Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Year Ended December 31, 1996
COMMISSION FILE NO. 0-27352
HYBRIDON, INC.
---------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 3072298
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
620 Memorial Drive, Cambridge, Massachusetts 02139
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 528-7000
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
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. [ ]
On March 14, 1997, the aggregate market value of voting Common Stock held
by nonaffiliates of the registrant was $118,762,093, based on the last reported
sale price of the registrant's Common Stock on the Nasdaq National Market on
March 14, 1997. There were 25,173,502 shares of Common Stock outstanding as of
March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part of Form 10-K
DOCUMENT INTO WHICH INCORPORATED
-------- -----------------------
Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13
with respect to the Annual Meeting of Stockholders of Part III
to be held on May 19, 1997
2
PART I
ITEM 1. BUSINESS.
--------
GENERAL
Hybridon, Inc. ("Hybridon" or the "Company"), established in 1989, is a
leader in the discovery and development of novel genetic medicines based
primarily on antisense technology. Antisense technology involves the use of
synthetic segments of DNA (oligonucleotides) constructed through rational drug
design to interact at the genetic level with target messenger RNA, which codes
for the production of proteins. In contrast to traditional drugs, which are
designed to interact with protein molecules associated with diseases, antisense
drugs work at the genetic level to interrupt the process by which
disease-causing proteins are produced. Drugs based on antisense technology may
have broader applicability, greater efficacy and fewer side effects than
conventional drugs because antisense compounds are designed to intervene early
in the disease process at the genetic level and in a highly specific fashion.
Hybridon has established a leadership position in the antisense field by
developing an integrated antisense technology platform based on a combination of
patented and proprietary medicinal chemistries, synthetic DNA manufacturing
technology and analytical processes. The Company's strategy is to leverage this
technology platform by applying its oligonucleotides against a range of genetic
targets associated with major diseases, by manufacturing oligonucleotides for
its own internal use and on a custom contract basis for sale to third parties
and by extending its medicinal chemistries to additional targets through
collaborations with large pharmaceutical company partners.
Hybridon's first gene expressive modulation ("GEM") drug candidate, GEM 91
for the treatment of HIV-1 infection and AIDS, is in a confirmatory Phase II
clinical trial in advanced AIDS patients. This trial is designed to confirm the
preliminary findings from the Company's Ib/II clinical trials of GEM 91 in the
U.S. in which a significant decrease was observed in the quantities of cell-
associated HIV-1 in circulating blood cells of patients with characteristics of
advanced HIV disease. Hybridon is also conducting clinical trials of GEM 132, an
advanced chemistry antisense compound for the treatment of CMV. The first trial
involves the treatment of CMV retinitis in AIDS patients by intravitreal
injection in the eye; the second trial involves the treatment of systemic CMV by
intravenous administration. Hybridon believes that its clinical trials of GEM 91
were the first human clinical trials involving intravenous or other systemic
administration of an antisense oligonucleotide for the treatment of a viral
disease and that its clinical trials of GEM 132 were the first human clinical
trials involving administration of an advanced chemistry oligonucleotide into
humans.
The Company plans to commence clinical trials of three additional product
candidates in the second half of 1997: GEM 231, an antisense compound being
developed to inhibit the production of protein kinase A, which is associated
with many cancers; GEM 92, an antisense compound being developed for the
treatment of HIV-1 infection and AIDS by oral administration; and GEM 220, an
antisense compound being developed to target vascular endothelial growth factor
for the treatment of various cancers. All three of these compounds are based on
Hybridon's advanced antisense chemistries and, the Company believes, have the
potential for oral administration.
In 1996, Hybridon formed its Hybridon Specialty Products Division to
manufacture highly purified oligonucleotide compounds both for the Company's
internal use and on a custom contract basis for sale to third parties, including
the Company's collaborative partners. The Company is manufacturing
oligonucleotides in compliance with GMP at its 36,000 square foot leased
manufacturing facility, which the Company believes is the first commercial-scale
synthetic DNA production facility with a fully integrated manufacturing
technology platform, including large-scale synthesis, purification
2
3
and proprietary analytical support. The Division first began production of
oligonucleotide compounds for sale to third parties in June 1996 and by the end
of 1996 had achieved sales revenues of approximately $1.1 million. The Division
also has received orders to provide analytical services and plans to expand its
product offerings to include proprietary intermediates used in the manufacture
of oligonucleotides. In order to strengthen the marketing of the Division's
products, the Company has entered into a sales and supply agreement with the
Applied Biosystems Division of the Perkin-Elmer Corporation ("Perkin-Elmer")
under which Perkin-Elmer refers potential customers to the Company.
Because of the broad applicability of Hybridon's antisense technology
platform and its patent estate, the Company's strategy is both to pursue
research and development programs on its own and to form a variety of
collaborations with pharmaceutical and biotechnology companies and academic and
research institutions. These collaborations provide Hybridon with access to
resources and expertise not otherwise available and enable the Company to
conserve its resources while accelerating research and development. To date,
Hybridon has entered into corporate collaborations with G.D. Searle & Co.
("Searle"), a subsidiary of Monsanto Company, in the field of
inflammation/immunomodulation, F. Hoffmann-La Roche Ltd. ("Roche") relating to
human papilloma virus and hepatitis C virus, and Medtronic, Inc. ("Medtronic")
involving the development of a drug delivery device for use in delivering
Hybridon's antisense compounds for the treatment of Alzheimer's disease. The
Company has developed lead compounds for each of the two disease targets in the
Roche collaboration and has received associated milestone payments from Roche.
The Company's accomplishments to date have been based on its integrated
antisense technology platform, which includes:
- Advanced Medicinal Chemistries. Hybridon's scientists have designed and
produced over 20 proprietary families of synthetic antisense
oligonucleotide chemistries. The Company believes that antisense
compounds based on these chemistries will demonstrate a range of
favorable pharmaceutical attributes and provide flexibility in
addressing many biological targets. In particular, the Company believes
that its advanced chemistries provide the potential for enhanced
metabolic stability, which may result in less frequent dosing and
therefore lower costs of therapy. In addition, the Company believes that
its advanced chemistries provide the potential for oral administration.
In this regard, in a preclinical test in which an advanced antisense
oligonucleotide developed by the Company was administered orally to nude
mice in which human colon and breast cancer cells had been implanted, a
significant antisense-specific anti-tumor effect was exhibited.
- Manufacturing Technology. The Company has developed a manufacturing
technology platform which integrates key elements of the manufacturing
process. In 1996, the Company completed development of two separate
commercial scale oligonucleotide synthesizers, one in an internal
program and one in a collaboration with Pharmacia Biotech, Inc.
("Pharmacia"). The synthesizer developed by Hybridon is specifically
designed to produce advanced chemistry antisense oligonucleotides. In
addition, the Company has implemented proprietary purification
processes, which use water in place of chemical solvents, simplifying
environmental compliance and permitting purification of kilogram batches
of oligonucleotides. The advances made by the Company in oligonucleotide
manufacturing technology have enabled the Company to reduce its direct
oligonucleotide unit production costs by approximately 50% annually
since 1991. Because antisense compounds targeted at different diseases
can be manufactured with the same nucleotide building blocks and using
the same manufacturing processes and equipment with minimal adjustments,
the knowledge and experience that the Company obtains in the manufacture
of each compound is substantially applicable to the manufacture of other
oligonucleotide compounds for the treatment of other diseases and
results in significant manufacturing efficiencies.
3
4
- Proprietary Analytical Tools and Processes. Hybridon has developed
proprietary analytical tools and processes that enable the Company to
analyze the chemical purity, base sequencing and composition of its
oligonucleotides with greater speed and accuracy than existing
analytical processes. In particular, the Company has developed
proprietary laser induced fluorescence and physical sequencing mass
spectrometry which enables the Company to directly sequence advanced
chemistry oligonucleotides which is not possible using more traditional
enzymatic and chemical methods. The Company uses the information that it
obtains with its analytical tools and processes to improve production
quality control, to comply with regulatory requirements and to monitor
the pharmacokinetic behavior of its oligonucleotide compounds in
preclinical studies and clinical trials.
Hybridon seeks to establish a comprehensive proprietary position through a
"layered" patent strategy covering the Company's families of oligonucleotide
chemistries, the antisense sequences of the Company's oligonucleotide compounds
and the chemical compositions of these oligonucleotide compounds. The Company
believes that this approach may provide it with at least three independent
levels of protection. Hybridon also seeks to protect its proprietary analytical
and manufacturing processes. Hybridon owns or exclusively licenses 23 issued
U.S. patents, six issued European patents, 31 allowed U.S. patent applications,
eight allowed European patent applications and 168 other U.S. patent
applications. One of the issued U.S. patents and one of the issued European
patents broadly claim antisense oligonucleotides targeted at HIV, four of the
issued U.S. patents and 63 of the U.S. patent applications relate to antisense
oligonucleotides targeted at genes which are implicated in diseases such as
cancer and viral and bacterial infections, seven of the issued U.S. patents and
38 of the U.S. patent applications relate to the Company's medicinal
chemistries, including one issued U.S. patent that broadly claims methods of
orally-administering advanced chemistry oligonucleotides, and six of the issued
U.S. patents and 47 of the U.S. patent applications relate to oligonucleotide
production.
TECHNOLOGY OVERVIEW
Introduction
Proteins play a central role in virtually every aspect of human
metabolism. Almost all human diseases are the result of inappropriate protein
production or performance. Traditional drugs are designed to interact with
protein molecules that support or create diseases. Antisense drugs work at the
genetic level to interrupt the process by which disease-causing proteins are
produced.
The information necessary to produce a specific protein is encoded in a
specific gene. The information required to produce all human proteins is
contained in the human genome and its collection of more than 100,000 genes.
Each gene is made up of DNA, which is a duplex of entwined strands -- a "double
helix." In each duplex, the building blocks of DNA, called nucleotides, are
bound or "paired" with complementary nucleotides on the other strand. The
precise sequence of a nucleotide chain that is the blueprint for the information
that is used during protein production is called the "sense" sequence. The
sequence of a nucleotide chain that is precisely complementary to a given sense
sequence is called its "antisense" sequence.
Protein synthesis or expression typically involves a two-phase process.
First, the information contained in the gene is transcribed from the sense
strand of DNA into one or more molecules of messenger RNA. Second, the
information encoded in the messenger RNA is translated into the sequence of
amino acids that comprise the protein. The information contained in a single
gene is often repeatedly transcribed into multiple copies of messenger RNA,
which in turn are repeatedly translated, giving rise to multiple copies of the
same protein.
4
5
Conventional Drugs
Most drugs are chemicals designed to induce or inhibit the function of a
target molecule, typically a protein, with as few unwanted side effects as
possible. However, conventional drugs are not available for the treatment of
many diseases because of their relatively low level of selectivity. The
selectivity of conventional drugs is usually determined by only a few, generally
two or three, points of interaction at the binding site of the target molecule.
Frequently, sites on other non-target molecules resemble the target binding site
sufficiently to permit the conventional drug to bind to some degree. This lack
of selectivity may result in decreased efficacy, unwanted side effects or a need
to administer the drug in less than optimal dosages due to toxicity concerns. In
addition, the development of conventional drugs is generally time consuming and
expensive, as thousands of compounds must be synthesized to find one with the
right efficacy and side effect profile.
Gene Expression Modulation
In contrast to conventional drugs, which usually interact with
disease-associated proteins after they have been produced, gene expression
modulation technology is intended to regulate the production of
disease-associated proteins, thus targeting an earlier biochemical process.
Advances in genomic science have identified many targets for gene expression
modulation products. Once a gene that codes for a disease-associated protein is
identified, an oligonucleotide based on the complementary sequence for the
selected site can be synthesized and its pharmaceutical properties optimized by
chemical modification. These chemically-modified oligonucleotides may be
composed of DNA, RNA or a combination of the two.
