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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27352
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HYBRIDON, INC.
(Exact name of Registrant as specified
in its certificate of incorporation)
Delaware 04-3072298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Fortune Blvd.
Milford, Massachusetts 01757
(Address of principal executive offices) (Zip Code)
(508) 482-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 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 (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 [ ]
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. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $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 registrant had 15,306,825 shares of Common Stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13 of
with respect to the Annual Meeting of Part III.
Stockholders to be held on June 8, 1999.
HYBRIDON, 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
i
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
ii
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
HYBRIDON
Hybridon, established in 1989, is a leader in the discovery and development of
genetic drugs. These drugs are based on "antisense" technology which uses
synthetic RNA and DNA that are designed to treat the underlying cause of disease
by stopping or reducing the body's production of 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 some
instances, the proteins act directly to cause or support a disease. In other
instances, the proteins interfere with other proteins that prevent or combat
disease. Traditional drugs are designed to interact with protein molecules that
support or cause diseases. Antisense drugs are designed to work at an earlier
state to stop the production 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 form 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 strands 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
2
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 in 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 made, 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 drugs are designed to intervene in the production of proteins,
rather than intervening after the proteins are made, and in a highly specific
and more selective fashion.
Conventional Drugs
Most drugs are chemicals that stimulate or stop the function of a
particular molecule, usually 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 other proteins as
possible causes fewer side effects.
Conventional drugs are not well tolerated for the treatment of many
diseases because of their relatively low level of selectivity, thus producing
more side effects. Conventional drugs bind only a few, generally two or three,
points of the target molecule. Frequently, sites on other non-target molecules
resemble the target binding site enough to permit the conventional drug to bind
to some degree to the non-target molecules. This lack of selectivity may result
in decreased effectiveness of the drug because of unwanted side effects.
In addition, the development of conventional drugs is generally time
consuming and expensive, as thousands of compounds must be made to find the most
effective drug with the fewest side effects.
3
Antisense Drugs
In contrast to conventional drugs, antisense drugs regulate the actual
production of proteins. Advances in the human genome project, including work
conducted by academic institutions, biotechnology companies and pharmaceutical
companies, have identified many targets for antisense drugs. Once a gene
associated with a disease-associated protein is identified, an antisense
oligonucleotide can be designed and its pharmaceutical effects can be improved
by chemical modification. Chemically-modified oligonucleotides may be composed
of DNA, RNA or a combination of the two.
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 40 and 60. Thus, the oligonucleotide will form a strong
bond with the messenger RNA read from the selected gene. A few identical
messenger RNA molecules may cause the cell to produce many copies of a protein;
nonetheless, a few identical chemically-modified antisense oligonucleotides may
stop this process. Moreover, an enzyme called RNaseH has been found that can
destroy the messenger RNA that binds the oligonucleotide. This occurs without
destroying the oligonucleotide itself, thus freeing the oligonucleotide to bind
with other identical messenger RNA molecules and cause destruction of these
molecules as well. This is called catalytic activity. All of Hybridon's drugs
are designed to take advantage of this catalytic activity so that a relatively
small number of antisense molecules can effectively inhibit production of
disease-associated proteins.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries, analytical chemistry and manufacturing
technology. The development of Hybridon's antisense chemistry has been directed
by Dr. Sudhir Agrawal, Hybridon's Chief Scientific Officer. 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 Hybridon.
Currently, Dr. Zamecnik is a Professor Emeritus at Harvard Medical School and
has a research affiliation with the Massachusetts General Hospital in Boston.
Medicinal Chemistries. Hybridon's first antisense drug, GEM 91, which
was based on its first-generation phosporothioate chemistry and differed 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 the administration of this modified DNA into the body. In
particular, in the last clinical trial of 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 made over twenty families of
advanced oligonucleotide chemistries including DNA/RNA combinations, also called
hybrid or mixed backbone chemistries. Hybridon believes that antisense compounds
based on these advanced chemistries will show favorable pharmaceutical
characteristics; thus significantly increasing their potential therapeutic
value. These compounds are likely to have the following properties:
o catalytic activity;
o fewer side effects;
o more stable in the body enabling a patient to take
doses less frequently;
o more 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. Hybridon's expertise in the synthesis of
chemically modified oligonucleotides has served as the foundation of its
manufacturing technology and know-how. Hybridon has developed proprietary
technology, including equipment, to increase the purity of its oligonucleotides,
improve the efficiency of the production process, increase the scale of
production and reduce the cost of drug compounds significantly.
Proprietary Analytical Tools. Hybridon has established analytical tools
and processes that enable it to test the purity of oligonucleotides more quickly
and accurately than traditional methods. Hybridon uses the information that it
obtains with its tools and processes to improve quality control, to comply with
regulatory requirements and to monitor absorption and stability of its drugs in
preclinical 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 Drug 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
antisense compounds which incorporate its advanced chemistries for the treatment
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 radiation 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 for each of its
compounds in development. Hybridon 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 other programs described below beyond
their current stages of development without a collaborative arrangement with a
corporate partner.
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 is
found in, and is necessary to the 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 stop the 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 study that has evaluated the
safety of GEM 231 at multiple doses and found it to be well tolerated. The
maximum tolerated dose of GEM 231 was established for both single doses and
multiple doses. Even high doses of GEM 231 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 solid tumors which had not
responded to prior therapy. In addition to continuing to evaluate GEM 231 as a
single-agent therapy, Hybridon plans to conduct small Phase II studies in at
least two types of solid tumors using GEM 231 in combination with radiation or
other anti-tumor agents, such as Taxol.
HIV-1 and AIDS
AIDS is caused by infection with the HIV-1 virus and leads to severe,
life-threatening impairment of the immune system. AIDS therapy using a
combination of drugs has resulted in decreased rates of death and improvements
in the quality of life for patients with AIDS.
8
However, there are increasing reports that this therapy may be failing to give
sustained clinical benefit. Hybridon believes this underscores the need for new
AIDS therapies.
Hybridon has completed a pilot Phase I clinical study in Europe of GEM
92, Hybridon'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 absorption of GEM 92 after oral dosing and injection. All
doses given in the pilot study were well tolerated. Further, GEM92 was detected
in the blood after both oral dosing and injection, suggesting that it may be
possible to develop GEM 92 as 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 United 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
132, Hybridon's advanced chemistry antisense oligonucleotide for the treatment
of CMV infection. No clinical studies with GEM 132 are currently ongoing and
none are currently planned. Hybridon will reevaluate the status of GEM 132
development should the current poor market conditions improve. A competitor of
Hybridon 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 Origenix 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 MethylGene
to develop and market (i) antisense compounds to inhibit the protein DNA
methyltransferase for the treatment of any disease, (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any disease and (iii)
antisense compounds to inhibit up to two additional targets for the treatment of
cancers. DNA methyltransferase is a protein that has been shown to be
overproduced in some tumors, such as small cell lung cancer, colon cancer and
breast cancer. MethylGene is obligated to purchase from Hybridon all formulated
oligonucleotides that MethylGene requires at specified prices. Hybridon is also
performing drug development and other services for MethylGene.
10
The Canadian investors who initially invested in MethylGene 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 U.S.
