in which case the 1998 Unit Notes will not
be convertible into equity securities. If the market price of the common
stock is less than 125% of the conversion price of the Series B Preferred
Stock on the one-year anniversary of the final closing date of the 1998
Unit Financing, the conversion price of the Series B Convertible
Preferred Stock will be further adjusted (the Series B Reset) to the
greater of (a) the market price of the common stock at such time divided
by 1.25 and (b) 50% of the conversion price of the Series B Convertible
Preferred Stock at such time, and holders of the Series B Convertible
Preferred Stock will also be entitled to receive additional warrants to
purchase a number of shares of common stock equal to 50% of the
additional number of shares of common stock issuable upon conversion of
the Series B Convertible Preferred Stock following the Series B Reset.
As of March 30, 1998, the Company has received $4.8 million of gross
proceeds from the 1998 Unit Financing.
On February 6, 1998, the Company commenced an Exchange Offer to the
holders of the 9% Notes to exchange the 9% Notes for a Series A
Convertible Preferred Stock and certain warrants of the Company. In the
Exchange Offer, each $1,000 of principal amount and accrued but unpaid
interest on the 9% Notes may be exchanged, upon the terms and subject to
the conditions set forth in the Exchange Offer documents, for 10 shares
of Series A Convertible Preferred Stock, stated value $100 per share, and
warrants to purchase such a number of shares of common stock of the
Company equal to 15% of the number of shares of common stock into which
such Series A Convertible Preferred Stock would be convertible at 212.5%
of the initial conversion price of the Series B Convertible Preferred
Stock (the Stated Price). Such Series A Convertible Preferred Stock
would have a liquidation preference of $100 per share plus accrued but
unpaid dividends and would bear a dividend of the 6.5% per annum,
payable on April 1 and October 1 of each year in cash or additional
Series A Preferred Stock, at the option of the Company. The conversion
price would be $35 per share of common stock through April 1, 2000 and
the Stated Price thereafter, which conversion price would be reset upon
the occurrence of any Series B Reset to 212.5% of the re-set Series B
conversion price. Exchanging holders of the 9% Notes will be granted the
right to designate the nominee to the Board of Directors of the Company
(the Designated Director). As part of the Exchange Offer, approximately
82% of the 9% Note holders have consented as of March 30, 1998 to defer
the interest payment due on April 1, 1998 to October 1, 1998. There can
be no assurance that the Exchange Offer will be successful.
On March 30, 1998, the Company amended its Exchange Offer to provide that
the terms of the Series A Convertible Preferred Stock and warrants
issuable in the Exchange Offer would be revised as described below if the
following conditions (the Equity Conditions) had been met no later than
the date the Company accepts for exchange in the Exchange Offer at least
$40 million principal amount of the 9% Notes: (i) the Company consummates
an offering, the size of which is acceptable to the Designated Director,
of units consisting of common stock priced (the Common Stock Offering
Price) at the greater of $2.00 and 85% of the Market Price (as defined
below) of the common stock and warrants to purchase a number of shares of
common stock equal to 25% of such Common Stock sold at an exercise price
equal to 120% of the Common Stock Offering Price (the 120% Exercise
Price); (ii) the Company consummates an offering, with gross proceeds of
at least $10 million, of Units consisting of shares of preferred stock
having the same terms as the preferred stock issuable in the amended
Exchange Offer, and warrants with the same 25% coverage as the warrants
issuable in the amended Exchange Offer, as described in the following
paragraph, but at the 120% Exercise Price (which shares are expected to
be sold at a 30% discount from stated value); and (iii) all 1998 Note
Units previously sold and accrued interest thereon are exchanged for
common stock and warrants to purchase a number of shares of common stock
equal to 30% of the common stock issued in such 1998 Note Unit exchange,
such common stock and warrants to be valued, and to have the terms,
described in clause (i) above. Market Price means the average reported
closing bid price of the common stock for the five consecutive trading
days immediately preceding the closing date.
The amended Exchange Offer provides that if the Equity Conditions are
met, (a) the conversion terms of the Series A Convertible Preferred Stock
will be revised as follows: (i) the conversion price will be 212.5% of
the Common Stock Offering Price described above; (ii) such Series A
Convertible Preferred Stock will not be convertible for one year
following the closing; and (iii) such Series A Convertible Preferred
Stock will have no conversion price reset mechanism and (b) the warrant
coverage will increase from 15% to 25% of the number of shares of common
stock underlying the Series A Convertible Preferred Stock (such warrants
being exercisable at 212.5% of the Common Stock Offering Price) and will
not have any conversion price reset provisions.
F-8
81
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)delisting.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use ofManagement Estimates in the Preparation of Financial Statementsand Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The Company is subject to a number of risks and uncertainties similar
to those of other companies of the same size within the biotechnology
industry, such as uncertainty with clinical trials, uncertainty of
additional funding and history of operating losses.
F-8
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
results of the Company and its subsidiaries, Hybridon S.A. (Europe),
a French corporation, and Hybridon Canada, Inc. (an inactive
majority-owned subsidiary). The consolidated financial statements
also reflect the Company's 30% interest in MethylGene, Inc.
(MethylGene), a Canadian corporation which is accounted for under the
equity method (see Note 14). All material intercompany balances and
transactions have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with maturities
of three months or less when purchased to be cash equivalents. Cash
and cash equivalents and restricted cash at December 31, 1997 and
1998 consisted of the following (at amortized cost, which
approximates fair market value):
1997 1998
Cash and cash equivalents-
Cash and money market funds $1,702,272 $3,865,365
Corporate bond 499,930 1,742,517
---------- ----------
Total cash and cash equivalents $2,202,202 $5,607,882
========== ==========
Restricted cash-
Note payable to bank (Note 7(a)) $1,758,542 $ -
Foreign bank account (Note 6) 1,034,618 -
Capital lease obligations (Note 7(d)) 257,822 -
---------- ----------
$3,050,982 $ -
========== ==========
(d) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets as
follows:
Asset Classification Estimated
Useful Life
Leasehold improvements Life of lease
Laboratory equipment and other 3-5 years
F-9
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(e) Accrued Expenses
At December 31, 1997 and 1998, accrued expenses consist of the
following:
1997 1998
Restructuring (Note 3) $8,316,148 $469,485
Interest 1,125,000 29,385
Payroll and related costs 742,452 1,151,742
Outside research and clinical costs 1,231,818 797,593
Professional fees 150,000 149,957
Contingent stock (Notes 7(b) and 15(c)) - 1,000,000
Other 351,880 470,517
----------- ----------
$11,917,298 $4,068,679
=========== ==========
(f) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current
period's presentation.
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 8, 9 and 14. Revenue is recognized as
earned on a straight-line basis over the term of the agreement, which
approximates when work is performed and costs are incurred. Revenues
from product and service sales are recognized when the products are
shipped or the services are performed. Product revenue during 1997
and 1998 represents revenues from the sale of oligonucleotides
manufactured on a custom contract basis by HSP.
(h) Research and Development Expenses
The Company charges research and development expenses to operations
as incurred.
(i) Patent Costs
The Company charges patent expenses to operations as incurred.
F-10
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(j) Comprehensive Loss
The Company applies SFAS No. 130, Reporting Comprehensive Income.
Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The Company's comprehensive loss
is the same as the reported net loss for all periods presented.
(k) Net Loss per Common Share
Effective December 31, theThe Company adopted Statement of Financial
Accounting Standards (SFAS)applies SFAS No 128, Earnings per Share. Under SFAS No.
128, basic net loss per common share is computed using the weighted
average number of shares of common stock outstanding during the
period. Diluted net loss per common share is the same as basic net
loss per common share as the effects of the Company's potential
common stock equivalents are antidilutive. The Company
has applied the provisions of SFAS No. 128 retroactively to all
periods presented. In accordance with staff Accounting Bulleting
(SAB) No. 98, the Company has determined that there were no
nominal issuances of capital in the period prior to the Company's
initial public offering (IPO). Antidilutive securities
which consist of stock options, warrants and warrantsconvertible preferred
stock (on an as-converted basis) that are not included in diluted net
loss per common share were 2,441,436, 2,595,496, 2,404,561 and 2,404,56127,774,883 for
1995, 1996, 1997, and 1997,1998, respectively.
The calculation
of pro forma basic net loss per share assumes that all series of
convertible preferred stock had been converted to common stock as
of the original issuance date. Calculations of net loss per common
share and potential common share are as follows:
1995 1996 1997
Net loss $(34,546,676) $(46,852,600) $(69,461,326)
============ ============ ============
Weighted average shares outstanding 364,810 4,575,555 5,049,840
============ ============ ============
Basic and diluted net loss per share $ (94.70) $ (10.24) $ (13.76)
============ ============ ============
Weighted average shares outstanding 364,810 4,575,555 5,049,840
Convertible preferred stock 2,770,044 267,859 --
============ ============ ============
Pro forma weighted average shares
outstanding 3,134,854 4,843,414 5,049,840
============ ============ ============
Pro forma basic and diluted net loss per
share $ (11.02) $ (9.67) $ (13.76)
============ ============ ============
F-9
82
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
results of the Company and its subsidiaries, Hybridon S.A.
(Europe), a French corporation and Hybridon Canada, Inc. (an
inactive majority-owned subsidiary). The consolidated financial
statements also reflect the Company's 49% interest in MethylGene,
Inc. (MethylGene), a Canadian corporation which is accounted for
under the equity method (see Note 13). All material intercompany
balances and transactions have been eliminated in consolidation.
(d) Cash Equivalents and Short-Term Investments(l) Segment Reporting
The Company applies SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115,
debt securities that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost and are
classified as held-to-maturity securities. These securities
include cash equivalents, short term investments and restricted
cash. At December 31, 1996 and 1997, the Company has classified
all investments as held-to-maturity. The Company considers all
highly liquid investments with maturities of three months or less
when purchased to be cash equivalents. Short-term investments
mature within one year of the balance sheet date. Cash and cash
equivalents, short-term investments and restricted cash at
December 31, 1996 and 1997 consisted of the following (at
amortized cost, which approximates fair market value):
DECEMBER 31,
1996 1997
Cash and Cash Equivalents-
Cash and money market funds $10,144,367 $1,702,272
Corporate bond -- 499,930
U.S. government securities 2,489,375 --
----------- ----------
Total cash and cash equivalents $12,633,742 $2,202,202
=========== ==========
Short-Term Investments-
U.S. government securities $ 3,785,146 $ --
=========== ==========
Restricted Cash (Note 5)-
Certificates of deposit $ 437,714 $2,016,364
Savings Account -- 1,034,618
----------- ----------
$ 437,714 $3,050,982
=========== ==========
F-10
83
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Leasehold improvements Life of lease
Laboratory equipment 5 years
Equipment under capital lease 5 years
Office equipment 3-5 years
Furniture and fixtures 5 years
(f) Accrued Expenses
Accrued expenses on the accompanying consolidated balance sheets
consist of the following:
DECEMBER 31,
1996 1997
Restructuring $ -- $ 8,316,148
Interest -- 1,125,000
Payroll and related costs 1,593,451 742,452
Outside research and clinical costs 1,381,124 1,231,818
Professional fees 390,440 150,000
Other 825,751 351,880
----------- -----------
$ 4,190,766 $11,917,298
=========== ===========
(g) Revenue Recognition
The Company has recorded research and development revenue under
the consulting and research agreements discussed in Notes 7 and 8.