Chemically-modified oligonucleotides can be designed to attack a disease
at the genetic level by binding to messenger RNA or DNA to prevent production of
disease-associated proteins. Binding to messenger RNA generally is used in the
"antisense" and "ribozyme" approaches to gene expression modulation, while
binding to the DNA generally is used in the "triplex" approach to gene
expression modulation.
In the antisense approach to gene expression modulation,
chemically-modified oligonucleotides, which consist of the antisense sequence to
a selected region on a target messenger RNA, are used to inhibit the synthesis
of a particular protein. Because the sequence of nucleic acid bases of a
chemically-modified antisense oligonucleotide is complementary to its target
sequence on a messenger RNA, the antisense oligonucleotide forms a large number
of bonds at the target site, typically in excess of 35, practically assuring
that the oligonucleotide will hybridize (bind) tightly to the selected type of
messenger RNA. Since a single messenger RNA may be translated repeatedly into a
protein, a single chemically-modified antisense oligonucleotide may inhibit the
synthesis of many copies of a protein. Moreover, in vitro tests have shown that
certain chemically-modified antisense oligonucleotides form complexes with their
target messenger RNAs. These complexes activate RNase H, a cellular enzyme, in a
manner that destroys the messenger RNA to which the oligonucleotide is bound,
without destroying the oligonucleotide itself, thus freeing the oligonucleotide
to bind with another identical messenger RNA.
Ribozymes are RNA molecules that have the ability to cleave other RNA
molecules. Ribozymes contain a catalytic core along with an oligonucleotide
sequence complementary to a sequence on the target messenger RNA. As with
enzymes, ribozymes function catalytically when cleaving other RNA molecules and
thus are not themselves permanently affected by the process. As with antisense
oligonucleotides, ribozymes bind selectively with target RNAs. Therefore, a
single ribozyme molecule will cleave a specific target messenger RNA molecule
with which the ribozyme becomes bound. That same ribozyme will then be free to
bind with another identical messenger RNA molecule and repeat the cleaving
function. Because of their catalytic activity, ribozymes may have advantages
over antisense oligonucleotides in situations in which cellular RNase H is not
abundant or
5
6
cannot be activated. Ribozymes have had limited utility as potential drugs
because of their relatively large size, which increases the expense of
synthesizing these molecules; the difficulty in increasing their stability
through chemical modification; and the limited nature of the catalytic activity
of synthetic ribozymes, particularly at magnesium levels present in human cells.
The triplex approach involves the interaction of oligonucleotides directly
with the appropriate region of the double-stranded DNA comprising the target
gene, thus resulting in a triplex structure and physically interfering with the
transcription of DNA into messenger RNA. The triplex approach typically does not
involve the destruction of the region of DNA to which the oligonucleotides are
bound, in contrast with the effects of antisense oligonucleotides and ribozymes
on messenger RNA. Constraining factors to the triplex approach to date have been
the difficulty of obtaining access for oligonucleotides to the DNA, the relative
weakness of the bonding of the oligonucleotides with the DNA and concerns over
compounds that interact directly with the DNA genetic information.
HYBRIDON TECHNOLOGY
Antisense
Hybridon has developed an integrated antisense technology platform based
on proprietary medicinal chemistries, analytical chemistry and manufacturing
technology. The development of Hybridon's antisense technology has been directed
by Dr. Sudhir Agrawal, the Company's Chief Scientific Officer, along with Drs.
John Goodchild and Jin-Yan Tang, two of the Company's principal scientists, and
builds on the pioneering work in the antisense field begun in the 1970s by Dr.
Paul C. Zamecnik, a founder and director of the Company and Chairman of its
Scientific Advisory Board, at the Massachusetts General Hospital ("MGH") and
continued by Dr. Zamecnik at the Worcester Foundation for Biomedical Research,
Inc. (the "Worcester Foundation").
Medicinal Chemistries. Hybridon's scientists have designed and synthesized
over 20 proprietary families of synthetic antisense oligonucleotide chemistries.
The Company believes that antisense compounds based on these chemistries may
demonstrate a range of favorable pharmaceutical attributes, including: reduced
side effects, increased duration of action, increased potency and susceptibility
to lower dosing, less frequent dosing, controlled release formulation and
alternative routes of administration, including oral administration. Hybridon
designed its first generation phosphorothioate oligonucleotides to increase
their resistance to enzymatic degradation and their biological activity and to
act catalytically by triggering RNase H. GEM 91 is such a phosphorothioate-
modified oligonucleotide. Hybridon has used the insights gained by it in the
development and ongoing human clinical trials of GEM 91 in the design of its
more advanced oligonucleotide chemistries.
In addition to developing advanced oligonucleotide chemistries, Hybridon
is developing new formulations of its antisense oligonucleotides to optimize
their pharmaceutical properties. Data from in vivo studies in a rat model of
Hybridon's antisense oligonucleotide formulated with the chemical cyclodextrin
suggest that such compounds would exhibit increased cellular uptake, lower
immunostimulatory effects, a generally enhanced safety profile and improved
stability. In in vitro tests, a formulation of Hybridon's antisense
oligonucleotide with protamine also demonstrated reduced immunostimulatory
effects.
Hybridon has also developed substantial expertise in the selection of
molecular targets for its antisense compounds. The Company's studies of DNA and
messenger RNA from a large number of viruses, other infectious organisms and
cancer cells have yielded an improved understanding by Company scientists of RNA
structure and the importance of particular RNA sequences to the processing of
messenger RNA and the translation of proteins. This knowledge enhances the
Company's ability to select attractive target sites and thereby increases the
efficiency of Hybridon's
6
7
drug development programs. The Company has developed in vitro tests which can
select preferred oligonucleotide binding sequences on messenger RNA. The Company
also employs conventional computer-based rational drug design to select
attractive binding sequences.
Manufacturing Technology. The Company's expertise in the structure, design
and analysis of chemically-modified oligonucleotides has served as the
foundation of its manufacturing technology and know-how. The Company has
developed proprietary technology to increase the purity of oligonucleotide
products, enhance the efficiency of the production process and increase the
scale of production. In 1996, the Company completed development of two separate
commercial scale oligonucleotide synthesizers, one in an internal program and
one in a collaboration with Pharmacia. The synthesizer developed by Hybridon is
specifically designed to produce advanced chemistry antisense oligonucleotides.
In addition, the Company has implemented proprietary purification processes,
which use water in place of chemical solvents, simplifying environmental
compliance and permitting purification of kilogram batches of oligonucleotides.
The Company has also developed proprietary chemical synthesis processes and
novel reagents used in the synthesis process, which the Company believes may
further decrease the cost of production of its modified oligonucleotides.
Proprietary Analytical Tools and Processes. The Company has established
proprietary analytical tools and processes that enable it to analyze
oligonucleotide compounds with greater speed and accuracy when compared to
traditional methods. Hybridon has developed a novel method of determining
antisense purity that is sensitive to a single DNA base difference; this method
is significantly more accurate than traditional chromatography methods. The
Company is also able to sequence and identify short strands of DNA at the
subparts-per-billion level, allowing Hybridon's scientists to trace the compound
through the metabolic pathway and assess the compound's bioavailability. The
Company uses the information that it obtains with its proprietary analytical
tools and processes to improve production quality control, to comply with
regulatory requirements and to monitor the pharmacokinetic behavior of its
oligonucleotide compounds in preclinical studies and clinical trials.
Ribozyme
Hybridon believes that the ribozyme approach of gene expression modulation
is complementary to the Company's antisense technology because the Company's
oligonucleotide drug development, production and analytic and advanced medicinal
chemistry technology are all directly applicable to this approach.
Hybridon's ribozyme research group is working on the development of
ribozymes which may exhibit favorable pharmaceutical attributes, such as
improved catalytic activity and greater resistance to degradation by cellular
enzymes, the development of oligonucleotides with ribonuclease-like activity
that do not contain enzymatic RNA and the development of shorter length
ribozymes which are easier and less expensive to synthesize. The Company has
developed a method of using ribozymes in the presence of antisense
oligonucleotides that bind to a site on the target messenger RNA immediately
adjacent to the site of ribozyme binding. These antisense oligonucleotides act
as facilitators for the binding of ribozymes and, in in vitro tests, have
allowed the use of shorter length ribozymes. Also in in vitro tests, the Company
has shown that the presence of antisense oligonucleotide facilitators increases
the catalytic activity of ribozymes, thereby potentially increasing the potency
of these compounds, and promotes ribozyme activity at concentrations of
magnesium naturally occurring in human cells. Synthetic ribozymes generally
cleave poorly or not at all in such low levels of magnesium. Another ribozyme
approach under research by the Company involves the combination of
oligonucleotides that do not activate RNase H with ribozymes that act in a
catalytic manner, thereby offering the prospect of lower dosing of the
oligonucleotide. The Company is engaged in additional studies to improve the
pharmaceutical properties of ribozymes against various disease targets.
7
8
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
Hybridon is focusing its development efforts on products for the treatment
of diseases for which the gene encoding the target protein is well
characterized; that afflict a substantial number of people; for which there are
significant unmet clinical needs, particularly diseases for which there is no
current drug therapy or for which available therapies have unacceptable side
effects; and for which expedited regulatory review processes reasonably may be
expected. Based on these criteria, Hybridon is directing its drug development
efforts at the treatment of HIV-1 infection and AIDS, other viral and infectious
diseases, cancers and certain metabolic disorders.
The following table summarizes Hybridon's principal product development
and discovery programs. All of these programs involve the discovery and
development of chemically-modified oligonucleotides using the antisense approach
to gene expression modulation. This table is qualified in its entirety by
reference to the more detailed descriptions elsewhere in this Annual Report on
Form 10-K.
8
9
- -------------------------------------------------------------------------------------------
Primary Therapeutic
TARGET Indication(s) STATUS(1)
- ----------------------------- --------------------------- -----------------------------
HIV-1 AND AIDS
HIV-1........................ HIV-1 Infection and AIDS GEM 91 - Phase II Clinical
Trials
HIV-1 Infection and AIDS GEM 92 - Preclinical
(Intravenous and Oral
Formulations)
VIRAL AND INFECTIOUS
DISEASES
Cytomegalovirus.............. CMV Retinitis GEM 132 for Intravitreal
Injection - Phase I/II Clinical
Trials
CMV (Systemic) GEM 132 for Systemic
Injection - Phase II Clinical
Trials
Human Papilloma Virus........ Genital Warts; Cancer Preclinical (2)
Hepatitis C Virus............ Hepatitis; Liver Cancer Lead Compounds (2)
Hepatitis B Virus............ Hepatitis; Liver Cancer Research Compounds
CANCERS
Protein Kinase A............. Cancer GEM 231 - Preclinical
(Intravenous and Oral
Formulations)
Vascular Endothelial Growth
Factor....................... Cancer Angiogenesis GEM 220 - Preclinical
Multiple Drug Resistance..... Cancer Chemotherapy Preclinical
DNA Methyltransferase........ Cancer Lead Compounds (3)
METABOLIC DISORDERS
Vascular Endothelial Growth
Factor....................... Retinopathies Preclinical
Psoriasis Preclinical
Amyloid Precursor Protein.... Alzheimer's Disease Lead Compounds
ApoE-4....................... Alzheimer's Disease Lead Compounds
- ----------------------------- --------------------------- -----------------------------
(1) Preclinical: Compounds are undergoing additional testing and alternative
chemistries are being evaluated in biological assays and/or appropriate
animal models in order to assess efficacy, toxicology and pharmacokinetics
and to select particular chemistries with optimal pharmaceutical
attributes. If these procedures are completed satisfactorily and other
scientific and financial criteria are met, the Company may initiate
investigational new drug ("IND")- enabling Good Laboratory Practices
("GLP") studies and begin preparation of an IND application.
Lead Compounds: One or more antisense compounds have demonstrated
biological activity for a particular gene target in a specific and relevant
biological assay.