$56.25) for one share of Hybridon Common Stock (subject to adjustment for stock
splits, stock dividends and the like). This option expires 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 viral diseases. Hybridon owns approximately
49% of OriGenix. If certain conditions are satisfied by OriGenix, the Canadian
investors are committed to make an additional investment, at which time
Hybridon's ownership interest in OriGenix will be reduced to 40%.
Hybridon has granted to OriGenix worldwide exclusive licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human 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 liver. In the future, OriGenix may negotiate with
Hybridon for additional targets. In addition, OriGenix is obligated to purchase
from Hybridon all bulk oligonucleotides it requires at specified prices.
Hybridon anticipates that it will perform drug development and other services
for 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 these
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
collaboration agreement
11
as modified in April 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 funding certain
research and development efforts at Hybridon, and Searle and Hybridon have
committed personnel 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 Searle will contribute $50,000,000 in cash 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 (HSP)
In 1996, Hybridon formed HSP to manufacture oligonucleotide compounds
both for Hybridon's internal use and for sale to third parties. 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 strategy 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
facility, which Hybridon believes is the only facility capable of manufacturing
large commercial-scale oligonucleotides. HSP first began production of
oligonucleotide compounds for sale in June 1996 and had revenues of
approximately $1.1 million in 1996, $1.9 million in 1997 and $2.8 million in
1998. HSP's principal customers include Genta/JBL Scientific, LaJolla
Pharmaceuticals, Inc. and 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 addition, 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 process, which HSP believes may further lower its
production costs.
In 1996, Hybridon 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 to HSP, and Hybridon agreed to
purchase amidites from Perkin-Elmer for the manufacture of oligonucleotides sold
to such customers. 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.
HSP is targeting three market areas for oligonucleotides: antisense and
non-antisense therapeutics, diagnostics and genetic research. Within each area
there is a large number of potential products. HSP is currently manufacturing
oligonucleotides for diagnostics, therapeutics and genetic research.
The production of oligonucleotides is similar in many respects to the
chemical synthesis used to produce conventional drugs. However, unlike many
conventional drugs, antisense compounds used for different diseases can be made
with the same chemical building blocks using the same manufacturing processes
and equipment with minimal changes. As a result, the knowledge and experience
that HSP obtains manufacturing one oligonucleotide compound can be applied to
the manufacture of other oligonucleotide compounds for the treatment of other
diseases. This also allows several different compounds to be manufactured
14
in one facility, potentially reducing capital expenditures required in the
future and reducing the risks associated with building a plant for a single
designated drug compound.
HSP may need to increase its manufacturing capacity by adding more
oligonucleotide synthesizers in order to satisfy future internal and third-party
requirements. In addition, in order to successfully commercialize its drugs or
achieve satisfactory profit on sales, HSP may be required to reduce its
production costs. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Risk Factors -- HSP's Results May Be
Lower Than Currently Anticipated."
Hybridon believes that it is currently manufacturing oligonucleotides
according to FDA-required Good Manufacturing Practices (GMP). The FDA has not
formally inspected Hybridon's facility and procedures and Hybridon may need to
improve its procedures in the future as production increases. In 1997, HSP was
one of two biotechnology companies chosen to participate in the FDA's
Biotechnology PAI Pilot Initiative. This is a pilot program that allows FDA
regulatory officials to provide advice on compliance with FDA standards before
companies submit drug approval filings.
MARKETING STRATEGY
Hybridon plans to market the drugs it is developing either directly with
its own sales group or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. To market products
that will serve a large, geographically diverse patient population, Hybridon
expects to enter into licensing, distribution or partnering agreements with
pharmaceutical and biotechnology companies that have large, established sales
organizations. While Hybridon has developed general marketing strategies, it has
not begun to implement any of these 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 for specific
disease targets and other research activities in order to supplement its
internal research capabilities and to obtain access to the specialized knowledge
or expertise. In some cases Hybridon relies primarily upon outside
collaborators. Accordingly, termination of a collaborative research agreement
could result in the termination of the related research program.
In general, Hybridon's collaborative research agreements require
Hybridon to pay various amounts to support the research. Hybridon usually
provides the oligonucleotides,
15
which the collaborator then tests. If the collaborator creates any invention
during the course of his or her efforts, solely or jointly with Hybridon,
Hybridon generally has an option to negotiate an exclusive, worldwide,
royalty-bearing license to the 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 nonexclusive
and can be cancelled on short notice.
Since July 1997, as part of its restructuring, Hybridon has allowed a
number of its collaborative research agreements to expire and has terminated
certain others, but has maintained those which it believes 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 Hybridon's products, processes and know-how
is important to Hybridon's business. For that reason, Hybridon prosecutes and
aggressively enforces its patents and proprietary technology. Hybridon's policy
is to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
Hybridon also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
As of March 1, 1998, Hybridon owned or exclusively licensed 62 issued
U.S. patents, 9 issued foreign patents, 7 allowed U.S. patent applications, 2
allowed foreign applications and 63 other U.S. and 99 other non-U.S. patent
applications. The patents and applications cover various chemically advanced
oligonucleotides, target sequences, specific oligonucleotide products, methods
for making and purifying oligonucleotides, analytical methods and methods for
antisense treatment of various diseases. The patents expire at various dates
ranging from 2006 to 2015.
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 Foundation) ("U. Mass")
relating to oligonucleotides and 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 U. Mass cover antisense oligonucleotides as
new compositions of matter for stopping the replication of HIV. The other issued
U.S. patents include claims covering composition and uses of oligonucleotides
based on advanced chemistries, methods of oligonucleotide production,
compositions of certain modified oligonucleotides that are useful for diagnostic
tests or assays and methods of purifying oligonucleotides. The earliest
expiration of the patents licensed to Hybridon by U. Mass is 2006, when the HIV
Patent expires.
Hybridon also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including two U.S. patent applications
owned by McGill University relating to oligonucleotides and DNA
methyltransferase. Hybridon and Massachusetts General Hospital ("MGH") jointly
own one issued U.S. patent applicable to Alzheimer's disease. Hybridon holds an
exclusive license to MGH's interests under such patent.
Hybridon is a nonexclusive licensee of certain patents held by the
National Institutes of Health ("NIH") relating to oligonucleotide
phosphorothioates and a nonexclusive 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.
The U.S. Patent and Trademark Office (the "PTO") has informed Hybridon
that certain patent applications exclusively licensed by Hybridon from U. 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 phosphoro-thioates. An interference
proceeding is a proceeding in the PTO to determine who is the first to invent a
claimed invention, and thus who is entitled to a patent for the invention.
McDonnell Boehnen Hulbert & Berghoff, Hybridon's U.S. patent counsel, is of the
opinion that the U. 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 will be
declared, or if declared, as to the outcome thereof. If Hybridon were to lose
the interference, its nonexclusive license from the NIH of the NIH
phosphorothioate patents would not be affected.
The PTO has also declared a four-way interference involving two
additional U.S. patents relating to Hybridon'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 interference, and the settlement agreement
has been filed with the PTO for approval. In connection with the settlement,
Hybridon has obtained a license to certain 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
oligonucleotides which incorporate certain of Hybridon's advanced chemistries.
Under its licenses, Hybridon is obligated to pay royalties on its net
sales of products or processes covered by the licensed technology and in some
cases to pay a percentage of any sublicense income that Hybridon may receive.