Revenue is recognized as earned on a straight-line basis over the
term of the agreement, which approximates when work is performed
and costs are incurred. Revenues from product sales are recognized
when the products are shipped. Product revenue during 1996 and
1997 represents revenues from the sale of oligonucleoutides
manufactured on a custom contract basis by HSPD.
F-11
84
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(h) Research and Development Expenses
The Company charges research and development expenses to
operations as incurred.
(i) Patent Costs
The Company charges patent expenses to operations as incurred.
(j) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current
periods presentation.
(k) New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
requires disclosure of all components of comprehensive income on
an annual basis and interim basis. Comprehensive income is defined
as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner
sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not expect this
accounting pronouncement to materially effect its financial
statements.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information regarding operating segments in
annual financial statements and requires certain financial and supplementaryselected information for
those segments to be disclosed on an annual andpresented in interim basis for each reportable
segment of an enterprise.financial reports issued to
stockholders. SFAS No. 131 is effectivealso establishes standards for fiscal
years beginning after December 15, 1997. Unless impracticable,
companies would be requiredrelated
disclosures about products and services and geographic areas. To
date, the Company has viewed its operations and manages its business
as principally one operating segment. As a result, the financial
information disclosed herein, represents all of the material
financial information related to restate prior period information
upon adoption. The Company does not expect this accounting
pronouncement to materially effect its financial statements.the Company's principal operating
segment. All of the Company's revenues are generated in the United
States and substantially all assets are located in the United States.
(3) RESTRUCTURING
Beginning in July 1997, the Company implemented a restructuring plan to
reduce expenditures on a phased basis over the balance of 1997 in an effort to conserve its cash
resources. As part of this restructuring plan, in addition to terminating
the clinical development of GEM 91, the Company's first generation
antisense drug for the treatment of AIDS and HIV infection, the Company
reduced or suspended selected programs unrelated to its core advanced chemistry
antisense drug research and development programs, including its ribozyme program.programs. In connection with the
reduction in programs, the Company has accrued termination fees related to
research contracts and has incurred restructuring chargeswritten off assets related to programs that
have been suspended or canceled. As part of the restructuring, all outside
testing, public relations, travel and entertainment and consulting
arrangements were reviewed and where appropriate the terms were
F-12
85
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
renegotiated, contracts cancelled or the terms were significantly reduced.
In addition,As a result of the implementation of these changes, the Company terminated
the employment of 84 employees at its
F-11
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Cambridge and Milford, Massachusetts, facilities since
July ofin 1997 and substantially reducedclosed its
operations at itsin Paris, France, office and terminated 1011 employees at that location in August 1997.location.
In connection with the restructuring, the Company entered into two
different
sub-leasingsubleasing arrangements. TheDuring 1997, the Company has sub-leased one
facilitysubleased a portion of
each of its facilities in Cambridge, Massachusetts and(including a
substantial portion of its former headquarters located at 620 Memorial
Drive (the Cambridge Massachusetts.Headquarters). The Company incurred expenses
relating to these sub-leasessubleases for broker fees and renovation expenses
incurred in preparing the Memorial DriveCambridge Headquarters space for the new tenant.
In addition, the Company has accrued the estimated lease loss of subleasing
620 Memorial Drive.the Cambridge Headquarters which were vacated during 1998. The Company
hasalso subleased its office in Paris, France, and accrued the remainingestimated
lease costs of its Paris, France office prior to terminating
the lease effective March 31, 1998.loss.
The following are the significant components of the $11,020,000 charge for
restructuring:
Estimated loss on facility leases $ 6,930,000restructuring (in thousands):
To be Paid
as of
Restructuring Non-Cash Cash December 31,
Charge Portion Disbursed 1998
------ ------- --------- ----
Estimated loss on facility leases $ 6,372 $ 5,976 $ 356 $ 40
Employee severance, benefits and 2,738 -- 2,548 190
related costs
Write-down of assets to net realizable 946 946 -- --
value
Termination costs of certain 964 672 53 239
research programs ------- ------- ------- -------
$11,020 $ 7,594 $ 2,957 $ 469
======= ======= ======= =======
The Company disbursed cash totaling approximately $1,453,000 and
related costs 2,579,000
Writedown$1,504,000 in 1997 and 1998, respectively, with respect to the
restructuring. The remaining accrued amount of assets to net realizable value 600,000
Terminationapproximately $469,000 will
be paid during 1999.
(4) INVESTMENT IN REAL ESTATE PARTNERSHIP
Under the terms of the lease for the Cambridge Headquarters (the Cambridge
Lease), the Company accounted for $5,450,000 of its payments for a portion
of the costs of certain development programs 911,000
-----------
$11,020,000
===========
The total cash impactconstruction of the restructuring amountedleased premises as contributions to
approximately
$5,165,000. The total cash paid asthe capital of the Cambridge landlord in exchange for a limited
partnership interest in the Cambridge landlord (the Partnership Interest).
Under the terms of the Partnership Interest, the Company exercised its
right to sell back the Partnership Interest and received payment of the
$5,450,000 in 1998.
F-12
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) NOTE RECEIVABLE FROM OFFICER
At December 31, 1997 was approximately
$1,453,000 and the remaining amount will be paid in 1998.
(4) NOTES RECEIVABLE FROM OFFICERS
At December 31, 1996 and 19971998 the Company had noteshas a note receivable from
officer, including accrued interest, from officers of $317,978$247,250 and $247,250,$258,650,
respectively. As of December 31, 1997 oneThe note remains outstanding withhas an interest rate of 6.0% per annum and matures
in April 2001.
F-13
86
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5)(6) RESTRICTED CASH At December 31, 1996 and 1997, restricted cash was made up of the
following:
1996 1997
Capital lease obligations (Note 6(c)) $ 437,714 $ 257,822
Note payable to bank (Note 6(a)) -- 1,758,542
Foreign bank account -- 1,034,618
---------- ----------
$ 437,714 $3,050,982
========== ==========- BVH
In November 1997, the Company was notified by Bank Fur Vermogensanlagen
Und Handel AG (BVH) that the Federal Banking Supervisory Office (BAKred)
in Germany
had imposed a moratorium effective as of August 19, 1997 on BVH and had closed BVH for business.
Accordingly, the Company classified its deposit with BVH as restricted
cash. The Company has contacted BVH
and is actively pursuing the release of its deposit or sale ofsold the deposit to a third party, including possiblythe Cambridge Landlord, an entity affiliated with a
directoraffiliate
of certain directors of the Company. The Company, expects to recover substantially all
of its depositand recovered the full amount in
BVH through such means. However, the timing of the
recovery may be over a period of up to one year. There can be no
assurance that the Company will be able to recover all of its deposit or
that the Company will not be required to write off a portion of the
$1,034,618. Through March 18, 1998, the Company had recovered $250,000 of
the BVH deposit.
(6)1998.
(7) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Future minimum principal payments due under various notes payable,
excluding the 9% convertible subordinated notes (the 9% Notes) due April
1, 2004, are as follows at December 31, 1998:
December 31, Amount
------------ ------
1999 $ 6,070,951
2000 80,746
2001 91,892
2002 104,576
2003 119,010
Thereafter 76,870
---------------
Total long-term debt obligations 6,544,045
Less--Current portion 6,070,951
---------------
$ 473,094
===============
(a) Note Payable to a Bank
In December 1996, the Company entered into a five yearfive-year $7,500,000 note
payable withto a bank. The note contains certain financial
covenants that require the Company to maintain minimum tangible
net worth and minimum liquidity and prohibits the payment of
dividends. On January 15, 1998 and March 30,In November 1998, the Company
received waiversoutstanding balance of
approximately $2,895,000 was purchased from the bank by Forum Capital
Markets, LLC (Forum) and certain investors associated with Pecks
Management Partners Ltd. (Pecks) (collectively, the Lenders), which included the following terms:
(1) a waiverare
affiliates of any event of default that would otherwise arise as
a resulttwo members of the 1998 Unit Financing discussed in Note 1; (2) a
requirement that the Company deposit at least 50%Company's Board of its
unencumbered cash with the bank, including proceeds raised from
the 1998 Unit Financing discussed in Note 1; (3) in an event of
default, a requirement that all net cash proceeds of any
dispositions of assets of the Company permitted by the bank, as
defined, shall be applied as a prepayment against the note (if the
Company is not in default, only 50% of the net proceeds will be
applied against the note); (4) a waiver of covenants of
non-compliance through March 31, 1998 and; (5) an increase in the
interest rate to the bank's prime rate plus 5%. Prior to the
amendment the note bore interest at either the bank's prime rate
plus 1% or LIBOR plus 3.5% (9.5% at December 31, 1997), at the
Company's election. The Company has secured the obligations under
the note with a lien on all of its assets, including intellectual
property. The note is payable in 59 equal installments of $62,500
commencing on February 1, 1997 with a balloon payment of
$3,812,500, due on January 1, 2002. Prior to the amendments
discussed above, if at specified times, the Company's minimum
liquidity is less than $15,000,000, $10,000,000, or $5,000,000,
the Company is required to pledge cash collateral to the bank
equal to 25%, 50% or 100%, respectively, of the then outstanding
balance under the
F-14Directors.
F-13
87
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(b) Note Payable to Lenders
In connection with the purchase by the Lenders of the note pursuantpayable to the
bank, the Lenders lent an additional $3,200,000 so as to increase the
outstanding principal amount of the note to $6,000,000. The terms of the
note payable were amended as follows: (i) the maturity was extended to
November 30, 2003; (ii) the interest rate was decreased to 8%; (iii)
interest is payable monthly in arrears, with the principal due in full at
maturity of the loan; (iv) the note payable is convertible, at the
Lenders' option, in whole or in part, into shares of common stock at a
cash pledge agreement. During 1997,conversion price equal to $2.40 per share; (v) the Company'snote includes a minimum
liquidity, had fallen below $15,000,000as defined covenant of $2,000,000; and (vi) the note payable
may not be prepaid, in whole or in part, at any time prior to December 1,
2000. On March 30, 1999, the Company deposited $1,758,542received a waiver for noncompliance
with the minimum tangible net worth covenant effective as collateral underof December 31,
1998 and March 31, 1999. On April 15, 1999, the cash pledge
agreement.Company also received a
waiver for noncompliance with the minimun liquidity covenant effective as
of April 15, 1999. The Company has classified the outstanding balance of
$6,873,332$6,000,000 at December 31, 19971998 as a current liability in the accompanying
consolidated balance sheet as it does not currently have the financing to
remain in compliance with the financial covenants. Also, inIn connection with the
purchase of the note payable, Forum is entitled to receive $400,000 as a
fee, which Forum has agreed to reinvest by purchasing common stock or
preferred stock, both with attached warrants. The Company has recorded the
Company issued 5 year$400,000 as a deferred financing cost, which will be amortized to interest
expense over the term of the note and an accrued expense for the issuance
of common stock or preferred stock, both with attached warrants, which
will occur in 1999. In addition, Forum is entitled to receive warrants to
purchase 13,000$400,000 of shares of common stock of the Company at an exercise
pricethe per
share valuation of $34.49the next financing, or $3.00 per share. Theseshare if the financing
is not completed by May 1, 1999. The Company determined the value of the
warrants are fully exercisable at
December 31, 1997.