9
10
Research Compounds: Appropriate target gene(s) and sequence(s) are being
determined; antisense compounds are being synthesized and screened for
biological activity.
(2) Being developed as part of collaboration with Roche. See "Item 1. Business
-- Corporate Collaborations -- F. Hoffmann-La Roche Ltd."
(3) Technology relating to target has been licensed to and is being developed
by Methylgene Inc., a Canadian company co-founded by the Company and in
which the Company owns a minority interest ("Methylgene"). See "Item 1.
Business -- Financial Collaborations -- Methylgene Inc."
HIV-1 and AIDS
AIDS is caused by infection with HIV and leads to severe, life-threatening
impairment of the immune system. HIV causes immunosuppression by attacking and
destroying T-cells, which coordinate much of the network of normal immune
responses. HIV infection usually leads to AIDS, although progression to
symptomatic disease may take many years. The process of HIV replication involves
the integration of a DNA copy of the viral RNA into the human genome, the
transcription of the DNA copy into messenger RNA ("reverse transcription") and
the synthesis of viral proteins and copies of viral RNA for packaging into new
virus particles that may infect other cells.
As of June 30, 1996, approximately 548,100 cases of AIDS had been reported
to the U.S. Centers for Disease Control and Prevention, and the current
population of surviving AIDS patients in the U.S. was estimated to be
approximately 200,000. As of June 30, 1996, AIDS was the leading cause of death
in the U.S. for men between the ages of 25 and 44 and the third leading cause of
death in the U.S. for women between the ages of 25 and 44. The U.S. Public
Health Service estimates that more than 1,000,000 other people in the U.S. are
infected with HIV. As of June 30, 1996, the World Health Organization (the
"WHO") reported that approximately 1,394,000 AIDS cases had been reported
worldwide, but it estimated that the actual total number of cases was over
7,700,000. The WHO also estimated that, as of June 30, 1996, approximately
21,800,000 individuals were infected with HIV/AIDS worldwide.
Therapies that have received U.S. Food and Drug Administration ("FDA")
marketing approval for the treatment of HIV infection and AIDS include two
classes of products: reverse transcriptase inhibitors and inhibitors of HIV-1
protease, known as protease inhibitors. Both types of drugs are inhibitors of
viral enzymes and have shown efficacy in reducing the concentration of viral RNA
(HIV) in the blood and in prolonging the asymptomatic periods in HIV-positive
individuals, especially when administered in combination. However, not all
patients have benefitted from these drugs, when used in combination or
otherwise, and problems remain with respect to patient compliance regimens and
certain toxic side effects. In addition, it is not known to what extent HIV will
develop resistance over time to these drugs.
GEM 91. The Company is enrolling patients for a Phase II clinical trial of
GEM 91 in the U.S. This trial will involve the administration of GEM 91 in an
open label trial in which GEM 91 will be administered for a two-week period to
up to 24 HIV-positive patients with characteristics of advanced HIV disease.
This trial is designed to confirm the preliminary findings from the Company's
Phase Ib/II clinical trials of GEM 91 in the U.S. in which a decrease was
observed in the quantities of cell-associated HIV-1 in circulating blood cells
of patients with characteristics of advanced HIV disease.
In 1993 and 1994, the Company conducted Phase Ia clinical trials of GEM 91
in the U.S. and in France in conjunction with the Agence Nationale de Recherches
sur le SIDA (the "ANRS"). The Company believes that these trials were the first
human clinical trials involving intravenous or other systemic administration of
an antisense oligonucleotide for the treatment of a viral disease. In these
trials, the Company administered ascending single doses of up to 3.5 mg/kg of
GEM 91 to 72 HIV-
10
11
positive patients, administered by two-hour intravenous infusions. The Company
also conducted additional Phase Ia clinical trials of GEM 91 in Europe involving
27 normal volunteers to study the pharmacokinetic interaction of a combined
treatment of GEM 91 and AZT and to investigate the absolute bioavailability of
subcutaneously and intramuscularly administered GEM 91. GEM 91 was well
tolerated by all patients in the Phase Ia clinical trials without dose-limiting
toxicity or side effects.
In 1995, the Company initiated Phase Ib/II clinical trials of GEM 91 in
the U.S. and in France in conjunction with the ANRS. These trials are designed
to assess the safety and pharmacokinetics of repeated doses of GEM 91 and to
provide preliminary data on the drug's antiviral action in reducing viral load.
In the U.S. trials, daily doses of up to 4.4 mg/kg/day of GEM 91 have been
administered by continuous intravenous infusion for periods of between eight and
14 days. In the French trials, GEM 91 was administered by intermittent two hour
intravenous infusions for periods of up to 27 days at daily doses of up to 3.0
mg/kg/day. Through February 28, 1997, these trials have involved 176
HIV-positive patients. GEM 91 has been well tolerated by all patients in the
Phase Ib/II clinical trials without dose-limiting toxicity or side effects. In
addition, unblinded analysis of the on-going Phase Ib/II trials showed a
significant difference between treated and untreated patients in cellular
viremia (e.g. the quantities of infectious virus in circulating blood cells)
with a more pronounced difference in patients with characteristics of advanced
HIV. The Company is continuing these Phase Ib/II clinical trials in the U.S.
GEM 91 is a phosphorothioate antisense oligonucleotide comprised of 25
nucleotides. In certain specially-designed cell culture tests, GEM 91
demonstrated inhibition of HIV-1 replication at multiple stages in the virus
replication cycle: (i) by binding with surface proteins and inhibiting the
absorption of HIV into cells, (ii) by interfering with the reverse transcription
of viral RNA into DNA, and (iii) by binding with the gag-messenger RNA of HIV-1,
which is common to different viral strains (referred to as a "conserved region")
and which codes for a protein essential to viral replication. The multiple
mechanisms of action exhibited by GEM 91 in these in vitro tests may enhance the
likelihood that GEM 91 may delay the emergence of viral resistance to its
activity.
GEM 91 has demonstrated significant inhibition of the replication of HIV-1
in various cell culture tests of AZT-resistant and other primary human isolates.
In a cell culture model that was monitored for 187 days, GEM 91 inhibited HIV-1
replication without any significant resistance being observed. In a parallel
model that was monitored for 174 days, AZT inhibition of HIV-1 replication was
accompanied by the development of significant AZT resistance in the virus
population. In similar tests of protease inhibitors, significant resistance also
developed in the virus population. In tissue culture assays, GEM 91 suppressed
HIV-1 induced cytopathic effects on CD4 cells, thereby maintaining CD4 cell
population in a dose-dependent fashion. There can be no assurance that
preclinical tests will be predictive of the effect of GEM 91 in humans. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Certain Factors That May Affect Future Results -- Early Stage
of Development; Technological Uncertainty."
GEM 92. Using the insights gained in the development and ongoing clinical
trials of GEM 91 and employing chemistry advances developed by the Company, the
Company is developing GEM 92 for the treatment of HIV-1 infection and AIDS. GEM
92 is based on one of the Company's more advanced oligonucleotide chemistries.
Because GEM 92 also targets the gag messenger RNA, the Company believes that the
various attributes of GEM 91, including the multiple mechanisms of action, may
be equally applicable to GEM 92. GEM 92 has demonstrated significant inhibition
of the replication of HIV-1 in various human cell culture systems. In addition,
based on in vitro tests, the Company believes that GEM 92 may demonstrate
increased stability in comparison with GEM 91 and, as a result, longer duration
of action, thereby potentially permitting lower and less frequent dosing.
Because preclinical tests have demonstrated that other molecules with similar
chemical properties have the potential for oral administration, the Company
plans to systematically evaluate GEM 92 for potential oral use.
11
12
Other Viral and Infectious Diseases
Cytomegalovirus. CMV is widespread in the human population as a persistent
subclinical infection. Approximately 70,000 to 150,000 cases occur each year in
the U.S., of which approximately one-half involve congenitally infected infants.
Infection by CMV is manifested clinically in certain individuals, particularly
in newborns, transplant recipients, cancer patients and AIDS patients. In
approximately 40% of all AIDS patients, clinical CMV may develop as a
progressive destruction of the retina (retinitis), resulting in blindness. In
transplant recipients, CMV may develop as a variety of diseases, including
pneumonitis.
The Company is conducting two clinical trials of GEM 132, its advanced
chemistry compound for the treatment of CMV: a Phase I/II clinical trial of GEM
132 for the treatment of CMV retinitis in AIDS patients by intravitreal
injection in the eye (the "IVT Formulation") and a Phase II clinical trial of
another formulation of GEM 132 for the treatment of systemic CMV by intravenous
administration (the "Systemic Formulation"). The Company's Phase I/II clinical
trials of the IVT Formulation are being conducted in the U.S. and France and
will involve the injection of the IVT Formulation into the vitreous humor of the
affected eye in up to 29 HIV-positive patients with CMV retinitis. These trials
are designed to assess the safety of GEM 132 and to provide preliminary data as
to the ability of GEM 132 to inhibit the progression of CMV retinitis in
individuals with AIDS.
The Company's Phase II clinical trials of the Systemic Formulation are
currently being conducted in France. The Company recently submitted an IND
covering the Systemic Formulation with the FDA and, subject to such IND becoming
effective, expects trials to begin in the U.S. in the second quarter of 1997.
These clinical trials will involve the intravenous administration of the
Systemic Formulation to up to 30 HIV-positive patients with CMV infections and
are designed to study the safety and pharmacokinetics of the Systemic
Formulation and the usefulness of several currently available tests as surrogate
markers to evaluate the efficacy of anti-CMV therapies.
In October 1996, the Company completed a Phase I safety and
pharmacokinetic trial of the Systemic Formulation in healthy, adult male
volunteers in the United Kingdom. In this trial, subjects received doses of the
Systemic Formulation ranging from 0.125 to 0.5 mg/kg in a single two hour
intravenous infusion. Results of this study provided data on safety, drug
distribution and metabolism. GEM 132 was well-tolerated by the subjects without
dose-limiting toxicity or side effects during administration and for the
subsequent 14-day follow-up period.
GEM 132 has demonstrated significant inhibition of the replication of
human cytomegalovirus in tissue culture assays. GEM 132 has demonstrated
activity in cell culture against both clinical isolates and viruses which have
become resistant to current therapies, such as ganciclovir. In addition, in cell
culture studies, GEM 132 has demonstrated significantly more potent anti-viral
activity than the two existing therapies against which it has been tested,
ganciclovir and foscarnet.
Human Papilloma Viruses. Human papilloma viruses are associated with a
variety of warts, including benign genital warts which, if untreated, can lead
to cervical cancer. Human papilloma viruses are found in more than 24,000,000
Americans, with an estimated 500,000 to 1,000,000 new cases each year. Genital
warts currently are among the most prevalent sexually transmitted diseases in
the U.S. Pursuant to its collaboration with Roche, Hybridon has identified
through joint research with Roche specific sequences on the messenger RNA of the
papilloma virus as targets for chemically- modified antisense oligonucleotides
and has synthesized chemically-modified antisense oligonucleotides that inhibit
human papilloma virus gene expression in tissue culture assays. These compounds
also have been shown in an animal model to be active in preventing virus damage
to tissues. Hybridon has achieved the first contractually specified development
milestone, designation of a lead compound, in the human papilloma virus program
under its collaboration with Roche.
12
13
Hepatitis C Virus. There are approximately 3,500,000 people in the U.S.
carrying the hepatitis C virus, and approximately 150,000 individuals in the
U.S. become infected with hepatitis C each year. Approximately 80% of those who
contract the virus each year develop chronic hepatitis C infections and
approximately 30,000 cases each year ultimately result in cirrhosis of the
liver. Chronic infection due to hepatitis C is a significant disease in Japan
and other Pacific Rim countries that has been linked to the development of
primary liver cancer. Pursuant to its collaboration with Roche, Hybridon has
identified through joint research with Roche specific sequences on the messenger
RNA as targets for chemically modified antisense oligonucleotides and has
synthesized chemically-modified antisense oligonucleotides that inhibit
hepatitis C viral gene expression in in vitro and tissue culture assays.