These licenses impose various commercialization, sublicensing, insurance and
other obligations on Hybridon. Failure of Hybridon to comply with these
requirements could result in termination of the license.
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
prosecute their patent applications, Hybridon does not know whether any of the
applications will issue as patents or, if any patents are issued, whether they
will provide adequate proprietary protection. Since patent applications in the
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, was the first creator of inventions claimed by
pending patent applications or that Hybridon or any licensor, was the first to
file patent applications for such inventions. See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations -- Risk Factors --
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents May Not Provide
Adequate Protection."
Hybridon's competitors and other third parties hold issued patents and
pending patent applications relating to antisense and/or particular genetic
targets which could require Hybridon to change its products or processes, pay
substantial licensing fees or cease certain 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 "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors -- Hybridon May Be Unable To Obtain Or
Enforce Patents; Its Patents May Not Provide Adequate Protection." Previously,
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 appealed such decision. This appeal was dismissed on February 18,
1999.
Hybridon requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual is to be kept
confidential, subject to specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual are the
exclusive property of Hybridon. There is no assurance, however, that these
agreements will provide meaningful protection for Hybridon's trade secrets or
adequate remedies in the event of breach of 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 to gain access to certain technology.
Consistent with pharmaceutical industry and academic standards, 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
developments and results in order to commercialize products incorporating them.
There can be no assurance that Hybridon 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 Hybridon on an exclusive or nonexclusive
basis. See "Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
Hybridon's research, clinical development and production are regulated
for safety, effectiveness and quality by numerous governmental authorities in
the United States and other countries. Hybridon believes that it is in material
compliance with all applicable federal, state and foreign legal and regulatory
requirements. However, it is possible that legal or regulatory requirements may
change, which could have a material adverse effect on Hybridon's business or
results of operations.
FDA Approvals
In addition to product approvals by the FDA as described above, Hybridon
may be required to obtain a satisfactory inspection by the FDA covering
Hybridon's manufacturing facilities before a product manufactured by Hybridon
can be marketed in the United States. The FDA will review Hybridon's
manufacturing procedures and inspect its facilities and equipment for compliance
with GMP and other applicable rules and regulations. Any material
19
change by Hybridon in its manufacturing process, equipment or location would
necessitate additional FDA review and approval.
Other Regulation
In addition to regulations enforced by the FDA, Hybridon also is subject
to regulation under the Occupational Safety and Health Act and other present and
potential future federal, state or local regulations. In addition, because
Hybridon uses hazardous materials, chemicals, viruses and various radioactive
compounds, Hybridon'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 waste-water discharge. Although Hybridon believes that it complies with the
standards prescribed by applicable regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials. In the
event of such an accident, Hybridon could be held liable for any damages that
result. Any such liability could have a material adverse effect on Hybridon.
COMPETITION
Hybridon's proposed products will be competing with products developed
by third parties for the same diseases. Competition among these products will be
affected by, among other things, product efficacy, safety, reliability,
availability, price and patent protection. In addition, the speed at which
Hybridon can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market will be
an important competitive factor. Hybridon'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 funds to sustain it until commercial 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 regulation of gene expression, including antisense drugs.
Hybridon believes that the industry-wide interest in these technologies and
products will continue and will accelerate. It is possible that Hybridon's
competitors will succeed in developing products that are more effective than
Hybridon's or which would render Hybridon's technology and products obsolete or
noncompetitive. One competitor of Hybridon has recently received FDA approval to
market an antisense therapeutic product 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 Competitors Have Greater
Resources And Experience Than Hybridon." Furthermore, because of the fundamental
differences between
20
antisense and other technologies, there may be diseases for which such other
technologies are superior to 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 Hybridon. In addition,
many of these competitors have significantly greater experience than Hybridon 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, Hybridon's competitors may succeed in obtaining
regulatory approvals for products more rapidly than Hybridon. Furthermore, if
Hybridon 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 experience.
HSP also competes against a number of third parties. There is the
possibility 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 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. Hybridon may be
required to reduce the cost of its product offerings to meet competition. 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."
EMPLOYEES
As of March 31, 1999, Hybridon employed 51 individuals full-time, of
whom 20 held advanced degrees. Nineteen of these employees are engaged in
research and development activities and eight are employed in finance, corporate
development and legal and general administrative activities. In addition,
twenty-four of these employees are employees of HSP, of whom five are employed
in quality control. Many of Hybridon's management and professional employees
have had prior experience with pharmaceutical, biotechnology or medical products
companies. None of Hybridon's employees is covered by a collective bargaining
agreement, and management considers relations with its employees to be good.
ITEM 2. PROPERTIES
Hybridon leases its 36,000 square foot 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 a
third party under a sublease expiring September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could
have a material adverse effect on Hybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the
quarter ended December 31, 1998.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
The executive officers and significant employees of the Company as of
March 31, 1999 are as follows:
EXECUTIVE 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. From 1991 until its merger with another company in 1998, Mr.
Grinstead 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 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. 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 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 Biochemistry in 1978.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
------------------
From January 24, 1996 until December 2, 1997, Hybridon'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 Hybridon's
Common Stock.
On December 2, 1997, Hybridon's Common Stock was delisted from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Prices reflected on the NASD 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 Hybridon 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 NASD 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............................... 59.375 25.625
Third Quarter................................ 59.375 33.125
Fourth Quarter............................... 43.125 26.250
1997
- ----
First Quarter................................ $43.125 $28.125
Second Quarter............................... 35.625 25.000
Third Quarter................................ 28.125 7.500
Fourth 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
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on April 13, 1999 was $1.1875 per share.
(b) Holders
-------
The number of Common Stockholders of record on April 13, 1999 was 351.
(c) Dividends
---------
The dividend 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 does not expect to pay any dividends on its Common Stock or any cash
dividends on the Series A Preferred Stock in the foreseeable future. The
Indenture under which Hybridon issued its 9% Convertible Subordinated Notes (the
"9% Notes") on April 2, 1997 limits Hybridon'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, Hybridon is currently prohibited from paying cash dividends
under a $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, 1998, the Company did not
sell any securities that were not registered under the Securities Act of 1933,
as amended.
27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below 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,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Research and development................... $ 1,032 $ 1,186 $ 1,419 $ 945 $ 1,100
Product and service revenue................ -- -- 1,080 1,877 3,254
Royalty income............................. -- -- 62 48 --
Interest income............................ 135 219 1,447 1,079 148
------- ------- ------- ------- -------
1,167 1,405 4,008 3,949 4,502
Operating Expenses
Research and development................... 20,024 29,685 39,390 46,828 20,977
General and administrative................. 6,678 6,094 11,347 11,027 6,573
Interest................................... 69 173 124 4,536 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 -- -- -- -- 8,877
subordinated notes payable................. ------- ------- ------- ------- -------
Net 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 net loss per common share:
Loss per 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........................... 362 365 4,576 5,050 11,859
======== ======== ========== ========= =========
Balance Sheet Data:
Cash, cash equivalents and short-term
investments..................................... $3,396 $5,284 $ 16,419 2,202 5,608
Working capital (deficit)....................... (1,713) 210 8,891 (24,100) (5,614)
Total assets.................................... 11,989 19,618 41,537 35,072 16,536
Long-term debt, net of current portion.......... 1,522 1,145 9,032 3,282 6,473
9% Convertible Subordinated
Notes Payable................................... -- -- -- 50,000 1,306
Accumulated Deficit (67,794) (102,341) (149,194) (218,655) (238,448)
Total stockholders' equity (deficit)............ 4,774 12,447 22,855 (46,048) 2,249
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Hybridon is engaged in the discovery and development of genetic
medicines based on antisense technology. Hybridon commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, developing its manufacturing capabilities, and raising
capital. In order to commercialize its therapeutic products, Hybridon will need
to address a number of technological challenges and comply with comprehensive
regulatory requirements. All revenues received by Hybridon 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
HSP.