(b)to be $85,433, by using the Black-Scholes option pricing model.
The Company has recorded this $85,433 as a deferred financing cost, which
will be amortized to interest expense over the term of the note.
(c) Note Payable to Landlord
In December 1994, the Company issued a $750,000 promissory note to its
landlord to fund specific construction costs associated with the
development of its manufacturing plant in Milford, Massachusetts. The
promissory note bears interest at 13% per annum and is to be paid in equal
monthly installments of principal and interest over the remainder of the
10-year lease term.
(c)(d) Capital Lease Obligations
The Company hashad entered into various capital leases for equipment. In 1994,During
1998, the Company received $1,073,000 as a part of a
sale/leaseback transaction with a leasing company. These lease
amounts are subject to interest at an effective rate of 4.29% and
are being paid in equal installments of approximately $24,000 over
48-months through June 1998. In connection with this lease
agreement, the Company is required to maintain a certain amount of
cash in escrow as collateral. At December 31, 1997, the Company
had $257,822 in escrow related to the agreement.
In December 1996, the Company sold certain laboratory equipment to
a leasing company, atsettled its original cost of $1,722,333. In
connection with this transaction, the Company entered into a
capital lease to lease the equipment from this leasing company for
48 monthly payments ranging from $36,000 to $50,000. The sale of
the equipment resulted in a gain of $291,960 which has been offset
against the cost of the asset in the accompanying consolidated
balance sheet and is being amortized over the life of the lease.
In June 1997, the Company sold additional laboratory equipment to
the leasing company, at its original cost of $1,205,502. In
connection with this transaction, the Company entered into a
capital lease to lease the equipment from this leasing company for
24 monthly payments ranging from $24,000 to $34,000. The sale of
the equipment resulted in a gain of $127,378, which has been
offset against the cost of the asset in the accompanying
consolidated balance sheet and is being amortized over the life of
the lease.
In January 1997, the Company entered into a five year $1,169,000
lease with a leasing company to finance certain furniture and
fixtures in the Cambridge facility. The lease bears interest at a
F-15
88
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
rate of 13.7% and is payable in 60 equal monthly installments of
approximately $26,000 through February 2002.
Future minimum payments due under various notes payable and capital lease obligations excludingin full through
the 9% Notes due April 1,
2004, are as follows at December 31, 1997:
CALENDAR YEAR AMOUNT
1998 $ 8,206,684
1999 1,404,777
2000 1,324,184
2001 601,038
2002 136,000
Thereafter 195,881
-----------
Total long-term debtissuance of common stock and capital 11,868,564
lease obligations
Less--Amount representing interest 717,967
-----------
Principal obligations 11,150,597
Less--Current portion 7,868,474
-----------
$ 3,282,123
===========
(d) 9.0%warrants (see Note 15 (c)).
(e) 9% Convertible Subordinated Notes Payable
On April 2, 1997, the Company issued $50,000,000 of 9.0%
convertible subordinated notes (thethe 9% Notes).Notes. Under
the terms of the 9% Notes, the Company must make semiannual interest
payments on the outstanding principal balance through the maturity date of
April 1, 2004. If the 9% Notes are converted prior to April 1, 2000,
F-14
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
the Noteholdersnoteholders are entitled to receive accrued interest from the date of
the most recent interest payment through the conversion date. The 9% Notes are subordinate to substantially all
of the Company's existing indebtedness. The 9% Notes
are convertible at any time prior to the maturity date at a conversion
price equal to $35.0625, subject to adjustment under certain
circumstances, as defined.
F-16
89
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Beginning April 1, 2000, the Company may redeem the 9% Notes at its option
for a 4.5% premium over the original issuance price provided that from
April 1, 2000 to March 31, 2001, the 9% Notes may not be redeemed unless
the closing price of the common stock equals or exceeds 150% of the
conversion price for a period of at least 20 out of 30 consecutive trading
days and the 9% Notes are redeemed within 60 days after such trading
period. The premium decreases by 1.5% each year through March 31, 2003.
Upon a change of control of the Company, as defined, the Company will be
required to offer to repurchase the 9% Notes at 150% of the original
issuance price.
(7)On February 6, 1998, the Company commenced an exchange offer to the
holders of the 9% Notes to exchange the 9% Notes for Series A convertible
preferred stock and warrants. On May 5, 1998, noteholders holding
$48,694,000 of principal and $2,361,850 of accrued interest tendered such
principal and accrued interest to the Company for 510,505 shares of Series
A convertible preferred stock and warrants to purchase 3,002,958 shares of
common stock with an exercise price of $4.25 per share. In accordance with
SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the Company recorded an extraordinary gain of $8,876,685
related to the exchange. The extraordinary gain represents the difference
between the carrying value of the 9% Notes plus accrued interest, less
$2,249,173 of deferred financing costs written off, and the fair value of
the Series A convertible preferred stock, as determined by the per share
sales price of Series A convertible preferred stock sold in the 1998 Unit
Financing (see Note 15(c)), and warrants to purchase common stock issued
by the Company.
(8) G.D. SEARLE & CO. AGREEMENT
In January 1996, the Company and G.D. Searle & Co. (Searle) entered into a
collaboration relating to research and development of therapeutic
antisense compounds directed at upcompounds. According to eight molecularthe collaboration agreement, as modified
in April 1998, targets can be selected from those in the fieldfields of cancer,
cardiovascular disease and inflammation/immunomodulation (the Searle
Field).
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the
Searle Field designated by Searle.MDM2. In this project,
Searle is funding certain research and development efforts by the Company,
and each ofboth Searle and the Company have committed certain of its own
personnel to the collaboration. The initial phase of research and
development activities relating to the initial target will be conducted through the earlier of (i) the
achievement of certain product candidate milestones, orand (ii) 36
months after commencement of the collaboration,January 31, 2000, subject to
early termination by Searle (although in any event Searle is required to
F-17
90
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
pay 18 months of research and development funding).Searle. The parties may extend the initial
collaboration by mutual agreement, including agreement as to additional
research funding by Searle.
In addition, under the collaboration, Searle has the right at its option, to designate up
to six additional molecular targets in the Searle Field (the Additional
Targets) for collaborative research and development with the Company on terms substantially consistent with the terms
F-15
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
of the collaboration applicable to the initial molecular target. This
right is exercisable by Searle with respect to each of the Additional
Targets upon the payment by Searle of certain research payments (beyond
the project-specific payments relating to the particular Additional
Target) and the purchase of additional common stock from the Company by
Searle (at the then fair market value). The aggregate amount to be paid by
Searle for such research payments and equity investment in order to
designate each of the Additional Targets is $10,000,000 per Additional
Target. In the event that Searle designates all of the Additional Targets,
the aggregate amount to be paid by Searle for research payments will be
$24,000,000, and the aggregate amount to be paid by Searle in equity
investment will be $36,000,000. If Searle has not designated all of the
Additional Targets by the time it advances the
product candidate for the initial molecular target toreaches a
certain stagesstage of preclinical development, Searle will be required to
purchase an additional $10,000,000 of common stock (at the then fair
market value) on
specified dates in order to maintain its right to designate any of the
Additional Targets that it has not yet designated.Targets. The payment for any such common stock will be
creditable against the equity investment portion of the payments to be
made by Searle with respect to the designation of any of the Additional
Targets that Searle has not yet designated.
Searle also has the right, at its option, to designate a molecular target
in the Searle Field to develop a therapeutic agent for cancer that acts
through immunomodulation (the Searle Cancer Target) for collaborative
research and development with the Company on terms substantially
consistent with the terms of the collaboration applicable to the initial
molecular target. At the time of such designation, Searle will be
required to make certain research payments to the Company and purchase
additional common stock from the Company (at the then fair market value).
The aggregate amount to be paid by Searle for such research payments and
equity investment will range from $12,000,000 (composed of $5,000,000 in
research payments and $7,000,000 in equity investment) if the Searle
Cancer Target is designated in 1997 to $26,000,000 (composed of
$21,000,000 in research payments and $5,000,000 in equity investment) if
the Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle determines, in its sole discretion,elects to commercialize a product, Searle
will fund and perform preclinical tests and clinical trials of the product
candidate and will be responsible for regulatory approvals for and
marketing of the product. In certain
instances and for specified periods of time, theThe Company has agreed to perform research and
development work in the Searle Field exclusively with Searle. In addition, as tofor each product
candidate, the Company will be entitled to milestone payments from Searle
totaling up to an aggregate of $10,000,000 upon the achievement of certain
development benchmarks. The Company also will be entitled to royalties
from net sales of products resulting from F-18
91
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the collaboration. Subject to
satisfying certain conditions relating to its manufacturing capacities and
capabilities, the Company will retain manufacturing rights, and Searle
will be required to purchase its requirements of products from the Company
on an exclusive basis at specified transfer prices. Upon a change in control of the
Company, Searle would have the right to terminate the Company's
manufacturing rights, although the royalty payable would be increased in
such event.
Under the collaboration, inIn the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional Targets or in certain other instances relating to Hybridon's failureif
Hybridon fails to satisfy certain requirements relating to its
manufacturing capacities and capabilities, Searle will have the right exercisable in its sole
discretion, to
require Hybridon to form a joint venture with Searle, for
the development of products in the Searle Field (other than products
relating to molecular targets that have already been designated by
Searle) to which each party will contribute $50,000,000 in cash, although
the Company's cash contribution would be reduced by the value of the
technology and other rights contributed by the Company to the joint
venture.as defined. The
Company and Searle would each own 50% of the joint venture, although
Searle's ownership interest in the joint venture would increase based upon
a formula to up to a maximum of 75% if the joint venture is established in
certain instances relating to the Company's failure to satisfy certain
requirements relating to its manufacturing capacities and capabilities.
During 1996, 1997 and 1997,1998, the Company earned $400,000, $600,000 and
$600,000, respectively, in research and development revenues from Searle.