Hybridon has achieved the first contractually specified development milestone,
designation of a lead compound, in the hepatitis C program under its
collaboration with Roche.
Hepatitis B Virus. Hepatitis B is a major health problem throughout the
world, with endemic infection in some less developed countries. Approximately
1,200,000 individuals in the U.S. carry the hepatitis B virus. There are an
estimated 200,000 to 300,000 new hepatitis B infections in the U.S. each year.
Hepatitis B infections can lead to liver cirrhosis and cancer of the liver.
Pursuant to its collaboration with Roche, Hybridon identified through joint
research with Roche specific sequences on the messenger RNA as targets for
chemically-modified antisense oligonucleotides and synthesized
chemically-modified antisense oligonucleotides that inhibit the expression of
hepatitis B virus in cell cultures. Although Roche has since determined not to
pursue this program, the Company is continuing its development efforts. All
rights relating to the Roche-sponsored research with respect to hepatitis B have
reverted to the Company.
Cancer
Approximately 1,380,000 new cancer cases are reported in the U.S.
annually. Cancers of all types result in approximately 560,000 deaths in the
U.S. each year, making cancer the second leading cause of death in the U.S. In
addition to surgery and radiotherapy, there are nearly 50 FDA-approved drug
therapies for the treatment of a variety of cancers, although many of these
therapies suffer from severe adverse side effects.
Protein Kinase A. Protein Kinase A ("PKA") is a protein that has been
shown to be expressed in human cancer cell lines and in primary tumors after
cells have been transformed with various oncogenes or after stimulation of cell
growth with cell growth stimulating factors. Based on cell culture studies, the
Company believes that overexpression of PKA may be associated with colon,
breast, ovarian and lung cancer. Hybridon has identified specific sequences on
the PKA gene as targets for chemically-modified antisense oligonucleotides and
has synthesized an advanced chemically-modified antisense compound, GEM 231,
that has demonstrated inhibition of the expression of PKA and tumor growth in
animal model studies. In these studies, repeated daily doses of Hybridon's
oligonucleotide compound administered either intraperitoneally or orally
resulted in reduction of PKA, with suppression of tumor growth for seven days.
The Company plans to commence clinical trials of GEM 231 in the second half of
1997.
Vascular Endothelial Growth Factor -- Cancer Angiogenesis. Vascular
Endothelial Growth Factor ("VEGF") is a growth factor that stimulates
angiogenesis, the process of new blood vessel formation. Angiogenesis plays a
major role in wound healing and organ regeneration and also is involved in
certain pathological processes, such as tumor growth and metastasis. VEGF has
been shown to be overexpressed in developing tumors and is believed to be a key
factor in providing new blood supply to feed developing tumors. Hybridon has
identified specific sequences on the VEGF messenger RNA as targets for
chemically-modified antisense oligonucleotides and has synthesized an advanced
chemically-modified antisense oligonucleotide, GEM 220, that has inhibited the
expression of the VEGF gene in in vitro and tissue culture assays. In an animal
model for solid tumor growth, this compound
13
14
demonstrated tumor growth suppression. The Company plans to commence clinical
trials of GEM 220 in the second half of 1997.
Multiple Drug Resistance. Approximately 500,000 (or one-half) of the new
cancer cases reported each year are not curable by any conventional treatment.
In approximately one-half of these incurable cases, Multiple Drug Resistance
("MDR-1") gene expression is thought to play a predominant role in the cancers'
resistance to chemotherapy. Hybridon has identified specific sequences on the
messenger RNA as targets for chemically-modified antisense oligonucleotides and
has synthesized chemically- modified antisense oligonucleotides that inhibit the
expression of the MDR-1 gene in drug-resistant human cancer cells in tissue
culture assays and increase their sensitivity to anti-cancer drugs in such
assays. These compounds also have decreased MDR-1 expression in human tumors in
a mouse model and have shown activity in a murine leukemia model. In addition,
in in vitro and in vivo tests, these compounds sensitized formerly resistant
cancer cells to chemotherapeutic agents.
DNA Methyltransferase. DNA methyltransferase is a regulatory protein that
has been implicated in the processes of cell growth and differentiation and has
been shown to be overexpressed in some tumors, such as small cell lung cancer,
colon cancer and breast cancer. Hybridon has identified specific sequences on
the messenger RNA as targets for chemically-modified antisense oligonucleotides
and has synthesized chemically-modified antisense oligonucleotides that alter
DNA methylation of cultured human cancer cells and inhibit the ability of such
cells to grow in cell culture and their ability to form tumors in mice. The
Company has licensed the technology relating to the development of this compound
to Methylgene, which is currently developing this technology. See "Item 1.
Business -- Financial Collaborations -- Methylgene Inc."
Metabolic Disorders
Vascular Endothelial Growth Factor -- Retinopathies. Overexpression of
VEGF has been implicated in four major causes of blindness: late stage,
age-related macular degeneration, which currently afflicts approximately 500,000
people in the U.S.; proliferative diabetic retinopathy, the major cause of
blindness in diabetics which currently affects approximately 250,000 people in
the U.S.; central retinal vein occlusion, which currently afflicts approximately
200,000 people in the U.S.; and retinopathy of prematurity, which affects
approximately 10,000 premature newborns annually in the U.S. Hybridon has
identified specific sequences on the VEGF messenger RNA as targets for
chemically-modified antisense oligonucleotides and is synthesizing
chemically-modified antisense oligonucleotides designed to inhibit the
expression of the VEGF gene in retinal cells. These oligonucleotides have been
shown in an animal model of retinopathy to inhibit vascular proliferation and
prevent aberrant angiogenesis in the retinas of mice in a model for retinopathy
of prematurity. Hybridon's antisense oligonucleotides have also been shown to
inhibit neovascularization in a primate animal model of neovascularization.
Vascular Endothelial Growth Factor--Psoriasis. VEGF, in association with
its role in angiogenesis, has recently been implicated in psoriasis, which
currently afflicts more than 6,000,000 people in the U.S. with between 150,000
and 260,000 new cases in the U.S. each year. Hybridon has identified specific
sequences on the VEGF messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized chemically-modified antisense
oligonucleotides that have inhibited the expression of the VEGF gene in in vitro
and tissue culture assays. The Company is currently investigating optimal forms
of topical delivery to the basal layers of the epidermis, where VEGF has been
found to be overexpressed in psoriasis.
Amyloid Precursor Protein. Alzheimer's disease is a neurodegenerative
disease which is the most common cause of dementia in the elderly. It is
estimated to affect approximately 4,000,000 individuals in the U.S. The presence
of amyloid precursor protein ("APP") in the brain at abnormal sites and in
abnormal amounts has been reported to be associated with Alzheimer's disease.
Hybridon has identified specific sequences on the messenger RNA as targets for
chemically-modified antisense
14
15
oligonucleotides and has synthesized chemically-modified antisense
oligonucleotides that inhibit APP production in tissue culture assays. In
addition, the Company is continuing to conduct studies of APP regulation in
rats.
ApoE-4. Apolipoprotein E4 ("ApoE-4") is a plasma protein involved in
cholesterol transport and is associated with Alzheimer's disease. The two gene
products from the APP and ApoE-4 locus appear to interact and provide a
strategic site for therapeutic intervention in Alzheimer's disease. Hybridon and
has identified specific sequences on the messenger RNA as targets for
chemically- modified antisense oligonucleotides and is continuing to conduct
preclinical studies of ApoE-4. The Company is a party to a collaboration with
Medtronic involving the testing of a drug delivery device which could be used to
deliver Hybridon's antisense oligonucleotides targeting Alzheimer's disease and
other neurodegenerative diseases. See "Item 1. Business -- Corporate
Collaborations -- Medtronic, Inc."
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, for the development and commercialization of certain products. As
of the date hereof, the Company had entered into corporate collaborations with
Searle, Roche and Medtronic, all as summarized below. The Company intends to
retain manufacturing rights for many of the products it may license pursuant to
these collaborations.
G.D. Searle & Co.
In January 1996, the Company and Searle entered into a collaboration
relating to research and development of therapeutic antisense compounds directed
at up to eight molecular targets in the field of inflammation/immunomodulation
(the "Searle Field").
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the Searle
Field designated by Searle. In this project, Searle is funding certain research
and development efforts by Hybridon, and each of Searle and Hybridon have
committed certain of its own personnel to the collaboration. The initial phase
of research and development activities relating to the initial target will be
conducted through the earlier of (i) the achievement of certain product
candidate milestones and (ii) 36 months after commencement of the collaboration,
subject to early termination by Searle (although in any event Searle is required
to pay 18 months of research and development funding). The parties may extend
the initial collaboration by mutual agreement, including agreement as to
additional research funding by Searle.
In addition, under the collaboration Searle has the right, at its option,
to designate up to six additional molecular targets in the Searle Field (the
"Additional Targets") for collaborative research and development with Hybridon
on terms substantially consistent with the terms of the collaboration applicable
to the initial molecular target. This right is exercisable by Searle with
respect to each of the Additional Targets upon the payment by Searle of certain
research payments (beyond the project specific payments relating to the
particular Additional Target) and the purchase of additional Common Stock from
the Company by Searle (at the then fair market value). The aggregate amount to
be paid by Searle for such research payments and equity investment in order to
designate each of the Additional Targets is $10,000,000 per Additional Target.
In the event that Searle designates all of the Additional Targets, the aggregate
amount to be paid by Searle for research payments will be $24,000,000 and the
aggregate amount to be paid by Searle in equity investment will be $36,000,000.
If Searle has not designated all of the Additional Targets by the time it
advances the product candidate for the initial molecular target to certain
stages of preclinical development, Searle will be required to purchase an
additional $10,000,000 of Common Stock (at the then fair market value) on
specified dates in order to maintain its right to designate any of the
Additional Targets that it has not yet designated.
15
16
The payment for any such Common Stock will be creditable against the equity
investment portion of the payments to be made by Searle with respect to the
designation of any of the Additional Targets that Searle has not yet designated.
Searle also has the right, at its option, to designate a molecular target
in the Searle Field to develop a therapeutic agent for cancer that acts through
immunomodulation (the "Searle Cancer Target") for collaborative research and
development with Hybridon on terms substantially consistent with the terms of
the collaboration applicable to the initial molecular target. At the time of
such designation, Searle will be required to make certain research payments to
Hybridon and purchase additional Common Stock from the Company (at the then fair
market value). The aggregate amount to be paid by Searle for such research
payments and equity investment will range from $12,000,000 (comprised of
$5,000,000 in research payments and $7,000,000 in equity investment) if the
Searle Cancer Target is designated in 1997 to $26,000,000 (comprised of
$21,000,000 in research payments and $5,000,000 in equity investment) if the
Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests and
clinical trials of the product candidate and will be responsible for regulatory
approvals for and marketing of the product. In certain instances and for
specified periods of time, Hybridon has agreed to perform research and
development work in the Searle Field exclusively with Searle. In addition, as to
each product candidate, Hybridon will be entitled to milestone payments from
Searle totalling up to an aggregate of $10,000,000 upon the achievement of
certain development benchmarks. Hybridon also will be entitled to royalties from
net sales of products resulting from the collaboration. Subject to satisfying
certain conditions relating to its manufacturing capacities and capabilities,
Hybridon will retain manufacturing rights, and Searle will be required to
purchase its requirements of products from Hybridon on an exclusive basis at
specified transfer prices. Upon a change in control of the Company, Searle would
have the right to terminate Hybridon's manufacturing rights, although the
royalty payable in respect of net sales would be increased in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional Targets
or in certain other instances relating to Hybridon's failure to satisfy certain
requirements relating to its manufacturing capacities and capabilities, Searle
will have the right, exercisable in its sole discretion, to require Hybridon to
form a joint venture with Searle for the development of products in the Searle
Field (other than products relating to molecular targets that have already been
designated by Searle) to which each party will contribute $50,000,000 in cash,
although Hybridon's cash contribution would be reduced by the value of the
technology and other rights contributed by Hybridon to the joint venture.