Hybridon has very limited cash resources and substantial obligations to
lenders, its real estate landlords, trade creditors, and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding by the
end of May 1999, it will be required to terminate its operations or seek relief
under applicable bankruptcy laws. Hybridon is currently 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.
In the Report of Independent Public Accountants set forth in Appendix A
attached to this Annual Report on Form 10-K, 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 has incurred cumulative losses from inception through December
31, 1998 of approximately $238.4 million. Hybridon implemented a restructuring
plan in the second half of 1997, which significantly reduced Hybridon's
operating expenses in 1998 from 1997 levels. However, Hybridon expects that its
research and development expenses will be significant in 1999 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.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements herein that are not statements of historical fact
may be deemed to be forward-looking statements. 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 Hybridon'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 "Risk Factors."
29
RESTRUCTURING PLAN
During the second half of 1997, Hybridon implemented a restructuring
plan to reduce expenditures on a phased basis in an effort to conserve its cash
resources. As part of this plan, in addition to terminating the development of
GEM 91, Hybridon reduced or suspended programs unrelated to its core advanced
chemistry antisense drug development programs. In addition, in 1997, Hybridon
terminated the employment of a substantial number of employees at its Cambridge
and Milford, Massachusetts and Paris, France facilities and substantially
reduced operations at its Paris, France office. In December 1999, Hybridon began
the final process of terminating all operations in Europe.
In 1997 Hybridon subleased a portion of each of its facilities in
Cambridge, Massachusetts (including a substantial portion of its former
headquarters). In June 1998, Hybridon relocated its headquarters from Cambridge,
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 Cambridge
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 actions, Hybridon was
relieved of its substantial lease obligations for the Cambridge facility,
subject to a continuing liability for any defaults which may arise under the
sublease.
RESULTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
Revenues
Hybridon had total revenues of $4.0 million in 1996, $3.9 million in
1997, and $4.5 million in 1998. During 1996, 1997 and 1998, Hybridon received
revenues from research and development collaborations of $1.4 million, $0.9
million and $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 by
Roche. Research and development collaboration revenues increased in 1998 from
1997, primarily due to Hybridon receiving certain payments under its license
agreement with MethylGene, Inc.
Product and service revenues were $1.1 million in 1996, $1.9 million in
1997 and $3.3 million in 1998. The increase in revenues in 1997 over those in
1996 resulted from a full year of operations for HSP, which commenced operations
in the third quarter of 1996. As of December 31, 1998, HSP had a backlog of $0.9
million. Hybridon anticipates filling this backlog in the first half of 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 and $0.1 million in 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 each year.
Research and Development Expenses
During 1996, 1997 and 1998, Hybridon expended $39.4 million, $46.8
million and $21.0 million, respectively, on research and development activities.
The increases in research and development expenses in 1997 from 1996
reflected increasing expenses related primarily to ongoing clinical trials of
Hybridon'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 Hybridon terminated
development of this compound. Research and development expenses also increased
in 1997 over 1996 due to significant increases in preclinical expenses incurred
to meet the filing requirements to initiate clinical trials of Hybridon's
product candidates in the 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 decreased in 1998 from 1997 due to the substantial reduction in the number
of employees engaged in research and development in 1998.
Patent expenses also remained at approximately the same level in 1998 as
1997 and 1996, as Hybridon continued to limit the scope of patent protection
that it sought as part of its effort to conserve its cash resources, while
prosecuting and maintaining key patents and patent applications.
31
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $11.3 million
in 1996, $11.0 million in 1997 and $6.6 million in 1998.
The decrease in general and administrative expenses in 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 general and administrative salaries and
related costs and in consulting expenses in the second half of 1997, which
carried over into 1998. Hybridon's facilities expense related to the general and
administrative area decreased significantly in 1998 as a result of its
relocation to Milford, Massachusetts. Facility costs in 1998 were 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.
Interest Expense
Interest expense was $0.1 million in 1996, $4.5 million in 1997 and $2.9
million in 1998. 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 equipment was reduced in May
1998, resulting in a reduction in interest expense.
The increase in interest expense in 1997 from 1996 reflected an increase
in Hybridon's debt outstanding associated with the issuance of the 9% Notes and
interest incurred on borrowings to finance the purchase of property and
equipment.
Restructuring Charge
As a part of its restructuring plan, Hybridon recorded an $11.0 million
restructuring charge in 1997 to provide for (i) the termination costs of certain
research programs and other 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 net realizable value.
Net Loss
As a result of the above factors, Hybridon incurred net losses before
extraordinary items of $46.9 million in 1996, $69.5 million in 1997 and $26.0
million in 1998. Hybridon had extraordinary income of $8.9 million in 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
Since inception, Hybridon has incurred significant losses which it has
funded through the issuance of equity securities, debt issuances, sales by HSP,
and through research and development collaborations and licensing arrangements.
During the year ended December 31, 1998, Hybridon utilized approximately
$21.5 million to fund operating activities and approximately $472,000 for
capital expenditures. The primary use of cash for operating activities was to
fund Hybridon's loss before extraordinary items of $26.0 million. Capital
expenditures during 1998 included amounts expended for the build-out and
equipping of Hybridon's corporate headquarters and primary research and
development laboratories in its leased manufacturing facility in Milford,
Massachusetts. Hybridon expects to purchase a minimal amount of capital
equipment in 1999 as part of its effort to conserve cash resources.
Cash Resources
Hybridon had cash and cash equivalents of $5.6 million at December 31,
1998. However, since that date, Hybridon has expended the majority of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On March 30, 1999, Hybridon's obligations
included $1.3 million principal amount of 9% Notes, a $6.0 million loan with
Forum Capital Markets, LLC and others, as described below, $0.5 million of notes
payable and approximately $2.4 million of accounts payable. Because of
Hybridon's financial condition, many trade creditors are only willing to provide
Hybridon with products and services on a cash on delivery basis.
Hybridon's ability to continue operations in 1999 depends on its success
in obtaining new funds in the immediate future. Hybridon is currently 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. However, there can be no assurance
that Hybridon will obtain any funds or as to the timing thereof. If the Company
is unable to obtain substantial additional new funding by 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 operations or seek relief under
applicable bankruptcy laws. It is also possible that Hybridon's creditors may
seek to commence involuntary bankruptcy proceedings against the Company.
33
Even if Hybridon obtains sufficient cash to fund its operations in 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 1999. Except for research and
development funding from Searle under its 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
and sold by HSP).
No assurance can be given that additional funds will be available to
fund operations for the balance of 1999 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.