Under the collaboration, Searle also purchased 200,000 shares of common
stock in the Company's initial public offering of common stockCompany at the initial
public offering price as discussed in Note 14(b).
(8)of $50.00 per share.
F-16
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(9) F. HOFFMANN-LA ROCHE LTD. (ROCHE) COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of Hybridon'sthe Company's antisense oligonucleotide
chemistry to the development ofdevelop compounds for the treatment of hepatitis B, hepatitis
C and human papilloma virus.
Under this collaboration, Roche funded research and development efforts
relating to the collaboration and committed personnel of its own to the
collaboration. In 1995, Roche notified the Company that it had selected
an antisense oligonucleotide directed at hepatitis C as a lead compound
for further development and made a milestone payment to the Company in
connection with such designation. In the third quarter of 1996, Roche
notified the Company that it had selected an antisense oligonucleotide
directed at human papilloma virus as a lead compound for further
development, and in the fourth quarter of 1996, made a milestone payment
to the Company in connection with such designation. At such time, Roche
also notified the Company that Roche had elected not to continue the
hepatitis B program under the research and development collaboration. In
addition, Roche notified the Company that Roche
F-19
92
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
was exercising its option to terminate the entire research and
development phase of the collaboration as of March 31, 1997. On September 3, 1997, Roche notified the
Company that it had decided not to pursue further collaboration with the
Company and was terminating the collaboration effective February 28, 1998.
The Company has recorded $1,186,124, $1,019,389 and $345,000 of research and
development revenue related to this collaboration in 1995, 1996 and 1997,
respectively. In conjunctionDue to the termination of the collaboration, as discussed
above, the Company recognized no revenue with the Roche Collaboration, Roche purchased 163,678
shares of common stock for $6,000,000. Roche was also issued five-year
warrants for the purchase of 110,345 shares of common stock at an initial
price of $57.50 per share, such exercise price increases commencing on
August 12, 1995 on an annual basis at a compound rate of 25%. At December
31, 1997, the exercise price of these warrants are $112.30 per share. The
warrants expired on February 12,respect to this
collaboration in 1998.
(9)(10) MEDTRONIC, INC. COLLABORATIVE STUDY AGREEMENT
In May 1994, the Company and Medtronic, Inc. (Medtronic) entered into a
collaborative study agreement (the Medtronic Agreement) involving the
development of antisense compounds for the treatment of Alzheimer's
disease and a drug delivery system to deliver such compounds into the
central nervous system. The agreement provides that the Company will beis
responsible for the development of, and hold all rights to, any drug
developed pursuant to this collaboration, and Medtronic will beis responsible for
the development of, and hold all rights to, any delivery system developed
pursuant to this collaboration. The parties may extend this collaboration
by mutual agreement to other neurodegenerative disease targets. The
research and
development to be conductedCompany is determined and supervised by a committee
comprised of an equal number of designees of the Company and Medtronic.
As part of the Medtronic Agreement, Medtronic purchased 131,667 shares of
common stock for $5,000,000.
(10)not currently conducting any activities under this
collaboration.
(11) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc., which has merged in 1997 intowith the
University of Massachusetts Medical Center, (the Foundation License), under which the Company has
received exclusive licenses to technology in certain patents and patent applications.
The Company is required to make royalty payments based on future sales of
products employing the technology or falling under claims of a
F-20
93
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) patent, as
well as a specified percentage of sublicense income received related to
the licensed technology. Additionally, the Company is required to pay an
annual maintenance fee through the life of the patents.
(11)(12) PHARMACIA BIOTECH, INC. AGREEMENTCOLLABORATION
In December 1994, the Company and Pharmacia Biotech, Inc. (Pharmacia)
entered into a collaboration involving the design and development of a
large-scale oligonucleotide synthesis machine. Following completion of the
machine in December 1996, the collaboration expired, in December 1996, and Pharmacia
retained the right to sell the machine to third parties, subject to an
obligation to pay the Company royalties on such third partythird-party sales. During
1996 and 1997, the Company has received $62,321 and $48,000, respectively, of
royalty income related to such third partythird-party sales. (12)The Company recognized
no royalty income related to this collaboration for 1998.
F-17
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(13) PERKIN-ELMER CORPORATION SALES AND SUPPLY AGREEMENT
In September 1996, the Company and the Applied Biosystems Division of
Perkin-Elmer Corporation (Perkin-Elmer) signed a four yearfour-year sales and
supply agreement under which Perkin-Elmer agreed to refer potential
customers to HSPDHSP for the manufacture of custom oligonucleotides and the
Company agreed that amidites for the manufacture of these oligonucleotides
would be purchased from Perkin-Elmer and a percentage of the sales price
wouldwill be paid to Perkin-Elmer. In addition, Perkin-Elmer licensed to the
Company its oligonucleotide synthesis patents.
(13)(14) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and certainthree Canadian institutional investors
formed a Quebec company, MethylGene, Inc. (MethylGene) to develop and
market certain compounds and procedures to be agreed upon by the Company
and MethylGene.
The Company has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the methylgeneMethylGene
fields. These fields, as amended, are defined as (i) antisense compounds
to inhibit DNA methyltransferase for the treatment of cancers,any disease; (ii)
other methods of inhibiting DNA methyltransferase for the treatment of any
indications,disease; and (iii) antisense compounds to inhibit a secondup to two additional
molecular target other
than DNA methyltransferasetargets for the treatment of cancers, to be agreed upon by the
Company and MethylGene. In December 1997, the Company and
MethylGene expanded the methylgene fields to include (a) antisense
compounds to inhibit DNA methyltransferase for any indication and (b)
antisense compounds to inhibit a second and third molecular target for
any indications, as may be selected by MethylGene, so long as such
molecular targets are not already targeted by the Company. In addition, the Company and MethylGene have
entered into a supply agreement pursuant to which MethylGene is obligated
to purchase from the Company all required formulated bulk oligonucleotides
at specified transfer prices.
The Company acquired a 49% interest in MethylGene for approximately
$734,000, and the Canadian investors acquired a 51% interest in MethylGene
for a total of approximately $5,500,000 (the Institution
Investors).$5,500,000. The Institutional Investorsinstitutional investors have
the right to exchange (the
MethylGene Exchange) all (but not less than all) of their shares of stock
in MethylGene for an aggregate of 100,000 shares of Hybridon common stock
(subject to adjustment for
F-21
94
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) stock splits, stock dividends and the like).
This option is exercisable only during a 90-day period commencing on the
earlier of the date five years after the closing of the Institutional Investors'institutional
investors' investment in MethylGene or the date on which MethylGene ceases
operations. This option terminates sooner if MethylGene raises certain
additional amounts of equity or debt financing or if MethylGene enters
into a corporate collaboration that meets certain requirements. Subsequent to December 31,
1997,During
1998, MethylGene raised additional proceeds from outside investors that
decreased the Company's interest to 30%, which did not terminate the
MethyGene Exchange available to the Institutional Investors.. The Company is accounting for its
investment in MethylGene under the equity method and, due to the existence
of the investors exchange rights, the Company has recorded, up to its
original investment, 100% of MethylGene's losses in the accompanying
consolidated statement of operations.
(14)In May 1998, this agreement was amended to grant MethylGene a
non-exclusive right to use any and all antisense chemistries discovered by
the Company or any of its affiliates for a period commencing on May 5,
1998 and ending on the earlier of (i) the effective date of termination by
MethylGene of its contract for development services to be provided by the
Company; (ii) May 5,
F-18
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
1999, unless MethylGene exercises its option to continue contracting for
development services provided by the Company; or (iii) May 5, 2000. As
additional consideration for this nonexclusive right, MethylGene is
required to pay the Company certain milestone amounts, as defined, and
transferred 300,000 shares of MethylGene's Class B shares to the Company.
The Company has placed no value on these shares. During 1996, 1997 and
1998, the Company recognized $49,565, $101,894 and $1,685,932,
respectively, of product and service revenue related to this agreement.
(15) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock, $.001 par
value, of which 5,059,65015,304,825 shares were issued and outstanding at December
31, 1997.1998.
(b) Initial Public Offering (IPO)
On February 2, 1996, the Company completed its initial public
offeringIPO of 1,150,000 shares of
common stock at $50.00 per share. The sale of common stock resulted in net
proceeds to the Company of approximately $52,231,000$52,231,244 after deducting expenses related to
the offering.
(c) Reverse1998 Unit Financing
On May 5, 1998, the Company completed a private offering of equity
securities raising total gross proceeds of $26,681,164 from the issuance
of 9,597,476 shares of common stock, 114,285 shares of Series A
convertible preferred stock and warrants to purchase 3,329,486 shares of
common stock at $2.40 per share. The gross proceeds include the conversion
of $5,934,558 of accounts payable, capital lease obligations and other
obligations into common stock. The Company incurred $1,636,137 of cash
expenses related to the private offering and issued 597,699 shares of
common stock and warrants to purchase 1,720,825 shares of common stock at
$2.40 per share to the placement agents. The compensation received by
Pillar, a company affiliated with certain directors of the Company, with
respect to the offshore component of the private offering (Offshore
Offering) consisted of (i) 9% of gross proceeds of such Offshore Offerings
and (ii) a nonaccountable expense allowance equal to 4% of gross proceeds
of such Offshore Offering. Pillar received $1,636,137 and warrants to
purchase 1,111,630 shares of common stock at $2.40 per share.
In addition, Pillar is entitled to receive 300,000 shares of common stock
in connection with its efforts in assisting the Company in restructuring
its balance sheet. The Company has recorded $600,000 of general and
administrative expense in the accompanying consolidated statement of
operations during 1998, which represents the value of this common stock on
May 5, 1998 with an offsetting amount to accrued expenses for the shares
to be issued. These shares will be issued in 1999.
F-19
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(d) Units Issued to Primedica Corporation
In connection with the unit financing (see Note 15(c)) the Company issued
250,000 shares of common stock and 62,500 warrants to purchase common
stock to Primedica Corporation (Primedica) for future services to be
provided. The services shall commence upon the Company's request after (i)
the Company's securities are listed on a nationally recognized exchange,
and (ii) the average closing price of the Company's common stock is at
least $2.00 per share for the twenty-day trading period preceding the
contract commencement date. In the event that the Company does not use
these services as a result of the failure to meet the contract conditions,
Primedica shall forfeit to the Company all or part of the common stock and
warrants held by Primedica. The Company has recorded these shares as
issued and outstanding at December 31, 1998 at par value. The Company will
record the value of these services as the services are rendered.
(e) Stock Split
On December 10, 1997, the Board of Directors declared a one-for-five
reverse split of its common stock. Share quantities and related per share
amounts have been retroactively restated to reflect the reverse stock
split.