Hybridon 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 Hybridon's failure to satisfy certain requirements relating to its
manufacturing capacities and capabilities.
Under the collaboration, Searle also purchased 1,000,000 shares of Common
Stock in the Company's initial public offering.
F. Hoffmann-La Roche Ltd.
In December 1992, the Company and Roche entered into a collaboration
involving the application of Hybridon's antisense oligonucleotide chemistry to
the development of compounds for the treatment of hepatitis B, hepatitis C and
human papilloma virus. See "Item 1. Business -- Hybridon Drug Development and
Discovery Programs." Under this collaboration, Roche funded research and
development efforts relating to the collaboration and committed personnel of its
own to the collaboration. In 1995, Roche notified the Company that it had
selected an antisense
16
17
oligonucleotide directed at hepatitis C as a lead compound for further
development and made a milestone payment to Hybridon in connection with such
designation. In the third quarter of 1996, Roche notified the Company that it
had selected an antisense oligonucleotide directed at human papilloma virus as a
lead compound for further development, and in the fourth quarter of 1996, made a
milestone payment to the Company in connection with such designation. At such
time, Roche also notified the Company that Roche had elected not to continue the
hepatitis B program under the research and development collaboration. As a
result, in light of the selection by Roche of lead compounds directed at
hepatitis C and human papilloma virus for further development and its
determination to discontinue the hepatitis B program, Roche notified the Company
that Roche was exercising its option to terminate the research phase of the
collaboration as of March 31, 1997. The Company and Roche are engaged in ongoing
discussions as to the manner in which they will collaborate in connection with
the further development of the two antisense oligonucleotides that have been
selected by Roche as lead compounds. All rights relating to the hepatitis B
program have reverted to the Company.
The Company has licensed to Roche any products resulting from the
collaboration on a royalty-bearing, worldwide exclusive basis. Subject to
compliance with certain production cost requirements, Roche is required to
purchase from Hybridon, and Hybridon is required to supply to Roche, Roche's
requirements of products at specified transfer prices.
As part of this collaboration, Roche purchased 551,724 shares of the
Company's Series E Convertible Preferred Stock and 200,000 shares of the
Company's Series F Convertible Preferred Stock, which shares were automatically
converted into an aggregate of 818,390 shares of Common Stock upon the Company's
initial public offering. In addition, the Company issued Roche a five-year
(subject to earlier expiration in certain circumstances) warrant to purchase
551,724 shares of Common Stock, which has a current exercise price of $17.97 per
share.
Medtronic, Inc.
In May 1994, the Company and Medtronic entered into a collaboration
involving the testing of a drug delivery device for use in delivering Hybridon's
antisense oligonucleotides for the treatment of Alzheimer's disease. See "Item
1. Business -- Hybridon Drug Development and Discovery Programs -- Metabolic
Disorders -- Amyloid Precursor Protein and Beta-amyloid Protein." Hybridon will
be responsible for the development of, and hold all rights to, any drug
developed pursuant to this collaboration, and Medtronic will be responsible for
the development of, and hold all rights to, any delivery system developed
pursuant to this collaboration. The parties may extend this collaboration by
mutual agreement to other neurodegenerative disease targets. The research and
development to be conducted is determined and supervised by a committee
comprised of an equal number of designees of the Company and Medtronic.
As part of the collaboration, Medtronic purchased 400,000 shares of the
Company's Series F Convertible Preferred Stock and 125,000 preferred stock units
of the Company (each unit consisting of one share of Series G Convertible
Preferred Stock and one warrant to purchase one-half of one share of the
Company's Common Stock). Upon the closing of the Company's initial public
offering, the shares of Series F Convertible Preferred Stock and Series G
Convertible Preferred Stock purchased by Medtronic automatically converted into
an aggregate of 658,333 shares of the Company's Common Stock. In addition, the
Company issued to Medtronic a warrant expiring on May 10, 1997 to purchase
53,333 shares of the Company's Common Stock at an exercise price equal to $7.50
per share (subject to increase under certain circumstances).
FINANCIAL COLLABORATIONS
17
18
In order to maintain financial flexibility, Hybridon considers innovative
arrangements to finance certain applications of its GEM technology, particularly
applications that it would not develop in the near term without external
funding. The Company has entered into one such arrangement and has executed a
letter of intent with respect to a second. These arrangements are summarized
below.
Methylgene Inc.
The Company and certain Canadian institutional investors have formed a
Quebec company, Methylgene, to develop and market (i) antisense compounds to
inhibit DNA methyltransferase for the treatment of cancers, (ii) other methods
of inhibiting DNA methyltransferase for the treatment of any indications and
(iii) antisense compounds to inhibit a second molecular target other than DNA
methyltransferase for the treatment of cancers, to be agreed upon by Hybridon
and Methylgene (such three product areas being referred to herein as the
"Methylgene Fields").
Hybridon acquired a 49% minority interest in Methylgene for approximately
CDN$1,000,000, and the Canadian investors acquired a majority interest in
Methylgene for a total of approximately CDN$7,500,000. It is anticipated that
Methylgene will issue stock and stock options to certain key employees of and
consultants to Methylgene, including certain directors and officers of the
Company.
The Canadian investors have the right to exchange all (but not less than
all) of their shares of stock in Methylgene for shares of Common Stock of
Hybridon on the basis of 7.5 Methylgene shares (for which they paid
approximately US $11.25) for one share of Hybridon Common Stock (subject to
adjustment for stock splits, stock dividends and the like). This option is
exercisable only during a 90- day period commencing on the earlier of the date
five years after the closing of the Canadian investors' investment in Methylgene
or the date on which Methylgene ceases operations, and terminates sooner if
Methylgene satisfies certain conditions.
Hybridon has granted to Methylgene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the Methylgene Fields.
In addition, Hybridon and Methylgene have entered into a supply agreement
pursuant to which Methylgene is obligated to purchase from Hybridon all required
formulated bulk oligonucleotides at specified transfer prices.
It is anticipated that Methylgene will qualify to receive certain Canadian
tax benefits with respect to the research and development activities which it
carries on in Canada.
Symbiotech, Inc.
Hybridon and Symbiotech, Inc., a development stage biotechnology company
("Symbiotech"), have entered into a letter of intent to form a new company for
the development of quantitative in vitro diagnostic, detection and biological
amplification products using certain of the Company's antisense oligonucleotides
and Symbiotech's phage technology. The letter of intent provides for each of
Hybridon and Symbiotech to grant the new company exclusive worldwide
royalty-free licenses of certain of their respective technologies for the
development of these products. The letter of intent also has been signed by
Medical Science Partners, L.P. ("MSP") and Pillar S.A., which have indicated an
intention initially to invest a total of $250,000 in the new company. It is
anticipated that each of Hybridon and Symbiotech initially will own
approximately one-third of the equity in the new company, with the balance held
by MSP, Pillar S.A. and certain key employees or consultants, including certain
officers and directors of the Company. The majority of the capital stock of
Symbiotech is owned by MSP.
Because a definitive agreement relating to this transaction has not yet
been executed by the parties, it is possible that the final terms of this
arrangement may differ from those summarized above, possibly materially, or that
this transaction will not be consummated.
18
19
MANUFACTURING TECHNOLOGY AND THE HYBRIDON SPECIALTY PRODUCTS DIVISION
The Company has developed a manufacturing technology platform which
integrates key elements of the manufacturing process to increase the purity of
oligonucleotide products, enhance the efficiency of the production process and
increase the scale of production. The Company has developed two separate
commercial scale oligonucleotide synthesizers. One of these machines was
developed in an internal program and the other in a collaboration with
Pharmacia. Both machines are designed with a capacity of up to 100 millimoles
(approximately 300 grams per batch), although the Company believes that these
machines may be able to exceed such capacity. Pharmacia has retained the right
to sell the machine developed under the collaboration to third parties, subject
to an obligation to pay Hybridon royalties on such third party sales. The
Company believes that its machine is the first commercial scale synthesizer
designed for more advanced chemistries. In addition, the Company has implemented
proprietary purification processes, which use water in place of chemical
solvents, simplifying environmental compliance and permitting purification of
kilogram batches of oligonucleotides. The Company has also developed proprietary
chemical synthesis processes and novel reagents used in the synthesis process,
which the Company believes will further decrease the cost of production of
advanced oligonucleotides.
In 1996, Hybridon formed the Hybridon Specialty Products Division to
capitalize on this technology and know-how and manufacture highly purified
oligonucleotide compounds both for Hybridon's internal use and for sale to third
parties, including the Company's collaborative partners, on a custom contract
basis. The Company is manufacturing oligonucleotides at its 36,000 square foot
leased manufacturing facility, which the Company believes is the first
commercial-scale synthetic DNA production facility with a fully integrated
manufacturing technology platform, including large-scale synthesis, purification
and proprietary analytical support. The Company first began production of
oligonucleotide compounds for sale to third parties in June 1996 and by the end
of 1996 had achieved sales revenues of approximately $1.1 million. The Company
also has received orders to provide analytical services and plans to expand its
product offerings to include proprietary intermediates used in the manufacture
of oligonucleotides.
In order to strengthen the marketing of the Division's products, in 1996
the Company entered into a four-year sales and supply agreement with the Applied
Biosystems Division of Perkin-Elmer. Under the agreement, Perkin-Elmer agreed to
refer potential customers for the custom contract manufacture of
oligonucleotides to Hybridon, and Hybridon agreed to purchase amidites from
Perkin- Elmer for the manufacture of oligonucleotides sold to such customers and
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 and agreed to discuss a future collaboration with respect to the
development, marketing and distribution of Hybridon's proprietary intermediates.
The production of antisense compounds is similar to the chemical synthesis
used in the production of conventional pharmaceuticals, and in contrast with
typical biopharmaceuticals, does not involve any fermentation processes or
living cells. Moreover, unlike many conventional drugs, antisense compounds
targeted at different diseases can be manufactured with the same nucleotide
building blocks and using the same manufacturing processes and equipment with
minimal adjustments. As a result, the knowledge and experience that the Company
obtains in the manufacture of one compound is substantially applicable to the
manufacture of other oligonucleotide compounds for the treatment of other
diseases and results in other manufacturing efficiencies.
The Company will need to further increase its manufacturing capacity
through the purchase or construction of additional large-scale oligonucleotide
synthesizers in order to satisfy its anticipated future requirements for GEM 91
and the Company's other product candidates and in order to manufacture
oligonucleotides on a custom contract basis for sale to third parties. In
addition, in order to successfully commercialize its product candidates or
achieve satisfactory margins on sales, the
19
20
Company may be required to reduce further the cost of production of its
oligonucleotide compounds. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - - Certain Factors That May
Affect Future Results -- Limited Manufacturing Capability."
The Company believes that it is currently manufacturing oligonucleotides
in substantial compliance with FDA requirements for manufacturing in compliance
with GMP, although its facility and procedures have not been formally inspected
by the FDA and the procedures and documentation followed may have to be enhanced
in the future as the Company expands its oligonucleotide production activities.
Failure to establish to the FDA's satisfaction compliance with GMP can result in
the FDA denying authorization to initiate or continue clinical trials, to
receive approval of a product or to begin or to continue commercial marketing.
In addition, the Company's manufacturing processes are subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of certain materials and waste products.