Hybridon'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 HSP
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, Hybridon's
ability to establish and maintain collaborative academic and commercial
research, development and marketing relationships, its ability 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 FINANCING ACTIVITIES
On February 6, 1998, Hybridon commenced an offer to the holders of the
9% Notes to exchange the 9% Notes for Series A Preferred Stock and certain
warrants of Hybridon. On May 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
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 bank. The note contained certain financial covenants that
required Hybridon to maintain minimum tangible net worth and minimum liquidity
and prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 commencing on February 1, 1997 with a balloon payment of
the then remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make certain prepayments of principal during 1998, the
outstanding principal balance of the loan at November 16, 1998 was approximately
$2.8 million. The lender has granted Hybridon a waiver of compliance with the
minimum tangible net worth requirement at December 31, 1998 and March 31, 1999
and the minimum liquidity requirement at April 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 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 amount of the note to
$6,000,000. In addition, 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;
(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 7 of the Notes to Consolidated
Financial Statements.
Facility Leases
As of December 31, 1998, 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 $220.0 million and
$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 Hybridon'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.
Hybridon has completed several financings since the effective date of the Tax
Act,
35
which, as of December 31, 1998, have resulted in ownership changes in excess of
50%, as defined under the Tax 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 year 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 systems 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 end of the third quarter of 1999. Hybridon is currently evaluating all of
its internal computer systems and microprocessors in light of the Y2K 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 then upgrade or
otherwise modify its internal computer systems and microprocessors, to the
extent necessary. 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 significant 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 governmental authorities that Y2K problems
have the potential to disrupt global economies, that no business is immune from
the potentially far-reaching effects of Y2K problems, and that it is difficult
to predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that Y2K problems will have a material effect on
Hybridon's business even if Hybridon takes all appropriate measures to ensure
that it and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its
analysis to date will change, which could cause Hybridon's Y2K cost estimates
and target completion dates to change.
36
RISK FACTORS
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 Resources."
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 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, its real estate landlords, trade creditors and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding by the
end of May 1999, it will be forced to terminate its operations or seek relief
under applicable bankruptcy laws. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations -- General" and "-- Cash
Resources."
In 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 1999, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings, to support Hybridon's operations beyond 1999.
If adequate funds are not available, Hybridon may be forced to (1) further
curtail significantly one or more of its research, drug recovery or development
programs, (2) obtain funds through arrangements with collaborative partners or
others that may require Hybridon to relinquish rights to certain of its
technologies, drug
38
candidates or drugs, (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
ownership 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 the loan, 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. Hybridon
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 not 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 sell
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
risks of transactions in penny stocks. These requirements will likely have an
adverse effect on the market liquidity of Hybridon's securities, and therefore
on Hybridon's ability to raise funds, the ability of broker-dealers to sell
Hybridon's securities, and the ability of purchasers to sell any of their
Hybridon securities in the secondary market.
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents May Not Provide
Adequate Protection
Hybridon's success will depend to a large extent on its ability to (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 patents that protect its drugs is uncertain and involves
complex legal and factual questions.
39
To obtain a patent on an invention, one must be the 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 and
patent applications were the first to invent, or the first to file patent
applications for, those inventions. Furthermore, that Hybridon owns or licenses
pending or future patent applications does not mean that patents based on those
applications will ultimately be issued. Existing or future patents may be
challenged, infringed, invalidated, found to be unenforceable, or circumvented
by others. Hybridon's rights under any issued patents 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 Time-Consuming And Expensive Patent
Litigation; Adverse Decisions In 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 time-consuming and extremely expensive litigation regarding patents and other
intellectual property rights. Hybridon may be required to commence, or may be
made a party to, litigation relating to the scope and validity of its
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 may be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office (or similar proceedings in
foreign countries) and in International Trade Commission proceedings aimed at
preventing the importing of drugs that would compete unfairly with Hybridon
drugs. 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 unpatented proprietary information plays an
important role in Hybridon's business. Hybridon seeks to protect this
information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. If any of these agreements is
breached, Hybridon may be without adequate remedies. Also, Hybridon's trade
secrets may become known or be independently developed by competitors. This
could have a material adverse effect on Hybridon's business, and Hybridon may
need to engage in costly and time-consuming litigation to protect its
proprietary rights.
The Loss Of Key Members Of Management Could Be Damaging
Hybridon depends on the principal members of its management and
scientific staff, including E. Andrews Grinstead III, Hybridon's Chairman of the
Board, President and its Chief Executive Officer, and Sudhir Agrawal, Hybridon's
Senior Vice President of Discovery
40
and its Chief Scientific Officer. The loss of their services could have a
material adverse effect on 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 31, 1999, the number of employees of
Hybridon decreased from 213 to 51. As a result, Hybridon has lost significant
expertise, and must recruit and retain new scientific personnel to maintain 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 need for additional management personnel. Hybridon may not be able to
attract and retain 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. The failure to recruit and retain personnel could result in delays
in commercializing drugs, and could cause Hybridon to incur additional costs.
Hybridon Relies On Relationships With Research Institutions And Corporate
Partners, And Would Be Harmed By A Lack Of, Or The Termination 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 Hybridon can give no assurances that it will be able to develop and
maintain such relationships on acceptable terms. Hybridon 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 specialized knowledge or expertise. The
loss of any of these collaborative relationships could have a material adverse
effect on Hybridon'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 future may not be scientifically or commercially
successful. Hybridon may 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 HSP, Hybridon manufactures oligonucleotide compounds for sale to
others. The results of HSP will depend on the demand for and margins on these
drugs, which may be lower than Hybridon anticipates. HSP's results will also be
affected by the price and availability of raw materials.
41
Hybridon Faces Intense Competition, And Hybridon's Products Could Be Rendered
Obsolete; Many Of Hybridon's Competitors Have Greater Resources And Experience
Than Hybridon
Many companies are attempting to develop drugs similar to those Hybridon
proposes to develop. Some of these drugs are in clinical trials, and one has
received FDA approval and is being commercialized. In addition, there are other
drugs already available for the treatment of many of the diseases that
Hybridon's proposed drugs would treat. Any of these drugs may prove more
effective than those that Hybridon proposes to develop, and may gain or maintain
greater market acceptance.
Furthermore, biotechnology and related 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
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 Hybridon's competitors have substantially greater financial,
technical, and human resources than Hybridon, and have significantly greater
experience than Hybridon in preclinical studies, clinical trials, seeking
regulatory approval of new drugs, and manufacturing and marketing new drugs.
Hybridon's Manufacturing Capability May Be Adversely Affected By Problems With
Suppliers
Certain of the raw 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 able to secure an
adequate supply of these materials at an acceptable price. Also, due to
regulatory restrictions or other problems, Hybridon's suppliers may fail to
provide materials of acceptable quality.
Hybridon's Lack Of Marketing Experience Could Adversely Affect Its Ability To
Commercialize Its Drugs
Direct marketing of any of its proposed drugs would require a
substantial marketing staff and sales force supported by a distribution system.
Given that Hybridon currently has little experience in sales, marketing, or
distribution, Hybridon might not be able to undertake direct marketing of its
drugs in a cost-effective manner. The alternative -- co-marketing or other
licensing arrangements -- would allow Hybridon to avoid the significant cost
involved in direct marketing, but would require Hybridon to rely on the efforts
of others.