F-22
95
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(d)(f) Warrants
The Company has the following exercisable warrants outstanding and exercisable for the
purchase of common stock at December 31, 1997:
EXERCISE
PRICE
EXPIRATION DATE SHARES PER SHARE
February 12, 1998 110,345 $112.30
March 31, 1998-October 25, 2000 953,936 50.00
February 28, 2000 20,000 37.50
December 31, 2001 13,000 34.49
April 2, 2002 71,301 35.06
--------- -------
1,168,582
=========
Average per share exercise price $ 54.59
=======
As a component of the sale of preferred stock in 1994 and 1995,
the Company issued to the investors in such offering warrants for
the purchase of 585,425 shares of common stock at $40.00 to $50.00
per share. Warrants to purchase 331,382 shares of common stock at
an exercise price of $50.00 per share expire on March 31, 1998,
and the remaining warrants for the purchase of 254,043 shares of
common stock at an exercise price of $40.00 per share expired on
October 25, 1997.1998:
Outstanding Exercise Price Exercisable Exercise Price
Expiration Date Warrants per Share Warrants per Share
--------------- -------- --------- -------- ---------
February 4, 1999-October 25, 2000 551,201 $50.00 551,201 $50.00
February 28, 2000 20,000 37.50 20,000 37.50
December 31, 2001 13,000 34.49 13,000 34.49
May 4, 2003 8,641,503 2.40-4.25 4,378,044 2.40
--------------- ---------------
9,225,704 4,962,245
=============== ===============
Weighted average exercise price $5.48 $7.91
per share ===== =====
Five-year warrants to purchase 368,620 shares of common stock at $50.00
per share were issued in 1994 and 1995 as a component of the compensation
for services of several placement agents of the Company's convertible
preferred stock. Of these warrants, 304,335 were issued to a company that
is controlled by two directors of the Company (see Note 15(a)16(b)). The
remaining 64,285 warrants were issued to various other companies that
acted as placement agents. (e)See Note 15(c) for information relating to
warrants issued to placement agents in connection with the 1998 Unit
Financing.
F-20
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
As consideration of the agreements made by Forum consenting to the
Company's 1998 private placements and waiving certain obligations of the
Company to Forum, the Company agreed to amend the warrant to purchase
71,301 shares of common stock at an exercise price of $35.06 per share,
issued to Forum in connection with 9% notes so that the exercise price
will be equal to $4.25 per share, and the number of shares of common stock
purchasable upon exercise thereof will be increased to 588,235, in each
case subject to adjustment; provided, however, that such warrant will also
be amended to provide that such warrant may not be exercised until May 5,
1999 and the transactions contemplated by such private placements and by
the exchange offer will not trigger any anti-dilution adjustments to the
exercise price thereof or the number of shares of common stock subject
thereto.
(g) Stock Options
In 1990 and 1995, the Company established the 1990 Stock Option Plan (the
1990 Option Plan) and the 1995 Stock Option Plan (the 1995 Option Plan),
respectively, which provide for the grant of incentive stock options and
nonqualified stock options. Options granted under these plans vest over
various periods and expire no later than 10 years from the date of grant.
However, under the 1990 Option Plan, in the event of a change in control
(as defined in the 1990 Plan), the exercise dates of all options then
outstanding shall be accelerated in full and any restrictions on
exercising outstanding options issued pursuant to the 1990 Option Plan
shall terminate. In October 1995, the Company terminated the issuance of
additional options under the 1990 Option Plan. As of December 31, 1997,1998,
options to purchase a total of 604,863525,638 shares of common stock remained
outstanding under the 1990 Option Plan.
F-23
96
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A total of 700,000 shares of common stock may be issued upon the exercise
of options granted under the 1995 Option Plan. The maximum number of
shares with respect to which options may be granted to any employee under
the 1995 Option Plan shall not exceed 500,000 shares of common stock
during any calendar year. The Compensation Committee of the Board of
Directors has the authority to select the employees to whom options are
granted and determine the terms of each option, including (i) the number
of shares of common stock subject to the option; (ii) when the option
becomes exercisable; (iii) the option exercise price, which, in the case
of incentive stock options, must be at least 100% (110% in the case of
incentive stock options granted to a stockholder owning in excess of 10%
of the Company's common stock) of the fair market value of the common
stock as of the date of grant; and (iv) the duration of the option (which,
in the case of incentive stock options, may not exceed 10 years). As of
December 31, 1997,1998, options to purchase a total of 534,914550,534 shares of common
stock remained outstanding under the 1995 Option Plan.
In October 1995, the Company adopted the 1995 Director Stock Option Plan
(the Director Plan). A total of 50,000 shares of common stock may be
issued upon the exercise of options granted under the Director Plan. Under
the terms of the Director Plan, options to purchase 1,000 shares of common
stock were granted to eligible directors upon the closing of the Company's
initial public offering at the fair market value of the common stock on
the date of the closing. Thereafter, options to purchase 1,000 shares of
common stock will be granted to each eligible director on
F-21
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
May 1 of each year commencing in 1997. All options will vest on the first
anniversary of the date of grant or, in the case of annual options, on
April 30 of each year with respect to options granted in the previous
year. As of December 31, 1997,1998, options to purchase a total of 14,00021,000
shares of common stock remained outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan (the 1997
Option Plan), which provides and has reserved and may issue up to 4,500,000 shares for the
grant of incentive and non-qualifiednonqualified stock options. A total of 600,000 shares of common
stock may be issued upon the exercise of options granted to any
employee under the 1997 Option Plan. The maximum number of
shares with respect to which options may be granted to any employee under
the 1997 Option Plan shall not exceed 500,000 shares of common stock
during any calendar year. The Compensation Committee of the Board of
Directors has the authority to select the employees to whom options are
granted and determine the terms of each option, including (i) the number
of shares of common stock subject to the option; (ii) when the option
becomes exercisable; (iii) the option exercise price, which, in the case
of incentive stock options, must be at least 100% (110% in the case of
incentive stock) of the fair market value of the common stock as of the
date of grant; and (iv) the duration of the option (which, in the case of
incentive stock options, may not exceed ten years). As of December 31,
1997,1998, options to purchase a total of 36,7202,363,560 shares of common stock
remained outstanding under the 1997 Option Plan.
F-24
97
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
All stockStock option activity since inceptionfor the three years ended December 31, 1998 is
summarized as follows:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHAREWeighted
Number Exercise Price Average Price
of Shares per Share per Share
Options granted 66,940 $ .01 $ .01
Options exercised (33,460) .01 .01
---------- ----------------- --------
Outstanding, December 31, 1990 33,480 .01 .01
Options granted 1,700 .01 .01
Options terminated (540) .01 .01
---------- ----------------- --------
Outstanding, December 31, 1991 34,640 .01 .01
Options granted 192,540 1.25 - 25.00 9.90
Options exercised (34,615) .01 - 5.00 .10
Options terminated (4,865) 2.50 - 5.00 2.80
---------- ----------------- --------
Outstanding, December 31, 1992 187,700 .01 - 25.00 10.05
Options granted 288,108 17.50 - 62.50 41.90
Options exercised (8,725) .01 - 5.00 3.05
Options terminated (25,275) .01 - 50.00 3.95
---------- ----------------- --------
Outstanding, December 31, 1993 441,808 .01 - 62.50 31.30
Options granted 134,500 25.00 - 35.00 26.65
Options exercised (4,800) .01 - 5.00 2.80
Options terminated (15,000) .01 - 25.00 19.15
---------- ----------------- --------
Outstanding, December 31, 1994 556,508 .01 - 62.50 30.50
Options granted 407,108 37.50 - 50.00 37.75
Options exercised (5,880) 2.50 - 25.00 7.05
Options terminated (219,528) 2.50 - 62.50 49.10
---------- ----------------- --------
Outstanding, December 31, 1995 738,208 $ .01 - $ 50.00 29.15
Options granted$29.15
Granted 476,020 25.00 - 65.60 49.55
Options exercisedExercised (57,740) .01 - 37.50 18.85
Options terminatedTerminated (20,100) 25.00 - 57.85 40.20
---------- ----------------- ---------------
Outstanding, December 31, 1996 1,136,388 1.25 - 65.60 38.05
Options grantedGranted 315,675 27.50 - 32.50 30.75
Options exercisedExercise (25,005) 1.25 - 40.00 12.60
Options terminatedTerminated (236,561) 2.50 - 65.60 40.35
---------- ----------------- -----------------
Outstanding, December 31, 1997 1,190,497 $ .011.25 - $ 65.60 $ 36.18
==========Granted 2,513,000 2.00 - 3.13 2.00
Terminated (242,765) 2.50 - 57.85 37.79
--------
Outstanding, December 31, 1998 3,460,732 $1.25 - $65.60 $11.25
========= ================ ==============
Exercisable, December 31, 1996 622,930 $1.25 - $65.60 $32.55
========= ================ ======
Exercisable, December 31, 1997 740,780 $ .01$1.25 - $ 65.60 $ 34.40
==========$65.60 $34.40
========= ================ ==============
Exercisable, December 31, 1998 1,650,021 $1.25 $65.60 $17.13
========= ================ ======
F-25F-22
98
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Number Contractual Price per Number Price per
Prices Outstanding Life Share Outstanding Share
$ 1.25 10,000 3.10 $ 1.25 10,000 $ 1.25
2.00 - 2.37 2,505,000 9.56 2.00 901,562 2.00
2.44 - 3.13 18,800 6.03 2.61 10,800 2.50
4.25 - 5.00 1,200 3.75 5.00 1,200 3.75
17.50 - 25.00 197,330 3.54 23.21 191,331 23.15
27.50 - 31.66 168,974 7.45 30.50 76,017 30.28
35.00 - 36.25 30,000 6.73 35.71 30,000 35.71
37.50 - 37.50 316,048 4.72 37.50 282,583 37.50
38.13 - 43.75 47,900 7.81 40.64 24,648 40.73
50.00 17,700 6.35 50.00 11,700 50.00
57.85 - 65.60 147,780 6.08 58.22 110,180 58.34
------------- -------------
3,460,732 $ 11.25 1,650,021 $17.13
============= ======== ============= ======
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the measurement of the
fair value of stock options or warrants granted to employees to be
included in the statement of operations or disclosed in the notes to
financial statements. The Company has determined that it will continue
to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. In 1996, 1997 and 1997,1998, the Company
recorded $1,967,116, $205,978 and $205,978$109,734, respectively, of deferred
compensation related to grants to nonemployees, whichnet of terminations.
Deferred compensation will be amortized over the vesting period of the
options. The Company has recorded compensation expense of $763,190,
$316,067 and $316,067$246,444 in 1996, 1997 and 1997, respectively.1998, respectively, related to
these grants to nonemployees.
The Company has computed the pro forma disclosures require by SFAS No.