MARKETING STRATEGY
Hybridon plans to market the pharmaceutical products it is developing
either directly or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. Hybridon's current
strategy with respect to these products in development is to build a
hospital-targeted direct sales group for products for HIV-1 infection and AIDS
and other market areas that can be accessed with a small to medium size sales
force. Implementation of this strategy will depend on many factors, including
the market potential of any such products the Company develops as well as on the
Company's financial resources. The Company does not expect to establish a direct
sales capability with respect to such products until such time as one or more of
such products approach marketing approval. To market those products that will
serve a large, geographically diverse patient population, the Company expects to
enter into licensing, distribution or partnering agreements with pharmaceutical
and biotechnology companies that have large, established sales organizations. To
the extent the Company enters into marketing arrangements with third parties,
any revenues received by the Company will be dependent on the efforts of such
third parties, and there can be no assurance that such efforts will be
successful. While the Company has developed general marketing strategies, it has
not begun the implementation of any of these strategies with respect to any of
these potential products.
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon has entered into over 50 collaborative research agreements
relating to specific disease targets and other research activities in order to
augment its internal research capabilities and to obtain access to the
specialized knowledge or expertise of its collaborative partners. With respect
to certain of the Company's drug development programs, the Company relies
primarily upon outside collaborators. Accordingly, termination of the Company's
collaborative research agreements with any of these collaborators could result
in the termination of the related research program.
In general, the Company's collaborative research agreements require the
payment by Hybridon of various amounts in support of the research to be
conducted. The Company usually provides the collaborator with selected
oligonucleotides, which the collaborator then tests in his or her assay systems.
If the collaborator creates any invention during the course of his or her
efforts, solely or jointly with the Company, Hybridon generally has an option to
negotiate an exclusive, worldwide, royalty-bearing license of the collaborator's
rights in the invention for the purpose of commercializing any product
incorporating such invention. Inventions developed solely by Hybridon's
scientists as part of the collaboration generally are owned exclusively by
Hybridon. Most of these collaborative agreements are non-exclusive and can be
cancelled on relatively short notice.
20
21
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates, processes and
know-how is important to Hybridon's business. Thus, the Company plans to
prosecute and enforce aggressively its patents and proprietary technology. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development of
its business. Hybridon seeks to establish a comprehensive proprietary position
through a "layered" patent strategy covering the Company's families of
oligonucleotide chemistries, the antisense sequences of the Company's
oligonucleotide compounds and the overall chemical compositions of these
oligonucleotide compounds. The Company believes that this approach may provide
it with at least three independent levels of protection. Hybridon also seeks to
protect its proprietary analytical and manufacturing processes. The patents and
patent applications owned or exclusively licensed by the Company also are
directed to many aspects of the Company's proprietary oligonucleotide production
and analysis technology and ribozyme technology. The Company also relies upon
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
As of February 28, 1997, Hybridon owned or exclusively licensed 23 issued
U.S. patents, six issued European patents, 31 allowed U.S. patent applications,
eight allowed European applications and 168 other U.S. patent applications. Of
these, the Company owned (as opposed to licensed) nine issued U.S. patents, 22
allowed U.S. patent applications and 159 other U.S. patent applications along
with corresponding patent applications in many cases in other major industrial
countries. The patents and applications owned by the Company cover various
chemically advanced oligonucleotides, proprietary target sequences, specific
preferred oligonucleotide products, methods for making and purifying
oligonucleotides, analytical methods and methods for oligonucleotide-based
therapeutic treatment of various diseases. The U.S. patents owned or exclusively
licensed by Hybridon expire at various dates ranging from 2006 to 2014.
Under the terms of a license agreement with the Worcester Foundation (the
"Foundation License"), Hybridon is the worldwide, exclusive licensee under
twelve issued U.S. patents, four issued European patents, six allowed U.S.
patent applications, two allowed European patent applications and six other U.S.
patent applications owned by the Worcester Foundation relating to
oligonucleotides and their production and use, as well as certain
ribozyme-related technology. Many of these patents and patent applications have
corresponding applications on file in other major industrial countries.
One of the issued U.S. patents (the "HIV Patent") and one of the issued
European patents licensed from the Worcester Foundation broadly claim antisense
oligonucleotides as new compositions of matter for inhibiting the replication of
HIV. The other issued U.S. patents include claims covering composition and uses
of oligonucleotides based on the Company's advanced chemistries, methods of
oligonucleotide synthesis that are potentially applicable to large-scale
commercial production, compositions of certain modified oligonucleotides that
are useful for diagnostic tests or assays and methods of purifying full-length
oligonucleotides after synthesis. The earliest expiration of the patents
licensed to the Company by the Worcester Foundation is 2006, when the HIV Patent
expires.
The Company also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including one U.S. patent, one allowed
U.S. patent application and one U.S. patent applications jointly owned by the
Worcester Foundation and the Mount Sinai Medical Center of New York claiming the
use of antisense oligonucleotides for the inhibition of influenza viruses and
two U.S. patent applications owned by McGill University relating to
oligonucleotides and DNA methyltransferase. The Company and MGH jointly own
three patent applications and one allowed U.S. patent application directed to
compositions and use of antisense applied to Alzheimer's disease. The Company
holds an exclusive license to MGH's interests under such patent applications.
21
22
The Company is a non-exclusive licensee of certain patents held by the NIH
relating to oligonucleotide phosphorothioates and a non-exclusive licensee of an
NIH patent covering the phosphorothiolation of oligonucleotides. The field of
each of these licenses extends to a wide variety of genetic targets. If certain
of the claims of the NIH patents non-exclusively licensed to Hybridon are valid,
GEM 91 and certain of the Company's other products in development would infringe
these patents in the absence of the license.
The U.S. PTO has informed Hybridon that certain otherwise allowable patent
applications exclusively licensed by the Company from Worcester Foundation have
been submitted to the Board of Patent Appeals and Interferences to determine
whether an interference should be declared with issued U.S. patents held by the
NIH relating to oligonucleotide phosphorothioates. Banner & Witcoff, the
Company's U.S. patent counsel, is of the opinion that the Worcester Foundation
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 can be declared, or if declared, as to
the outcome thereof. In addition, Hybridon has filed an opposition to the NIH
oligonucleotide phosphorothioate patent in Europe. There can be no assurance as
to the outcome of the opposition. An adverse outcome in either the interference
or the European opposition would not affect the non-exclusive license from the
NIH to Hybridon of the NIH phosphorothioate patents.
Under the licenses to which it is a party, the Company is obligated to pay
royalties on net sales by the Company of products or processes covered by a
valid claim of a patent or patent application licensed to it. The Company also
is required in some cases to pay a specified percentage of any sublicense income
that the Company may receive. These licenses impose various commercialization,
sublicensing, insurance and other obligations on the Company. Failure of the
Company to comply with these requirements could result in termination of the
license. The Foundation License also grants the Company a right of first refusal
to certain technology developed by the Worcester Foundation.
The patent positions of pharmaceutical and biotechnology firms, including
Hybridon, are generally uncertain and involve complex legal and factual
questions. Consequently, even though Hybridon and its licensors are currently
prosecuting their respective patent applications with the U.S. Patent and
Trademark Office and certain foreign patent authorities, the Company does not
know whether any of its applications or those of third parties under which the
Company has or may obtain a license will result in the issuance of any patents
or, if any patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the U.S. are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, Hybridon cannot be certain that it, or any
licensor of patents to it, as the case may be, was the first creator of
inventions claimed by pending patent applications or that Hybridon or any
licensor, as the case may be, was the first to file patent applications for such
inventions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results -- Patents and Proprietary Rights."
Competitors of the Company and other third parties hold issued patents and
pending patent applications relating to antisense and other gene expression
modulation technologies, and it is uncertain whether these patents and patent
applications will require the Company to alter its products or processes, pay
licensing fees or cease certain activities. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results -- Patents and Proprietary." In particular, the
Company is aware of a European patent 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
22
23
complementary. This European patent was revoked in entirety in an opposition
proceeding before the European Patent Office in September 1995. The holder of
this patent has appealed such decision.
The Company is also aware of various issued U.S. patents and patent
applications owned by third parties that claim various uses of ribozymes,
including their use to modulate gene expression, particular ribozymes of
specific molecular sequences and methods of ribozyme production. Foreign
counterparts of certain of these patents and patent applications have been filed
in other major industrialized countries. There can be no assurance that the
Company will be successful in designing or producing ribozymes that fall outside
the valid scope of these patents and patent applications or that any license
that may be required for the Company to exploit ribozyme products, if any, will
be available on acceptable terms or at all. None of the Company's antisense
oligonucleotides infringe any of these patents. In addition, Banner & Witcoff is
of the opinion that the Company's finderons, oligonucleotides with
ribonuclease-like activity that do not contain enzymatic RNA, do not infringe
the claims of these patents and patent applications.
Hybridon's practice is to require its employees, consultants, members of
its Scientific and Clinical Advisory Boards, outside scientific collaborators
and sponsored researchers and other advisors to execute confidentiality
agreements upon the commencement of employment or consulting relationships with
the Company. These agreements provide that all confidential information
developed or made known to the individual during the course of the individual's
relationship with Hybridon is to be kept confidential and not disclosed to third
parties, subject to a right to publish certain information in the scientific
literature in certain circumstances and subject to other specific exceptions. In
the case of employees, the agreements provide that all inventions conceived by
the individual shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information.
Hybridon engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as the NIH, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patients, and related technology. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements may provide
that developments and results will be freely published, that information or
materials supplied by Hybridon will not be treated as confidential and that
Hybridon may be required to negotiate a license to any such developments and
results in order to commercialize products incorporating them. There can be no
assurance that the Company will be able successfully to obtain any such license
at a reasonable cost or that such developments and results will not be made
available to competitors of the Company on an exclusive or nonexclusive basis.
See "Item 1. Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety, effectiveness
and quality by numerous governmental authorities in the U.S. and other
countries. The Company believes that it is in material compliance with all
federal, state and foreign legal and regulatory requirements under which it
operates. However, there can be no assurance that such legal or regulatory
requirements will not be amended or that new legal or regulatory requirements
will not be adopted, any one of which could have a material adverse effect on
the Company's business or results of operations.
23
24
FDA Approval
In the U.S., pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process of
completing clinical trials and obtaining FDA approvals for a new drug is likely
to take a number of years and requires the expenditure of substantial resources.
There can be no assurance that any product will receive such approval on a
timely basis, if at all. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results -- No Assurance of Regulatory Approval; Government Regulation."
The steps required before a new oligonucleotide-based pharmaceutical
product for use in humans may be marketed in the U.S. include (i) preclinical
tests, (ii) submission to the FDA of an IND application, which must become
effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the product, (iv) submission of a New Drug Application ("NDA") to the FDA,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
effectiveness of the product. Compounds must be manufactured according to GMP
and preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding GLP. See "Item 1. Business -- Manufacturing." The
results of the preclinical tests are submitted to the FDA as part of an IND and
are reviewed by the FDA prior to the commencement of human clinical trials.
Unless the FDA objects to, or makes comments or raises questions concerning, an
IND, the IND will become effective 30 days following its receipt by the FDA.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board (an "IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety
(adverse effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials are undertaken to
further evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specified time period, if at all, with respect
to any of the Company's products subject to such testing. Furthermore, the
Company, an IRB or the FDA may suspend clinical trials at any time if it is felt
that the participants are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. In
24
25
any event, the FDA may deny an NDA if applicable regulatory criteria are not
satisfied. Moreover, if regulatory approval of a product is granted, such
approval may require postmarketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for which
it may be marketed. Finally, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the Company's manufacturing
facilities before a product manufactured by the Company can be marketed in the
U.S. The FDA will review the Company's manufacturing procedures and inspect its
facilities and equipment for compliance with GMP and other applicable rules and
regulations. Any material change by the Company in its manufacturing process,
equipment or location would necessitate additional FDA review and approval.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental regulatory authorities in
foreign countries must be obtained prior to the commencement of clinical trials
and subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be longer or
shorter than that required for FDA approval.