42
Hybridon Could Be Subject To Product Liability Claims For Which It Is Not Fully
Insured
Hybridon risks being the target of product liability claims alleging
that its drugs harm subjects or patients. Such claims could be asserted in
connection with Hybridon drugs used in clinical trials as well as those sold
commercially. Hybridon is covered against such claims by a product liability
insurance policy (subject to various deductibles), but such policies are
becoming increasingly expensive. Hybridon may not be able to maintain sufficient
coverage to protect it from incurring significant losses due to product
liability claims.
Hybridon Uses Hazardous Materials, And Could Be Held Liable For Damages In The
Event Of Accidental Contamination Or Injury
Hybridon's activities involve the controlled use of hazardous chemicals,
viruses, and radioactive compounds. Although Hybridon 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 cannot be completely eliminated. In the event
of such an accident, Hybridon could be held liable for any damages that result.
Restrictions On Third-Party Reimbursement Could Adversely Affect Hybridon's
Ability To Commercialize Its Drugs
Hybridon's ability to commercialize drugs successfully will depend in
part on the extent to which various third parties are willing to reimburse
patients for the costs of Hybridon's drugs and related treatments. These third
parties include government authorities, private health insurers, and other
organizations, such as health maintenance organizations. Third-party payors are
increasingly challenging the prices charged for medical products and services.
Accordingly, 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 alternatives. In addition, the trend toward
managed healthcare and government insurance programs could result in lower
reimbursement and reduced demand for Hybridon's drugs. Cost containment measures
instituted by healthcare providers and any general healthcare reform could
affect Hybridon's ability to sell drugs and may have a material adverse effect
on Hybridon. Hybridon may be forced to reduce its prices; this would in turn
adversely affect profitability.
Hybridon cannot predict what additional legislation or regulation
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what 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 safety 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 foreseeable future. Furthermore, the Indenture
pursuant to which the 9% Notes were issued limits Hybridon's ability to pay
dividends or make other distributions on the Common 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 year 1999. Hybridon's
exposure to this Y2K problem comes not only from its own 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 effect on Hybridon's business. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Year
2000."
44
Stock Ownership By Hybridon's Directors And Officers May Delay Or Prevent A
Change Of Control
Hybridon's directors and executive officers and their affiliates
beneficially own a significant percentage of Hybridon'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 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
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
None.
45
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF THE 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 8, 1999 (the "1999 Proxy
Statement"), under the caption "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 OFFICERS
The response to this item is contained in the 1999 Proxy Statement under
the caption "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
The response to this item is contained in the 1999 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
The response to this item is contained in the 1999 Proxy Statement under
the caption "Certain Relationships and Related Transactions," 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.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) Financial Statements. Reference is made to the Index to Consolidated
Financial Statements under Item 8 of this Annual Report on Form
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.
(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.
(b) Reports on Form 8-K. During the fourth quarter of 1998, the Company did
not file any reports on Forms 8-K.
(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed
identified.
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant, 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.
(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 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 to certain portions, which
portions are omitted and filed separately with the Commission.
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 31, 1997.
+++ Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.
52
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, 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
POWER 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.
Signatures Titles Date
/s/ E. Andrews Grinstead, III Chairman, Chief Executive April 15, 1999
- ----------------------------- Officer and Director
E. Andrews Grinstead, III
/s/ Robert G. Andersen Treasurer (Principal April 15, 1999
- ----------------------------- Financial and Accounting
Robert G. Andersen Officer)
Senior Vice President and
- ----------------------------- Director
Sudhir Agrawal, D. Phil.
/s/ James B. Wyngaarden
- ----------------------------- Director April 14, 1999
James B. Wyngaarden, Ph.D.
- ----------------------------- Director
Nasser Menhall
/s/ Paul C. Zamecnik Director April 15, 1999
- -----------------------------
Paul C. Zamecnik, Ph.D.
/s/ Youssef El-Zein Director April 15, 1999
- -----------------------------
Youssef El-Zein
/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 ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hybridon, Inc.:
We have audited the accompanying consolidated balance sheets of Hybridon, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 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, 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, 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, 1998, 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 and through research and development collaborations and
licensing agreements. The Company expects such resources to fund operations
through 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.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999 (except with
respect to the matter disclosed
in Note 7(b) as to which the date
is April 15, 1999)
F-2
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 2,202,202 $ 5,607,882
Accounts receivable 529,702 1,175,441
Prepaid expenses and other current assets 1,005,825 110,827
--------------- ---------------
Total current assets 3,737,729 6,894,150
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 16,027,734 11,127,035
Laboratory and other equipment 14,288,083 11,432,435
--------------- ---------------
30,315,817 22,559,470
Less-Accumulated depreciation and amortization 11,085,013 13,788,979
--------------- ---------------
19,230,804 8,770,491
--------------- ---------------
OTHER ASSETS:
Deferred financing costs and other assets 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 -
--------------- ---------------
12,102,999 871,024
--------------- ---------------
$ 35,071,532 $ 16,535,665
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,868,474 $ 6,070,951
Accounts payable 8,051,817 2,368,163
Accrued expenses 11,917,298 4,068,679
--------------- ---------------
Total current liabilities 27,837,589 12,507,793
--------------- ---------------
LONG-TERM DEBT, NET OF CURRENT PORTION 3,282,123 473,094
--------------- ---------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 1,306,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 16)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value-
Authorized-5,000,000 shares
Series A convertible preferred stock-
Designated-1,500,000 shares
Issued and 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-100,000,000 shares
Issued and outstandingC5,059,650 and 15,304,825 shares at December 31,
1997 and 1998, respectively 5,060 15,305
Additional paid-in capital 173,695,698 241,632,024
Accumulated deficit (218,655,101) (238,447,837)
Deferred compensation (1,093,837) (957,127)
--------------- ---------------
Total stockholders' (deficit) equity (46,048,180) 2,248,778
--------------- ---------------
$ 35,071,532 $ 16,535,665
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1997 1998
REVENUES:
Product and service $ 1,080,175 $ 1,876,862 $ 3,253,879
Research and development 1,419,389 945,000 1,099,915
Royalty and other income 62,321 48,000 -
Interest 1,446,762 1,079,122 148,067
------------- ------------- -------------
4,008,647 3,948,984 4,501,861
------------- ------------- -------------
OPERATING EXPENSES:
Research and development 39,390,525 46,827,915 20,977,370
General and administrative 11,346,670 11,026,748 6,572,502
Interest 124,052 4,535,647 2,932,362
Restructuring - 11,020,000 -
------------- ------------- -------------
Total operating expenses 50,861,247 73,410,310 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 applicable to common stockholders $ (46,852,600) $ (69,461,326) $ (19,792,736)
============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss per 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 4,575,555 5,049,840 11,859,350
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
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
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 stock options to nonemployees - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ---------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1996 - - - - 5,029,315 5,029
Issuance of common stock related to the
exercise of stock - - - - 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 stock options to nonemployees - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------- ---------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1997 - - - - 5,059,650 5,060
Additional Accumulated Deferred Total
Paid-in Deficit Compensation Stockholders'
Capital Equity (Deficit)
BALANCE, DECEMBER 31, 1995 $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 stock options to nonemployees 1,967,116 - (1,967,116) -