123 for all stock options and warrants granted after January 1, 1995 using the
Black-Scholes option pricing model. The assumptions used for the three
years ended December 31, 1998 are as follows:
DECEMBER 31,
1995
1996 1997 1998
Risk free interest rate 6.41% 6.14% 6.22% 5.15%
Expected dividend yield -- -- --- - -
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
The Black-Scholes option-pricingoption pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricingoption pricing
models require the input of highly subjective assumptions including
expected stock price
F-23
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
F-26
99
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The effect of applying SFAS No. 123 for the three years ended December
31, 1998 would be as follows:
DECEMBER 31,
1995 1996 1997 1998
Net Loss, as reported: $ (34,546,676)loss applicable to common
stockholders-
As reported $ (46,852,600) $ (69,461,326) ================ =============== ===============$ (19,792,736)
================= ================= =================
Pro forma Net Loss: $ (41,447,381) $ (52,890,455) $ (73,402,170) ================ =============== ===============$ (23,131,304)
================= ================= =================
Basic and Diluted net loss asper common
shares-
As reported Basic and Diluted $ (94.70) $ (10.24) $ (13.76)
========= ========= =========$(10.24) $(13.76) $(1.67)
======= ======== =======
Pro forma $ (11.02) $ (9.67) $ --
========= ========= =========
Basic and Diluted net loss, pro forma
Basic and Diluted $ (113.61) $ (11.56) $ (14.54)
========= ========= =========
Pro forma $ (13.22) $ (10.92) $ --
========= ========= =========$(11.56) $(14.54) $(1.95)
======= ======== =======
(f)(h) Employee Stock Purchase Plan
In October 1995, the Company adopted the 1995 Employee Stock Purchase
Plan (the Purchase Plan), under which up to 100,000 shares of common
stock may be issued to participating employees of the Company, as
defined, or its subsidiaries. All full-time employees of the
Company, except those who would immediately after the grant own 5%
or more of the total combined voting power or value of the stock
of the Company or any subsidiary, are eligible to participate.
On the first day of a designated payroll deduction period (the Offering
Period), the Company will grant to each eligible employee who has
elected to participate in the Purchase Plan an option to purchase shares
of common stock as follows: the employee may authorize an amount (a
whole percentage from 1% to 10% of such employee's regular pay) to be
deducted by the Company from such pay during the Offering Period. On the
last day of the Offering Period, the employee is deemed to have
exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the Purchase Plan,
the option price is an amount equal to 85% of the fair market value per
share of the common stock on either the first day or the last day of the
Offering Period, whichever is lower. In no event may an employee
purchase in any one Offering Period a number of shares which is more
than 15% of the employee's annualized base F-27
100
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
pay divided by 85% of the
market value of a share of common stock on the commencement date of the
Offering Period. The Compensation Committee may, in its discretion,
choose an Offering Period of 12 months or less for each of the Offerings
and choose a different Offering Period for each Offering. No shares have
been issued under the Plan.
(g)(i) Preferred Stock
The restated Certificate of Incorporation of the Company permits its
Board of Directors to issue up to 5,000,000 shares of preferred stock,
par value $.01 per share (the Preferred Stock), in one or more series,
to designate the number of shares constituting such series, and fix by
resolution,
F-24
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
the powers, privileges, preferences and relative, optional or special
rights thereof, including liquidation preferences and dividends, and
conversion and redemption rights of each such series. NoDuring 1998, the
Company designated 1,500,000 shares as Series A convertible preferred
stock.
(j) Series A Convertible Preferred Stock
The rights and preferences of the Series A convertible preferred stock
are as follows:
Dividends
The holders of the Series A convertible preferred stock, as of
March 15 or September 15, are entitled to receive dividends
payable at the rate of 6.5% per annum, payable semi-annually in
arrears. Such dividends shall accrue from the date of issuance of
such share and shall be paid semi-annually on April 1 and October
1 of each year. Such dividends shall be paid, at the election of
the Company, either in cash or additional duly authorized, fully
paid and non assessable shares of Preferred
Stock are currently outstanding.
F-28Series A convertible preferred
stock. In calculating the number of shares of Series A
convertible preferred stock to be paid with respect to each
dividend, the Series A convertible preferred stock shall be
valued at $100.00 per share. During 1998, the Company recorded a
total accretion of $2,689,048 for the dividend on Series A
preferred stock and issued 16,470 shares of Series A convertible
preferred stock as a dividend.
Liquidation
In the event of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, after payment or
provision for payment of debts and other liabilities of the
Company, the holder of the Series A convertible preferred stock
then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders, an
amount equal to $100.00 per share plus all accrued but unpaid
dividends. If the assets to be distributed to the holders of the
Series A convertible preferred stock shall be insufficient to
permit the payment of the full preferential amounts, then the
assets of the Company shall be distributed ratably to the holders
of the Series A convertible preferred stock on the basis of the
number of shares of Series A convertible preferred stock held.
All shares of Series A convertible preferred stock shall rank as
to payment upon the occurrence of any liquidation event senior to
the common stock.
Conversion
Commencing after May 6, 1999, but not prior thereto, the shares
of Series A convertible preferred stock shall be convertible, in
whole or in part, at the option of the holder into fully paid and
nonassessable shares of common stock at $4.25 per share, subject
to adjustment as defined.
F-25
101
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(15)Mandatory Conversion
At any time after May 6, 1998, the Company at its option, may
cause the Series A convertible preferred stock to be converted in
whole or in part, on a pro rata basis, into fully paid and
nonassessable shares of common stock using a conversion price
equal to $4.00 if the closing bid price, as defined, of the
common stock shall have equaled or exceeded 250% of the
conversion price, $4.25, subject to adjustment as defined, for at
least 20 trading days in any 30 consecutive trading day period
ending three days prior to the date of notice of conversion (such
event, the Market Trigger).
At any time after April 1, 2000, the Company, at its option, may
redeem the Series A convertible preferred stock for cash equal to
$100.00 per share plus all accrued and unpaid dividends at such
time, if the Market Trigger has occurred in the period ending
three days prior to the date of notice of redemption.
(16) COMMITMENTS AND CONTINGENCIES
(a) Facilities
The Company has entered intoleases its facility in Milford, Massachusetts, under
a lease for a production plant in Milford,
Massachusetts. The leasewhich has a 10-year10- year term, which commenced on July 1,
1994, with certain extension options.
On February 4, 1994, the Company entered into a lease for an
approximately 91,500 square-foot building inthe Cambridge Massachusetts
(the Cambridge Lease). The Cambridge Lease is
with a partnership that is affiliated with threecertain directors of
the Company. The Cambridge Lease has a
term of 15 years, commencing February 1, 1997, and may be extended for
three additional five-year terms at the option of the Company. The
Cambridge Lease provides for annual rent of $37.79 per year per
F-29
102
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
square foot for the first five years, $42.73 per year per square foot for
the second five years and $47.00 per year per square foot for the third
five years. As compensation for arranging this lease, the
Company issued Pillar Limited (see Note 15(a)) five-year warrants for the purchase
of 100,000 shares of the Company's common stock at an exercise
price of $50.00 per share. These warrants are exercisable through February 4,
1999.
Under the terms ofexpired subsequent to
December 31, 1998. The Company vacated the Cambridge,
Lease, the Company electedMassachusetts, facility in June 1998 and moved its corporate
facilities to treat
$5,450,000 of its payments for a portion of the costs of the construction
of the leased premises (primarily relating to tenant improvements) as
contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord (the Partnership
Interest)Milford, Massachusetts (see Note 3). The Company's Partnership Interest represents a 32.15%
interest in the Cambridge Landlord. The Company's right to receive
distributions of cash generated from operations or from any sale or
refinancing of the property would be subordinate to the distribution to
certain other limited partners of priority amounts currently totaling
approximately $6,500,000 (approximately $3,500,000 of which is subject to
annual increase at a rate of between 12% and 15% as a result of a
cumulative return to one of the limited partners of the Cambridge
Landlord). In the case of a sale or refinancing of the property, after
payment of the priorities described in the preceding sentence, the
Company would be entitled to a return of its capital contribution and,
thereafter, to its pro rata share of the remaining funds available for
distribution. The Company has the right, at any time prior to February
2000 to sell the Partnership Interest back to certain limited partners of
the Cambridge Landlord for a price equal to the greater of (i) the total
paid for the Partnership Interest ($5,450,000) or (ii) the fair market
value of the Partnership Interest at the time. The assets of these
limited partners are limited to their investment in the Cambridge
Landlord.
Future approximate minimum rent payments as of December 31, 1997,1998,
under theexisting lease agreements through 2012 discussed above,2007, net of sublease
agreements are as follows:
CALENDAR YEAR AMOUNTDecember 31, Amount
------------ ------
1999 $ 614,000
2000 784,000
2001 1,213,000
2002 1,209,000
2003 1,213,000
Thereafter 2,338,000
---------------
$ 7,371,000
===============
F-26
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
$ 2,275,000
1999 2,831,000
2000 4,248,000
2001 4,677,000
2002 4,991,000
Thereafter 40,586,000
-----------
$59,608,000
===========(Continued)
During 1995, 1996, 1997 and 1997,1998, facility rent expense net of sublease
revenue was approximately $2,142,000, $2,352,000, $4,613,000 and $4,613,000,$3,871,000,
respectively.
F-30
103
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(a) Consulting(b) Related-Party Agreements with Affiliates of Stockholders and
Directors
The Company has entered into consulting agreements, stock
placement agreements and an advisory agreement with several
companies that are controlled by two shareholders and directors
of the Company. The terms of the agreements with the affiliated
companies,Company including Forum, S.A. Pillar Investment N.V.
(Pillar Investment), Pillar S.A. (formerly Commerce Consult S.A.)
and Pillar Investment Limited (formerly Ash Properties Limited)
(Pillar Limited), are
described below.
In March 1994, the Company entered into a consulting agreement
with Pillar S.A., which was amended in March 1995 (the 1994 Pillar
Consulting Agreement). Under the 1994 Pillar Consulting Agreement,
the Company agreed to pay to Pillar S.A. cash compensation for
financial advisoryDuring 1996, 1997 and managerial services in connection with the
Company's overseas operations, including support services in
connection with contracts, agreements and arrangements with the
Agence Nationale de Recherches sur le SIDA (ANRS), and for
overhead costs and reimbursement of certain authorized
out-of-pocket expenditures. The Company is committed to pay Pillar
S.A. a monthly fee of approximately $96,000 with respect to this
agreement. The agreement expires on February 28, 1998, as amended.
During 1995, 1996 and 1997, the Company had
expensed $1,226,000,
$1,106,000, $998,000 and $998,000$1,300,000, respectively, under
this consulting agreement,
respectively.
In connectionand advisory agreements with the 1994 Pillar Consulting Agreement, the
Company issued to Pillar S.A. two, five-year warrants to purchase
up to 40,000 shares of the Company's common stock. The first
warrant was issued on March 1, 1994 at an exercise price of $50.00
per share and will expire on February 28, 1999 and is fully
exercisable as of December 31, 1997. The second warrant was issued
on March 1, 1995 at an exercise price of $37.50 per share and will
expire on February 28, 2000 and is fully exercisable as of
December 31, 1997.