Under European Community ("EC") law, either of two approval procedures may
apply to the Company's products: a centralized procedure, administered by the
EMEA (the European Medicines Evaluation Agency); or a decentralized procedure,
which requires approval by the medicines agency in each EC Member State where
the Company's products will be marketed. The centralized procedure is mandatory
for certain biotechnology products and available at the applicant's option for
certain other products. Whichever procedure is used, the safety, efficacy and
quality of the Company's products must be demonstrated according to demanding
criteria under EC law and extensive nonclinical tests and clinical trials are
likely to be required. In addition to premarket approval requirements, national
laws in EC Member States will govern clinical trials of the Company's products,
adherence to good manufacturing practice, advertising and promotion and other
matters. In certain EC Member States, pricing or reimbursement approval may be a
legal or practical precondition to marketing.
At present, pharmaceutical products generally may not be exported from the
U.S. for other than research purposes until the FDA has approved the product for
marketing in the U.S. However, a company may apply to the FDA for permission to
export finished products or partially processed products to a limited number of
countries prior to obtaining FDA approval for marketing in the U.S.
The Company has FDA permission for the export of GEM 91 to France.
Other Regulation
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act and other
present and potential future federal, state or local regulations. Furthermore,
because the Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds, the
Company's operations are subject to U.S. Department of Transportation and
Environmental Protection Agency requirements and other federal, state and
foreign laws and regulations regarding hazardous waste disposal, air emissions
and wastewater discharge, including without limitation the Environmental
Protection Act, the Toxic Substances Control Act and the Resource Conservation
and Recovery Act. Although the Company believes that its procedures for handling
and disposing of such materials comply with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
25
26
accident, the Company could be held liable for any damages that result and any
such liability could have a material adverse effect on the Company.
COMPETITION
The Company's products under development are expected to address several
different markets defined by the potential indications for which such products
are developed and ultimately approved by regulatory authorities. For several of
these indications, the Company's proposed products will be competing with
products and therapies either currently existing or expected to be developed,
including antisense oligonucleotides developed by third parties. Competition
among these products will be based, among other things, on product efficacy,
safety, reliability, availability, price and patent position. An important
factor will be the timing of market introduction of the Company's or competitive
products. Accordingly, the relative speed with which Hybridon can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient capital resources for the often substantial period between
technological conception and commercial sales.
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 modulation of gene expression. The Company believes that
the industry-wide interest in these technologies and products will continue and
will accelerate as the techniques which permit their application to drug
development become more widely understood. There can be no assurance that the
Company's competitors will not succeed in developing products based on
oligonucleotides or other novel technologies that are more effective than any
which are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive prior to recovery by the
Company of the research, development and commercialization expenses incurred
with respect to those products. Furthermore, because of the fundamental
differences between gene expression modulation and other technologies, there may
be indications for which such other technologies are superior to gene expression
modulation. The development by others of new treatment methods not based on gene
expression modulation technology for those indications for which the Company is
developing compounds could render the Company's compounds noncompetitive or
obsolete.
Competitors of the Company engaged in all areas of drug discovery in the
U.S. and other countries are numerous and include, among others, major
pharmaceutical and chemical companies, biotechnology firms, universities and
other research institutions. Many of these competitors have substantially
greater financial, technical and human resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in undertaking preclinical studies and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. Furthermore, if the Company is permitted to commence
commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results -- Competition."
EMPLOYEES
As of February 28, 1997, Hybridon employed 206 individuals full-time, of
whom 99 held advanced degrees. 165 of these employees are engaged in research
and development activities and 31 are employed in finance, corporate development
and legal and general administrative activities. In addition, 90 of these
employees are employees of the Hybridon Specialty Products Division, of whom
26
27
35 are employed in analytical research and quality control. Many of the
Company's management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies. None of the
Company's employees is covered by collective bargaining agreements, and
management considers relations with its employees to be good.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
recognized expertise in gene expression modulation technology, antisense
oligonucleotides, oligonucleotide biochemistry, human genetics, medicine and
related fields who advise the Company about current and long-term scientific
planning, research and development. The Scientific Advisory Board holds
approximately three or four formal meetings annually. All members of the
Scientific Advisory Board are employed by employers other than the Company,
primarily academic institutions, and may have commitments to or consulting or
advisory agreements with other entities that may limit their availability to the
Company. These companies may also be competitors of Hybridon. Several members of
the Scientific Advisory Board have, from time to time, devoted significant time
and energy to the affairs of the Company. However, except for Drs. Zamecnik and
Wyngaarden, who are parties to consulting agreements with the Company, no
members are regularly expected to devote more than a small portion of their time
to Hybridon.
The following persons are members of the Scientific Advisory Board:
Paul C. Zamecnik, M.D. (Chairman) is a founder of Hybridon and serves as a
director of the Company. Dr. Zamecnik has served as a Principal Scientist of the
Worcester Foundation and as the Collis P. Huntington Professor of Oncologic
Medicine Emeritus at the Harvard Medical School since 1979.
Daniel M. Brown, Sc.D., F.R.S. has been a Fellow of King's College,
University of Cambridge, since 1953, and currently serves as Vice-Provost of
King's College and as an Attached Scientific Worker in the Medical Research
Council Laboratory of Molecular Biology at the University of Cambridge. Dr.
Brown is also an Emeritus Reader in Organic Chemistry at the University of
Cambridge and became a Fellow of the Royal Society in 1982.
Edgar Haber, M.D. has served as the Elkan R. Blout Professor of Health
Science and Director of the Division of Biological Sciences at the Harvard
School of Public Health and as a Clinical Professor of Medicine at Harvard
Medical School since 1991. From 1990 to 1991, Dr. Haber served as President of
the Bristol-Myers Squibb Pharmaceutical Research Institute, and from 1988 to
1990, he was President of the Squibb Institute for Medical Research.
Har Gobind Khorana, Ph.D. has served as a Sloan Professor in the
Departments of Biology and Chemistry at the Massachusetts Institute of
Technology since 1970. Dr. Khorana has been awarded numerous prestigious honors,
including the Nobel Prize in Medicine or Physiology in 1968 and the National
Medal of Science in 1987.
Roger E. Monier, Ph.D. has served as Director of Molecular Oncology at the
Institute Gustave Roussy in Paris since 1985. From 1980 to 1985, Dr. Monier
served as the Director of Life Sciences at the Centre Nationale de Recherches
Scientifiques in Paris. Dr. Monier was elected to the French Academy of Science
in 1992.
Peter Palese, Ph.D. has served as a Professor in the Department of
Microbiology at Mount Sinai School of Medicine in New York since 1978 and has
served as Chairman of the Department of Microbiology since 1987.
27
28
Thoru Pederson, Ph.D. is a Principal Scientist of Cell Biology at the
Worcester Foundation and has served as its President and Director since 1985.
From February 1990 to November 1993, Dr. Pederson served as a director of the
Company.
Jerry A. Weisbach, Ph.D. a director of the Company, is an independent
consultant to biotechnology and pharmaceutical companies. Dr. Weisbach served as
Director of Technology Transfer and as an Adjunct Professor at The Rockefeller
University from 1988 to 1994. Dr. Weisbach served as Corporate Vice President of
Warner-Lambert Company, an international pharmaceutical company, from 1981 to
1987 and President of the Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company from 1979 to 1987.
James B. Wyngaarden, M.D. a director of the Company, served as the Foreign
Secretary of the National Academy of Sciences and the Institute of Medicine of
the National Academy of Sciences from 1990 to 1994. Dr. Wyngaarden also served
as the Director of the NIH from 1982 to 1989 and as a council member of the
Human Genome Organization from 1990 to 1993 and as its Director from 1990 to
1991.
Members of the Company's Scientific Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings. Members
of the Scientific Advisory Board also have received options to purchase Common
Stock of the Company under the Company's stock option plans.
CLINICAL ADVISORY BOARD
The Company's Clinical Advisory Board was formally established in November
1993 to advise the Company with respect to clinical trials of the Company's
product candidates. The Clinical Advisory Board holds approximately three or
four formal meetings annually. The Clinical Advisory Board consists of
individuals with recognized expertise in the conduct of clinical trials and the
regulatory approval process. All members of the Clinical Advisory Board are
employed by employers other than the Company, primarily academic institutions,
and may have commitments to or consulting or advisory agreements with other
entities that may limit their availability to the Company. These companies may
also be competitors of Hybridon. Several members of the Clinical Advisory Board
have, from time to time, devoted significant time and energy to the affairs of
the Company. However, except for Drs. Wyngaarden and Weisbach, who are directors
of and consultants to the Company, and Dr. Groopman, who is a consultant to the
Company, no members are regularly expected to devote more than a small portion
of their time to Hybridon.
The following persons are members of the Clinical Advisory Board:
Dr. Wyngaarden's (Chairman) background and experience are described above
under "Item 1. Business -- Scientific Advisory Board."
Robert M. Chanock, M.D. has served as an infectious disease epidemiologist
and laboratory virologist at the NIH since 1957. Prior to that Dr. Chanock held
academic appointments at the University of Cincinnati College of Medicine and
the Johns Hopkins University School of Hygiene and Public Health. Dr. Chanock
has been awarded numerous prestigious honors, including the ICN International
Prize in Virology in 1990, the Bristol-Myers Squibb Award for Distinguished
Achievement in Infectious Diseases Research in 1993 and the Albert B. Sabin
Foundation award.
Vincent T. DeVita, Jr., M.D. has served as Director of the Yale Cancer
Center since 1993. Dr. DeVita served as an attending physician and member of the
Program of Molecular Pharmacology and Therapeutics from 1988 to 1993, and as
Physician-in-Chief from 1988 to 1991, at Memorial Sloan Kettering Cancer Center.
From 1980 to 1988, Dr. DeVita served as Director of the National Cancer
Institute, NIH. In 1995, he was honored with the City of Medicine Award.
28
29
Jerome Groopman, M.D. has served as Chief of the Division of
Hematology/Oncology at the New England Deaconess Hospital since 1985. He has
also served as a Professor of Medicine at Harvard Medical School since 1993. Dr.
Groopman is a member of the AIDS Advisory Committee, the Biologics Committee of
the FDA, the AIDS Clinical Trials Group of the NIH and the AIDS Basic Science
Research Study Section A, NIAID.
Paul Meier, Ph.D. has served as Professor and Chairman of the Department of
Statistics and Division of Biological Sciences at Columbia University since
1985. Dr. Meier has served as an advisor to the FDA on the statistical analysis
of clinical trials since 1991.
Dr. Weisbach's background and experience are described under "Item 1.
Business -- Scientific Advisory Board."
Members of the Company's Clinical Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings.
ITEM 2. PROPERTIES.
----------
The Company's executive, administrative and research and development
facilities, comprising approximately 90,000 square fee, currently are located in
Cambridge, Massachusetts. These facilities are held under a lease which expires
in 2007, but may be extended at Hybridon's option for three additional five-year
terms. The lease provides for an annual rent of approximately $38.00 per square
foot for the first five years and approximately $42.00 per square foot for the
second five years.
The Company leases its 36,000 square foot manufacturing facility in
Milford, Massachusetts under a lease which expires in 2004. The term of the
lease may be extended at Hybridon's option for two additional five-year terms.
In addition to its manufacturing operations, the Company conducts process and
analytical chemistry operations at this facility.
The Company also leases approximately 1,800 square feet of space in Paris,
France under a lease expiring on May 1, 2003 for administrative offices for its
European operations.
For a description of various arrangements relating to the Cambridge
facility and the Paris facility, see "Certain Transactions -- Transactions with
Pillar S.A. and Certain Affiliates" in the Company's 1997 Proxy Statement (as
defined in "Item 10. Directors and Executive Officers of the Registrant").
ITEM 3. LEGAL PROCEEDINGS.
-----------------
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
--------------------------------------------------
No matters were submitted to a vote of securityholders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1996.