Amortization of deferred compensation - - 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 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 stock options to nonemployees 205,978 - (205,978) -
Amortization of deferred compensation - - 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 stock options to nonemployees, -- -- -- -- -- --
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 -- -- -- -- -- --
------- -------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 -- $ -- 641,259 $ 6,413 15,304,825 $ 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 $ 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
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,852,600) $(69,461,326) $(17,103,688)
Adjustments to reconcile net loss to net cash used in
operating activitiesB
Extraordinary gain on exchange of 9% convertible -- -- (8,876,685)
subordinated notes payable
Depreciation and amortization 2,393,751 4,488,719 4,057,286
Issuance of common stock for services rendered -- 146,874 93,750
Amortization of deferred compensation 763,190 316,067 246,444
Amortization of deferred financing costs -- 479,737 160,813
Noncash portion of restructuring charge -- 1,255,000 --
Changes in assets and liabilitiesB
Accounts receivable (573,896) 44,194 (645,739)
Prepaid expenses and other current assets (593,797) 539,499 894,998
Note receivable from officer (9,845) 70,728 (11,400)
Accounts payable 2,010,981 3,987,398 (3,059,002)
Accrued expenses 736,141 7,071,532 1,565,806
Deferred revenue -- (86,250) --
Amounts payable to related parties (12,500) --
------------ ------------ ------------
Net cash used in operating activities (42,138,575) (51,147,828) (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 (8,902,989) (7,509,755) (471,949)
Proceeds from sale of property and equipment -- -- 714,400
(Investment in) sale of real estate partnership (3,751,552) 5,450,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (16,439,687) (3,724,609) 5,692,451
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A convertible preferred stock -- -- 7,999,960
Proceeds from issuance of common stock related to stock 1,089,676 86,326 --
options and restricted stock grants
Net proceeds from issuance of common stock 52,231,244 -- 6,876,676
Proceeds from notes payable 7,500,000 -- 6,000,000
Proceeds from issuance of convertible promissory notes payable -- 50,000,000 4,233,833
Proceeds from issuance of common stock related to stock 3,176,741 9,075 --
warrants
Proceeds from sale/leaseback of fixed assets 1,722,333 1,205,502 --
Payments on long-term debt (446,163) (1,564,268) (7,296,646)
Decrease (increase) in deferred financing costs 251,921 (2,820,790) (400,000)
Decrease (increase) in restricted cash and other assets 401,990 (2,474,948) 2,976,823
------------ ------------ ------------
Net cash provided by financing activities 65,927,742 44,440,897 20,390,646
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,349,480 (10,431,540) 3,405,680
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,284,262 12,633,742 2,202,202
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,633,742 $ 2,202,202 $ 5,607,882
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
HYBRIDON, INC. AND SUBSIDIARIES
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.
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 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 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 NASD OTC as a result of the delisting.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Management Estimates and 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
The Company 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. Antidilutive securities
which consist of stock options, warrants and convertible preferred
stock (on an as-converted basis) that are not included in diluted net
loss per common share were 2,595,496, 2,404,561 and 27,774,883 for
1996, 1997, and 1998, respectively.
(l) Segment Reporting
The Company applies 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 selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related
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 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 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 programs unrelated to its core advanced chemistry
antisense drug research and development programs. In connection with the
reduction in programs, the Company has accrued termination fees related to
research contracts and has written 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
renegotiated, contracts cancelled or the terms were significantly reduced.
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 in 1997 and closed its
operations in Paris, France, and terminated 11 employees at that location.
In connection with the restructuring, the Company entered into different
subleasing arrangements. During 1997, the Company subleased a portion of
each of its facilities in Cambridge, Massachusetts (including a
substantial portion of its former headquarters located at 620 Memorial
Drive (the Cambridge Headquarters). The Company incurred expenses
relating to these subleases for broker fees and renovation expenses
incurred in preparing the Cambridge Headquarters space for the new tenant.
In addition, the Company accrued the estimated lease loss of subleasing
the Cambridge Headquarters which were vacated during 1998. The Company
also subleased its office in Paris, France, and accrued the estimated
lease loss.
The following are the significant components of the $11,020,000 charge for
restructuring (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
$1,504,000 in 1997 and 1998, respectively, with respect to the
restructuring. The remaining accrued amount of approximately $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 construction of the leased premises as contributions to
the 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 and 1998 the Company has a note receivable from
officer, including accrued interest, of $247,250 and $258,650,
respectively. The note has an interest rate of 6.0% per annum and matures
in April 2001.
(6) RESTRICTED CASH - BVH
In November 1997, the Company was notified by Bank Fur Vermogensanlagen
Und Handel AG (BVH) that the Federal Banking Supervisory Office in Germany
had imposed a moratorium on BVH and had closed BVH for business.
Accordingly, the Company classified its deposit with BVH as restricted
cash. The Company sold the deposit to the Cambridge Landlord, an affiliate
of certain directors of the Company, and recovered the full amount in
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-year $7,500,000 note
payable to a bank. In November 1998, the outstanding 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 are
affiliates of two members of the Company's Board of Directors.
F-13
HYBRIDON, INC. AND SUBSIDIARIES
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 payable 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
conversion price equal to $2.40 per share; (v) the note includes a minimum
liquidity, as 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 received a waiver for noncompliance
with the minimum tangible net worth covenant effective as of December 31,
1998 and March 31, 1999. On April 15, 1999, the 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
$6,000,000 at December 31, 1998 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. In 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
$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 $400,000 of shares of common stock of the Company at the per
share valuation of the next financing, or $3.00 per share if the financing
is not completed by May 1, 1999. The Company determined the value of the
warrants 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.
(d) Capital Lease Obligations
The Company had entered into various capital leases for equipment. During
1998, the Company settled its capital lease obligations in full through
the issuance of common stock and warrants (see Note 15 (c)).
(e) 9% Convertible Subordinated Notes Payable
On April 2, 1997, the Company issued $50,000,000 of the 9% 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 noteholders are entitled to receive accrued interest from the date of
the most recent interest payment through the conversion date. 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.
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.
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. According to the collaboration agreement, as modified
in April 1998, targets can be selected from those in the fields 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 MDM2. In this project,
Searle is funding certain research and development efforts by the Company,
and both Searle and the Company have committed certain of its own
personnel 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 initial
collaboration by mutual agreement, including agreement as to additional
research funding by Searle.
In addition, under the collaboration, 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
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 the initial molecular target reaches a
certain stage of preclinical development, Searle will be required to
purchase an additional $10,000,000 of common stock (at the then fair
market value) in order to maintain its right to designate any of the
Additional 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 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. The Company has agreed to perform research and
development work exclusively with Searle. In addition, for 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 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 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.
In the event that 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, 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 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 at the offering price 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 the Company's antisense oligonucleotide
chemistry to develop compounds for the treatment of hepatitis B, hepatitis
C and human papilloma virus. 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 $1,019,389 and $345,000 of research and
development revenue related to this collaboration in 1996 and 1997,
respectively. Due to the termination of the collaboration, as discussed
above, the Company recognized no revenue with respect to this
collaboration in 1998.