All of the warrants issued to Pillar S.A. under the 1994 Pillar
Consulting Agreements and certain other warrants previously issued
to Pillar S.A. provide that within 15 days after the date of any
exercise, in full or in part, Pillar S.A. will pay to the Company
an amount in cash equal to the lesser of (i) 50% of all amounts
paid to Pillar S.A. as compensation under the various Pillar S.A.
consulting agreements and (ii) the positive difference, if any,
between the aggregate fair market value of the shares of common
stock purchased upon such exercise and the aggregate exercise
price for such shares.
On September 9, 1994, the Company entered into modifications to
its arrangements with Pillar S.A. and its affiliates, including:
(i) a reduction in the exercise price of certain warrants
previously issued to $50.00 per share; (ii) an amendment to the
terms of each of the warrants issued to Pillar S.A. and its
affiliates described above to provide for cashless exercise in
connection with a sale or change in control of the Company; (iii)
a grant of additional five-year warrants (the Additional Pillar
Warrants) to purchase 22,800 shares of Common Stock at an
F-31
104
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
exercise price of $50.00 per share; and a right of first
negotiation for Pillar S.A. to provide seed financing for any
spin-offs by the Company which do not involve or relate to
antisense therapeutic compounds.
On July 8, 1995, the Company entered into an agreement (the Pillar
Europe Agreement) with Pillar S.A. pursuant to which Pillar S.A.
agreed to provide to the Company certain consulting, advisory and
related services and serve as the Company's exclusive agent in
connection with potential corporate partnerships in Europe and as
a nonexclusive placement agent of the Company in connection with
future private placements of securities of the Company for a
period of two years. As discussed below, the Pillar Europe
Agreement was significantly amended on November 1, 1995.
The Company and Pillar S.A. agreed to modify the Pillar Europe
Agreement to provide that (i) Pillar would cease to serve as the
Company's exclusive agent in connection with potential corporate
partnerships in Europe but would continue to serve as a
nonexclusive agent in such respect; (ii) Pillar would receive a
retainer of $26,470 per month for the balance of the term of the
Pillar Europe Agreement; (iii) certain fees to be received by
Pillar in connection with European license or collaboration
agreements would only be payable to Pillar in connection with
potential collaborations with five specified French pharmaceutical
companies; and (iv) any compensation payable to Pillar S.A. in
connection with its services with respect to other corporate
collaborations or any placements of securities would be negotiated
on a case-by-case basis and would be subject to the approval of
the independent members of the Board of Directors of the Company.
In consideration of such modification, the Company paid Pillar in
1995 a fee totaling $300,000.
Pillar Limited acted as a placement agent for the Company for
certain sales of convertible preferred stock outside the United
States and, in addition, provided the Company with certain
financial advisory services with respect to the sale of such
preferred stock outside the United States. In connection with such
services, Pillar earned fees of $492,604 and $2,020,751 during
1994 and 1995, respectively. Pillar received payment for such fees
through $2,435,883 of cash payments and through the issuance of
five-year warrants for the purchase of 438,267 shares of common
stock at $50.00 per share, expiring on various dates beginning on
July 14, 1998 through October 25, 2000.
(b)parties.
(c) Other Research and Development Agreements
The Company has entered into consulting and research agreements
with the universities, research and testing organizations and
individuals, under which consulting and research support is
provided to the Company. These agreements are for varying terms
through
F-32
105
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and provide for certain minimum annual or per diem fees plus
reimbursable expenses to be paid during the contract periods.
Future minimum fees payable under these contracts as of December
31, 19971998 are approximately as follows:
CALENDAR YEAR AMOUNT
1998December 31, Amount
------------ ------
1999 $ 253,000
1999 129,000
---------582,000
2000 392,000
2001 279,000
---------------
$ 382,000
=========1,253,000
===============
Total fees and expenses under these contracts were approximately
$5,470,000, $7,171,000, $9,372,000 and $9,372,000$2,011,000 during 1995, 1996, 1997 and 1997,1998,
respectively.
(c)(d) Employment Agreements
The Company has entered into employment agreements with certain of its
executive officers which provide for, among other things, each
officer's annual salary, cash bonus, fringe benefits, and
vacation and severance arrangements. Under the agreements, the
officers are generally entitled to receive severance payments of
two to three year's base salary.
(16)F-27
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(e) Contingencies
From time to time, the Company may be exposed to various types of
litigation. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's financial condition or
results of operations.
(17) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1997,1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately
$205,997,000$219,993,000 and $3,436,000,$3,936,000, respectively, available to reduce federal
taxable income and federal income taxes, respectively. The Tax Reform
Act of 1986 (the Act), enacted in October 1986, limits the amount of net
operating loss and credit carryforwards that companies may utilize in
any one year in the event of cumulative changes in ownership over a
three-year period in excess of 50%. The Company has completed several
financings since the effective date of the Act, which, as of December
31, 1997,1998, have resulted in ownership changes in excess of 50%, as
defined under the Act.Act and which will limit the Company's ability to
utilize its net operating loss carryforwards. Ownership changes in
future periods may limitplace additional limits on the Company's ability to
utilize net operating loss and tax credit carryforwards.
F-33
106
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The federal net operating loss carryforwards and tax credit
carryforwards expire approximately as follows:
NET
OPERATING LOSS TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDSNet
Operating Loss Tax Credit
Expiration Date Carryforwards Carryforwards
--------------- ------------- -------------
December 31,
2005 $ 666,000 $ 15,000
2006 3,040,000 88,000
2007 7,897,000 278,000
2008 18,300,000 627,000
2009 25,670,000 689,000
2010 36,134,000 496,000
2011 44,947,000 493,000
2012 69,343,00060,087,000 750,000
------------- -----------2018 23,252,000 500,000
------------ ------------
$219,993,000 $ 205,997,000 $ 3,436,000
============= ===========
The3,936,000
============ ============
F-28
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
At December 31, 1997 and 1998, the components of the deferred tax amounts, carryforwards and the
valuation allowanceassets
are approximately as follows:
DECEMBER 31,
1996 1997 1998
---- ----
Operating loss carryforwards $ 54,661,00078,696,000 $ 82,399,00087,997,000
Temporary differences 1,325,000 5,243,0005,137,000 2,677,000
Tax credit carryforwards 2,686,000 3,436,000 3,936,000
------------ ------------
58,672,000 91,078,00087,269,000 94,610,000
Valuation allowance (58,672,000) (91,078,000)(87,269,000) (94,610,000)
------------ ------------
$ --- $ ---
============ ============
A valuation allowance has been provided, as it is uncertain ifmore likely than not
the Company will not realize the deferred tax asset. The net change in
the total valuation allowance during 19971998 was an increase of
approximately $32,406,000.
F-34
107
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(17)$7,341,000.
(18) EMPLOYEE BENEFIT PLAN
On October 10, 1991, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows employees
to make contributions up to a specified percentage of their
compensation. Under the plan, the Company may, but is not obligated to,
match a portion of the employees' contributions up to a defined maximum.
The Company is currently matching 50% of employee contributions to the
plan, up to 6% of the employee's annual base salary, and charged to
operations approximately $125,000, $224,000, $253,000 and $253,000 during 1995, 1996,
1997 and 1997,1998, respectively.
F-35
108
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18)(19) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The accompanying consolidated financial statements include the followingSupplemental disclosure of cash flow information:information for the three years in
the period ended December 31, 1998 are as follows:
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989)
--------------DECEMBER 31------------- TO DECEMBER 31,
1995 1996 1997 19971998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 172,757124,052 $ 124,052 $3,264,596 $3,630,450
============ ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:3,264,596 $ 1,666,127
============== ============== ===========
Purchase of property and equipment under capital leases $ 90,562 $1,722,333 $2,374,502 $5,604,370
============ ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of Series C convertible preferred
stock in exchange for convertible
promissory notes1,722,333 $ --2,374,502 $ -- $ -- $1,700,000
Issuance of Series D convertible preferred
stock in exchange for convertible -- -- -- 9,382,384
promissory notes and accrued interest
Issuance of Series E convertible preferred
stock in exchange for subscriptions
receivable -- -- -- 555,117
Issuance of Series F convertible preferred -- -- -- 2,535,000
stock in exchange for subscriptions
receivable -- -- -- 2,535,000
Issuance of Series G convertible preferred
stock in exchange for subscriptions
receivable -- -- -- 906,016
Issuance of convertible promissory notes
in exchange for subscriptions receivable -- -- -- 937,000
Issuance of stock warrants in exchange for
deferred financing costs -- -- 238,000
Cancellation of warrants and reduction of
deferred financing costs -- -- -- 68,000-
============== ============== ===========
Conversion of preferred stock into common stock --$ 159,822 -- 159,822$ - $ -
============== ============== ===========
Deferred compensation related to grants of stock options to $ 1,967,116 $ 205,978 $ 109,734
nonemployees, net of terminations ============== ============== ===========
F-29
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Issuance of Series A convertible preferred stock and attached $ - $ - $51,055,850
warrants in exchange for conversion of 9% convertible ============== ============== ===========
subordinated notes payable and accrued interest
Accretion of Series A convertible preferred stock dividends $ - $ - $ 2,689,048
============== ============== ===========
Issuance of common stock and attached warrants in exchange $ - $ - $ 4,800,000
for services
rendered -- -- 146,874 146,874
Deferred compensation related to
restrictedconversion of convertible promissory notes payable ============== ============== ===========
Issuance of common stock awards and grantattached warrants in exchange $ - $ - $ 5,934,558
for conversion of stock options -- 1,967,116 205,978 6,751,286accounts payable and other obligations ============== ============== ===========
F-36(20) RESTATEMENT
In March 1999, the Company restated its June 30, 1998 and September 30,
1998 financial statements to reflect the accretion on the Series A
convertible preferred stock, and record $600,000 of general and
administrative expense for the 300,000 shares of common stock that
Pillar is entitled to receive in connection with its efforts in
assisting the Company in restructuring its balance sheet.
(21) ORIGENIX TECHNOLOGIES, INC.
In January 1999, the Company and certain institutional investors formed
a Montreal company, OriGenix Technologies Inc. (OriGenix), to develop
and market drugs for the treatment of infectious diseases.
The Company received a 49% interest in OriGenix in consideration of
certain research and development efforts previously undertaken by the
Company which were made available to OriGenix. The Company has also
licensed certain antisense compounds and other technology to OriGenix.
If certain conditions are satisfied by OriGenix, the institutional
investors are committed to make an additional investment, at which time
the Company's ownership interest in OriGenix will be reduced 40%. The
institutional investors acquired a 51% interest in OriGenix for a total
of approximately $4.0 million. The Company will account for its
investment in OriGenix under the equity method.
F-30
109
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.13.1(1) Restated Certificate of Incorporation of the Registrant, as amended.