(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 is
responsible for the development of, and hold all rights to, any drug
developed pursuant to this collaboration, and Medtronic is 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
Company is 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 with the
University of Massachusetts Medical Center, under which the Company has
received exclusive licenses to 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 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.
(12) PHARMACIA BIOTECH, INC. COLLABORATION
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, and Pharmacia
retained the right to sell the machine to third parties, subject to an
obligation to pay the Company royalties on such third-party sales. During
1996 and 1997, the Company received $62,321 and $48,000, respectively, of
royalty income related to such third-party sales. 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-year sales and
supply agreement under which Perkin-Elmer agreed to refer potential
customers to HSP 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
will be paid to Perkin-Elmer. In addition, Perkin-Elmer licensed to the
Company its oligonucleotide synthesis patents.
(14) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and three 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 MethylGene
fields. These fields, as amended, are defined as (i) antisense compounds
to inhibit DNA methyltransferase for the treatment of any disease; (ii)
other methods of inhibiting DNA methyltransferase for the treatment of any
disease; and (iii) antisense compounds to inhibit up to two additional
molecular targets for the treatment of cancers, to be agreed upon by the
Company and MethylGene. 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 institutional investors have
the right to 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 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' 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. During
1998, MethylGene raised additional proceeds from outside investors that
decreased the Company's interest to 30%. 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.
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 15,304,825 shares were issued and outstanding at December
31, 1998.
(b) Initial Public Offering (IPO)
On February 2, 1996, the Company completed its IPO 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 $52,231,244 after deducting expenses related to
the offering.
(c) 1998 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) Warrants
The Company has the following warrants outstanding and exercisable for the
purchase of common stock at December 31, 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 16(b)). The
remaining 64,285 warrants were issued to various other companies that
acted as placement agents. 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, 1998,
options to purchase a total of 525,638 shares of common stock remained
outstanding under the 1990 Option Plan.
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, 1998, options to purchase a total of 550,534 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, 1998, options to purchase a total of 21,000
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) and has reserved and may issue up to 4,500,000 shares for the
grant of incentive and nonqualified stock options. 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,
1998, options to purchase a total of 2,363,560 shares of common stock
remained outstanding under the 1997 Option Plan.
Stock option activity for the three years ended December 31, 1998 is
summarized as follows:
Weighted
Number Exercise Price Average Price
of Shares per Share per Share
Outstanding, December 31, 1995 738,208 $ .01 - $ 50.00 $29.15
Granted 476,020 25.00 - 65.60 49.55
Exercised (57,740) .01 - 37.50 18.85
Terminated (20,100) 25.00 - 57.85 40.20
-------
Outstanding, December 31, 1996 1,136,388 1.25 - 65.60 38.05
Granted 315,675 27.50 - 32.50 30.75
Exercise (25,005) 1.25 - 40.00 12.60
Terminated (236,561) 2.50 - 65.60 40.35
---------
Outstanding, December 31, 1997 1,190,497 1.25 - 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 $1.25 - $65.60 $34.40
========= ================ ======
Exercisable, December 31, 1998 1,650,021 $1.25 $65.60 $17.13
========= ================ ======
F-22
HYBRIDON, INC. AND SUBSIDIARIES
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 1998, the Company
recorded $1,967,116, $205,978 and $109,734, respectively, of deferred
compensation related to grants to nonemployees, net 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 $246,444 in 1996, 1997 and 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 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:
1996 1997 1998
Risk free interest rate 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 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 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.
The effect of applying SFAS No. 123 for the three years ended December
31, 1998 would be as follows:
1996 1997 1998
Net loss applicable to common
stockholders-
As reported $ (46,852,600) $ (69,461,326) $ (19,792,736)
================= ================= =================
Pro forma $ (52,890,455) $ (73,402,170) $ (23,131,304)
================= ================= =================
Basic and Diluted net loss per common
shares-
As reported $(10.24) $(13.76) $(1.67)
======= ======== =======
Pro forma $(11.56) $(14.54) $(1.95)
======= ======== =======
(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.
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 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.
(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. During 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 Series 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
HYBRIDON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
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 leases its facility in Milford, Massachusetts, under
a lease which has a 10- year term, which commenced on July 1,
1994, with certain extension options.
On February 4, 1994, the Company entered into the Cambridge Lease
with a partnership that is affiliated with certain directors of
the Company. As compensation for arranging this lease, the
Company issued Pillar Limited 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 expired subsequent to
December 31, 1998. The Company vacated the Cambridge,
Massachusetts, facility in June 1998 and moved its corporate
facilities to Milford, Massachusetts (see Note 3).
Future approximate minimum rent payments as of December 31, 1998,
under existing lease agreements through 2007, net of sublease
agreements are as follows:
December 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
(Continued)
During 1996, 1997 and 1998, facility rent expense net of sublease
revenue was approximately $2,352,000, $4,613,000 and $3,871,000,
respectively.
(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 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). During 1996, 1997 and 1998, the Company had
expensed $1,106,000, $998,000 and $1,300,000, respectively, under
consulting and advisory agreements with related 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
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, 1998 are approximately as follows:
December 31, Amount
------------ ------
1999 $ 582,000
2000 392,000
2001 279,000
---------------
$ 1,253,000
===============
Total fees and expenses under these contracts were approximately
$7,171,000, $9,372,000 and $2,011,000 during 1996, 1997 and 1998,
respectively.
(d) Employment Agreements
The Company has entered into employment agreements with 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.
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, 1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately
$219,993,000 and $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, 1998, have resulted in ownership changes in excess of 50%, as
defined under the Act and which will limit the Company's ability to
utilize its net operating loss carryforwards. Ownership changes in
future periods may place additional limits on the Company's ability to
utilize net operating loss and tax credit carryforwards.
The federal net operating loss carryforwards and tax credit
carryforwards expire approximately as follows:
Net
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 60,087,000 750,000
2018 23,252,000 500,000
------------ ------------
$219,993,000 $ 3,936,000
============ ============
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 assets
are approximately as follows:
1997 1998
---- ----
Operating loss carryforwards $ 78,696,000 $ 87,997,000
Temporary differences 5,137,000 2,677,000
Tax credit carryforwards 3,436,000 3,936,000
------------ ------------
87,269,000 94,610,000
Valuation allowance (87,269,000) (94,610,000)
------------ ------------
$ - $ -
============ ============
A valuation allowance has been provided, as it is more likely than not
the Company will not realize the deferred tax asset. The net change in
the total valuation allowance during 1998 was an increase of
approximately $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 $224,000, $253,000 and $253,000 during 1996,
1997 and 1998, respectively.
(19) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the three years in
the period ended December 31, 1998 are as follows:
1996 1997 1998
Cash paid during the period for interest $ 124,052 $ 3,264,596 $ 1,666,127
============== ============== ===========
Purchase of property and equipment under capital leases $ 1,722,333 $ 2,374,502 $ -
============== ============== ===========
Conversion of preferred stock into common stock $ 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 conversion of convertible promissory notes payable ============== ============== ===========
Issuance of common stock and attached warrants in exchange $ - $ - $ 5,934,558
for conversion of accounts payable and other obligations ============== ============== ===========
(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
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant, 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.
+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.
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.
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.
+++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.
(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 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 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 the Annual Report on Form 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.