3.2*3.2(2) Amended and Restated By-Laws of the Registrant.
3.3###3.3(3) Form of Certificate of Designation of Series A Preferred Stock.
3.4###3.4(3) Form of Certificate of Designation of Series B Preferred Stock.
4.1*4.1(2) Specimen Certificate for shares of Common Stock, $.00l$.001 par value, of
the Registrant.
4.2#4.2(4) Indenture dated as of March 26, 1997 between Forum Capital Markets
L.P.LLC and the Registrant.
+10.1*4.3(7) Certificate of Designation of Series A Preferred Stock, par value
$.01 per share, dated May 5, 1998.
4.4(7) Class A Warrant Agreement dated May 5, 1998.
4.5(7) Class B Warrant Agreement dated May 5, 1998.
4.6(7) Class C Warrant Agreement dated May 5, 1998.
4.7(7) Class D Warrant Agreement dated May 5, 1998.
+10.1(2) License Agreement dated February 21, 1990 and restatedrestaged as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2*+10.2(2) Patent License Agreement dated September 21, 1995 between the
Registrant and National Institutes of Health.
+10.3*+10.3(2) Patent License Agreement effective as of October 13, 1994 between
the Registrant and McGill University.
+10.4*+10.4(2) License Agreement effective as of October 25, 1995 between the
Registrant and Thethe General Hospital Corporation.
+10.5*+10.5(2) License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6*+10.6(2) Collaborative Study Agreement effective as of December 30, 1992
between the Registrant and Medtronic, Inc.
+10.7*
+10.7(2) System Design and Procurement Agreement dated as of December 16,
1994 between the Registrant and Pharmacia Biotech, Inc.
10.8*10.8(2) Lease dated March 10, 1994 between the Registrant and Laborer's
Pension/Milford Investment Corporation for space located at 155
110155.
Fortune Boulevard, Milford, Massachusetts, including Note in the
original principal amount of $750,000.
10.9* Lease dated February 4, 1994 between the Registrant and
Charles River Building Limited Partnership for space located
at 620 Memorial Drive, Cambridge, Massachusetts.
10.10* Series G Convertible Preferred Stock and Warrant Purchase
Agreement dated as of September 9, 1994 among the Registrant
and certain Purchasers, as amended (the "Series G Agreement").
10.11*10.9(2) Registration Rights Agreement dated as of February 21, 1990 between
the Registrant, the Worcester Foundation for Biomedical Research,
Inc. and Paul C. Zamecnik.
10.12*10.10(2) Registration Rights Agreement dated as of June 25, 1990 between the
Registrant and Nigel L. Webb.
10.13*10.11(2) Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.14*10.12(2) Registration Rights Agreement dated as of February 6, 1992 between
the Registrant and Anthony J. Payne.
++10.15*10.13(2) 1990 Stock Option Plan, as amended.
++10.16*10.14(2) 1995 Stock Option Plan.
++10.17*10.15(2) 1995 Director Stock Plan.
++10.18*10.16(2) 1995 Employee Stock Purchase Plan.
10.19*10.17(2) Form of Warrant to purchase shares of Series C Convertible
Preferred Stock originally issued to Pillar Investment Limited
(formerly known as Ash Properties Limited), as amended.
10.20* Form of Warrant to purchase shares of Common Stock issued in
connection with the issuance of the Registrant's series of
notes known as its 10% Convertible Subordinated Notes due
September 16, 1993 and the Registrant's 10% Convertible
Subordinated Note Due March 19, 1993, as amended.
10.21* Warrant issued to Pillar S.A. to purchase up to 175,000 shares
of Common Stock dated as of December 1, 1992, as amended.
111
10.22* Form of Warrant originally issued to Pillar Investment Limited
to purchase 427,126 shares of Common Stock dated as of
February 15, 1993, as amended.
10.23* Form of Warrant originally issued to Pillar Investment Limited
to purchase 350,000 shares of Common Stock dated as of
February 15, 1993, as amended.
10.24* Warrant issued to Pillar Investment Limited to purchase
500,000 shares of Common Stock dated as of February 4, 1994,
as amended.
10.25* Form of Warrant issued to Pillar Investment Limited to
purchase shares of Common Stock issued as placement commissions in
connection with the sale of shares of Series F Convertible Preferred
Stock and in consideration of financial advisory services,service, as
amended.
10.26*10.18(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1994, as amended.
10.27* Form of Warrant to purchase shares of Common Stock issued as
part of the Units (as defined in the Series G Agreement)
issued and sold to investors pursuant to the Series G
Agreement on or prior to March 31, 1995, as amended.
10.28* Form of Warrant to purchase shares of Common Stock issued as
part of the Units issued and sold to investors pursuant to the
Series G; Agreement after March 31, 1995.
10.29*10.19(2) Warrant issued to Pillar S.A. to purchase 100,000 shares of Common
Stock dated as of March 1, 1995.
10.30*10.20(2) Form of Warrant issued to Pillar Investment Limited to purchase
shares of Common Stock issued as placement commissions in connection
with the sale of Units pursuant to the Series G Agreement.
++10.31***10.21(5) Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.32*10.22(2) Indemnification Agreement dated as of February 6, 1992 between the
Registrant and E. Andrews Grinstead, III.
++10.33**10.23(6) Employment Agreement dated March 1, 1997 between the Registrant and
Dr. Sudhir Agrawal.
112
++10.34*10.24(2) Consulting Agreement dated as of February 21, 1990 between the
Registrant and Dr. Paul C. Zamecnik.
10.35* Consulting Agreement dated as of March 1, 1994 between the
Registrant and Pillar S.A.
10.36* Consulting Agreement dated as of July 8, 1995 between the
Registrant and Pillar S.A., as amended.
10.37*10.25(2) Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
10.38* First Amendment to Lease dated as of November 30, 1995 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
+10.39**+10.26(6) Research, Development and License Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
+10.40**+10.27(6) Manufacturing and Supply Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.41**10.28(6) Registration Rights Agreement dated as of January 24, 1996 between
the Registrant and G.D. Sear1eSearle & Co.
10.42** Second Amendment to Lease dated as of February 23, 1996
between the Registrant and Charles River Building Limited
Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.43** Third Amendment to Lease dated as of February 28, 1996 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.44*** Fourth Amendment to Lease dated as of July 25, 1996 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.45*** Fifth Amendment to Lease dated as of March 14, 1997 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.46***10.29(5) Loan and Security Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank (the "Silicon
Agreement").
113
10.47***Bank.
10.30(7) First Amendment to Loan and Security Agreement dated March 30, 1998
between Hybridon, Inc. and Silicon Valley Bank.
10.31(8) Second Amendment to Loan and Security Agreement dated May 19, 1998,
effective as of April 30, 1998, between Hybridon, Inc. and Silicon
Valley Bank.
10.32(9) Third Amendment to Loan and Security Agreement dated September 18,
1998 between Hybridon, Inc. and Silicon Valley Bank.
10.33(9) Fourth Amendment to Loan and Security Agreement dated October 30,
1998, effective as of September 29, 1998 between Hybridon, Inc. and
Silicon Valley Bank.
10.34 Fifth Amendment to Loan and Security Agreement dated December 4,
1998 between Hybridon, Inc. and Silicon Valley Bank.
10.35(5) Warrant issued to Silicon Valley Bank to purchase 65,000 shares of
Common Stock dated as of December 31, 1996.
10.48***10.36(5) Registration Rights Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
10.49*** Master Equipment Lease Agreement dated as of October 25, 1996
between the Registrant and Finova Technology Finance, Inc.
+++10.50***+10.37(5) Supply and Sales Agreement dated as of September 1, 1996 between the
Registrant and P.E. Applied Biosystems.
10.51#10.38(2) Registration Rights Agreement dated as of March 26, 1997 between
Forum Capital Markets L.P.LLC and the Registrant.
10.52#
10.39(2) Warrant Agreement dated as of March 26, 1997 between Forum Capital
Markets L.P.LLC and the Registrant.
+++10.53##+10.40(6) Amendment No. 1 to License Agreement, dated as February 21, 1990 and
restated as of September 8, 1993, by and between the Worcester
Foundation for Biomedical Research, Inc. and the Registrant, dated
as of November 26, 1996.
10.54##10.41(10) Letter Agreement dated May 12, 1997 between the Registrant and
Pillar S.A. amending the Consulting Agreement dated as of March 1,
1994 between the Registrant and Pillar S.A.
10.55##10.42(10) Amendment dated July 15, 1997 to the Series G Convertible Preferred
Stock and Warrant Purchase Agreement dated as of September 9, 1994
among the Registrant and certain purchasers, as amended.
10.56## Sixth Amendment to Lease dated April 1997 between the
Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.5710.43(1) Consent Agreement dated January 15, 1998 between Silicon Valley Bank
and the Registrant relating to the Silicon Agreement.
10.58### Form of Unit Purchase10.44(11) Letter Agreement (the "Unit Purchase
Agreement") in connection with the sale of Notes due 2007 by
and amongbetween the Registrant and certain purchasers.
10.59### Form of Notes due 2007Forum Capital Markets
LLC and Pecks Management Partners Ltd. for the purchase of the Loan
and Security Agreement with Silicon Valley Bank.
10.45(7) Financial Advisory Agreement between Registrant issued to or issuable
pursuant to the Unit Purchase Agreement.
114
10.60### Formand Pillar
Investments Ltd. dated May 5, 1998.
10.46(7) Placement Agency Agreement between Registrant and Pillar Investments
Ltd. dated as of Warrants of the Registrant issued or issuable purusant
to the Unit Purchase Agreement.
21.*January 15, 1998.
+++10.47 Licensing Agreement dated March 12, 1999 by and between Hybridon,
Inc. and Integrated DNA Technologies, Inc.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31, 1997
27.2 Financial Data Schedule [EDGAR]1998
- Year Ended------------------------------------------------
(1) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
- ----------
*1997.
(2) Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-99024).
**(3) Incorporated by reference to Exhibit 9(a)(1) to the Registrant's
Schedule 13E-4 dated February 6, 1998.
(4) Incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated April 2, 1997.
(5) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
***(7) Incorporated by reference to Exhibits to the Registrant's AnnualQuarterly
Report on Form 10-K10-Q for the yearperiod ended DecemberMarch 31, 1996.
#1998.
(8) Incorporated by reference to Exhibits to the Registrant's CurrentQuarterly
Report on Form 8-K dated April 2, 1997.
##10-Q for the period ended June 30, 1998.
(9) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1998.
(10) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
###(11) Incorporated by reference to Exhibit 9(a)(1)Exhibits to the Registrant's
Schedule 13E-4 dated February 6, 1998.Registration Statement on Form S-1 (File No. 333-69649).
+ Confidential treatment granted as to certain portions, which
portions are omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to thisthe Annual Report on Form 10-K.10-K for the
year ended December 31, 1997.
+++ Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.