29
30
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
- -----------------------------------------------------------
The executive officers and significant employees of the Company and their
ages as of March 15, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Executive Officers
E. Andrews Grinstead, III......... 51 Chairman of the Board of Directors,
President and Chief Executive Officer
Sudhir Agrawal, D. Phil........... 43 Senior Vice President of Discovery,
Chief Scientific Officer and Director
Anthony J. Payne.................. 50 Senior Vice President of Finance and
Administration, International
Operations, Chief Financial Officer,
Treasurer and Secretary
Significant Employees
Robert G. Andersen . . . . . . . . .46 Vice.President of Systems Engineering
and Management Information Systems
Aharon Cohen, Ph.D. . . . . . . . . 52 Vice President of Analytical Research
and Chief Analytical Scientist
Jose E. Gonzalez, Ph.D. . . . . . . 50 Vice President of Manufacturing
John Goodchild, Ph.D. . . . . . . . 52 Vice President of Applied Chemistry
and Ribozyme Research
J. Michael Grindel, Ph.D. . . . . . 50 Vice President of Pre-Clinical
Development
Philippe Guinot, M.D., Ph.D. . . . .47 Vice President of Drug Development and
General Manager, Hybridon Europe
Charles R. Hogen, Jr. . . . . . . . 49 Vice President of Corporate
Communications and Public Affairs
Douglas J. Jensen . . . . . . . . . 44 Vice President of Corporate
Administration and Development
Monroe I. Klein, Ph.D. . . . . . . .54 Vice.President of Regulatory Affairs
R. Russell Martin, M.D. . . . . . . 61 Vice President of Drug Development
Jin-Yan Tang, Ph.D. . . . . . . . . 52 Vice President of Process Development
Darlene A. Van Stone . . . . . . . .34 Patent.Counsel
Mark C. Wiggins . . . . . . . . . . 41 Vice President of Business
Development and Marketing
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 PaineWebber, 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 as Administrator, Strategic Planning and Acquisitions. Since 1991, Mr.
Grinstead has served as a director of EcoScience Corporation, a development
stage company engaged in the development of biopesticides, and as a director of
Pharmos Corporation, a development stage company engaged in the development of
drug
30
31
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. 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 Directors since March 1993. Prior to joining the
Company, Dr. Agrawal served as a Foundation Scholar at the Worcester Foundation
from 1987 through 1991 and currently maintains Visiting Scholar status. Dr.
Agrawal served as a Research Associate at the Medical 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. Payne joined the Company in June 1991 and was appointed Chief Financial
Officer in August 1991, Treasurer in September 1991, Secretary in April 1992 and
Senior Vice President of Finance and Administration, International Operations in
January 1993. Prior to joining the Company, Mr. Payne served as Audit Director
at The First National Bank of Boston, an international commercial bank, from
1990 to 1991, where he directed that bank's audit coverage in global banking and
treasury. He served in a variety of financial and accounting positions with
Manufacturers Hanover Trust Corporation, an international commercial bank, from
1980 to 1990, most recently as Vice President and Audit Director. From 1974 to
1979, Mr. Payne was associated with Price Waterhouse, an international public
accounting firm. Mr. Payne received a B.Sc. in mathematics and physics from the
University of London in 1970 and an M.Sc. in computer science from the
University of Essex in 1973. Mr. Payne is both a chartered accountant and a
certified public accountant.
Mr. Andersen joined the Company and was appointed Vice President of Systems
Engineering and Management Information Systems in November 1996. 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. Cohen joined the Company in March 1992 and served as Director of
Analytical Research from 1992 to June 1993 prior to being appointed Vice
President of Analytical Research in June 1993. Prior to joining the Company, Dr.
Cohen served as Senior Staff Scientist in the Barnett Institute at Northeastern
University from 1987 to 1992 and as a Postdoctoral Research Associate at
Northeastern University from 1985 to 1987. Dr. Cohen received a B.S. in
chemistry in 1970, an M.S. in analytical chemistry in 1980 and a Ph.D. in
analytical chemistry in 1985 from Hebrew University.
Dr. Gonzalez joined the Company and was appointed Vice President of
Manufacturing in August 1995. Prior to joining the Company, Dr. Gonzalez served
as Vice President of Manufacturing Operations at Enzon Corporation, a
biotechnology company, from 1993 to 1995. From 1977 to 1993, Dr. Gonzalez served
in a variety of positions at The Upjohn Company, a pharmaceutical company, most
recently as Associate Director of Bioprocess Development. Dr. Gonzalez received
a B.S. in
31
32
chemistry from the University of Miami in 1969 and a Ph.D. in biochemistry from
Purdue University in 1974.
Dr. Goodchild joined the Company in March 1992 and served as Vice President
of Ribozyme Research from March 1992 to July 1993 prior to being appointed Vice
President of Applied Chemistry and Ribozyme Research in July 1993. He also has
served as an Adjunct Associate Professor at the University of Massachusetts
Medical Center Department of Pharmacology since September 1992. Prior to joining
the Company, Dr. Goodchild was a faculty member and Staff Scientist from 1987 to
1992 and a Visiting Scientist from 1984 to 1987 at the Worcester Foundation and
a Visiting Scientist at the National Research Council of Canada from 1982 to
1984. From 1971 to 1982, he was a Senior Research Scientist and Group Leader at
Searle. Dr. Goodchild is a Fellow of the Royal Society of Chemistry and became a
chartered chemist in 1979. Dr. Goodchild received a B.Sc. in chemistry in 1965
and a Ph.D. in organic chemistry in 1968 from Liverpool University.
Dr. Grindel joined the Company and was appointed Vice President of
Preclinical Development in September 1994. Prior to joining the Company, Dr.
Grindel served in a variety of positions at R.W. Johnson Pharmaceutical Research
Institute, a division of Johnson & Johnson, from 1988 to 1994, most recently as
Vice President of Strategic Planning, Project Planning and Management. Dr.
Grindel received a B.S. in chemistry from St. Benedict's College in 1969 and a
Ph.D. in medicinal chemistry from the University of Kansas in 1973.
Dr. Guinot joined the Company and was appointed Vice President of European
Drug Development and General Manager of Hybridon Europe in September 1995. Prior
to joining the Company, Dr. Guinot served as a consultant to the Laboratoire
Francais du Fractionnemant et des Biotechnologies (the "LFB") from 1994 to 1995,
where he was responsible for conducting audits of all of the LFB's research and
development programs. From 1981 to 1994, Dr. Guinot served in a variety of
positions at the Beaufour-Ipsen Group, a group of affiliated pharmaceutical
companies, most recently as General Manager of the Institute Henri Beaufour
where he was responsible for the planning, strategy, budget and coordination of
the Beaufour-Ipsen Group's product development efforts. In addition, Dr. Guinot
has served as an Adjunct Professor of Medicine at the University of California,
Davis since 1992, an Adjunct Professor of Physiology at New York Medical College
since 1991 and Consultant Physician in Internal Medicine at Broussais Hospital
in Paris. Dr. Guinot received an M.D. from the University of Paris in 1975 and a
Ph.D. in biophysics from Clermont Ferrand in 1994.
Mr. Hogen joined the Company and was appointed Vice President of Corporate
Communications and Public Affairs in February 1996. Prior to joining the
Company, Mr. Hogen served in a variety of positions at Merck & Co., a
pharmaceutical company, from 1988 to 1995, most recently as Executive Director
of Public Affairs. From 1978 to 1988, Mr. Hogen served in a variety of positions
at United Technologies Corporation, most recently as Director of Contributions
and Community Affairs. Mr. Hogen received a B.A. from Yale University in 1970.
Mr. Jensen joined the Company and served as Vice President of
Administration and Corporate Communications from March 1994 to May 1996 prior to
being appointed Vice President of Corporate Administration and Development in
May 1996. Prior to joining the Company, Mr. Jensen served as Managing Partner of
Parkway Capital Corporation, a securities firm which he co-founded, from 1990 to
1994. From 1984 to 1990, Mr. Jensen served as Senior Vice President of
Oppenheimer & Co., Inc., where he was responsible for marketing the firm's
proprietary trading strategies, and, from 1983 to 1984, as a registered
representative of Merrill Lynch. Mr. Jensen received a B.A. from Wheaton College
in 1976.
Dr. Klein joined the Company and was appointed Vice President of Regulatory
Affairs in November 1996. Prior to joining the Company, Dr. Klein served as the
Vice President of Worldwide Regulatory Affairs at Cephalon, Inc., a
pharmaceutical company, from 1994 to 1996. From 1990 to
32
33
1993, Dr. Klein served as the Vice President of Regulatory Affairs at
Carter-Wallace, Inc., a pharmaceutical company, and from 1983 to 1990 he held a
variety of regulatory positions at SmithKline & French Laboratories. Dr. Klein
received his B.Sc. in Pharmacy from Philadelphia College of Pharmacy and Science
in 1965 and a Ph.D. in Pharmacology from the Albert Einstein College of Medicine
in 1972.
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 1983 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. 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. 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.
Ms. VanStone joined the Company in May 1995 as its patent counsel. Prior to
joining the Company, Ms. VanStone served as patent counsel at ImmuLogic
Pharmaceutical Corporation from 1992 to 1995 and as an associate attorney at the
law firm of Weingarten, Schurgin, Gabnebin & Hayes from 1989 to 1992. Ms.
VanStone received an A.B. in biochemistry from Mount Holyoke College in 1984 and
a J.D. from Suffolk University Law School in 1989.
Mr. Wiggins joined the Company and was appointed Vice President of Business
Development and Marketing in November 1996. Prior to joining the Company, Mr.
Wiggins served in a variety of positions at Schering-Plough Corporation, a
pharmaceutical company, from 1986 to 1996, most recently as the Director of
Business Development. From 1980 to 1986, Mr. Wiggins held various marketing
positions at Ortho Pharmaceuticals, Inc., a pharmaceutical company, and Pfizer,
Inc., a pharmaceutical company. Mr. Wiggins received his B.S. in Finance from
Syracuse University in 1978 and a M.B.A. from the University of Arizona in 1980.
33
34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
Since January 24, 1996, the Company's Common Stock has traded on the
Nasdaq National Market under the symbol "HYBN." Prior to January 24, 1996, there
was no established public trading market for the Company's Common Stock.
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 since January 24, 1996.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996)............ $14.25 $ 8.75
Second Quarter................................... 11.875 5.125
Third Quarter.................................... 11.875 6.625
Fourth Quarter................................... 8.625 5.25
1997
- ----
First Quarter (through March 26, 1997)........... 8.625 5.625
The reported closing bid price of the Common Stock on the Nasdaq National
Market on March 26, 1997 was $6.375 per share. The number of stockholders of
record on March 14, 1997 was 352.
The Company has never declared or paid cash dividends on its capital
stock, and the Company does not expect to pay any cash dividends on its Common
Stock in the foreseeable future. The indenture under which the Company has
agreed to issue $50.0 million of 9% Convertible Subordinated Notes due 2004
(the "Notes") on April 2, 1997 limits the Company's ability to pay dividends or
make other distributions on its Common Stock. In addition, the Company is
currently prohibited from paying cash dividends under a credit facility with a
commercial bank (the "Bank Credit Facility").
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
During the quarterly period ended December 31, 1996, the Company sold the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):
1. On October 25, 1996, the Company issued, for an aggregate purchase
price of $1,637,352, a total of 204,669 shares of Common Stock to nine
individuals and one entity upon exercise by such individuals and entity of
warrants to purchase shares of Common Stock.
The shares of Common Stock issued in the above transactions were offered
and sold in reliance upon the exemption from registration under Regulation S
promulgated under the Securities Act, relative to sales by an issuer made
outside of the United States.
34
35
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The selected financial data presented below for each of the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the
Company's Consolidated Financial Statements that have been audited by Arthur
Andersen LLP, independent public accountants. These 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.
Year Ended December 31,
------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues
Research and Development.......... $ -- $ 917 $ 1,032 $ 1,186 $ 1,419
Product revenue................... -- -- -- -- 1,080
Royalty and other income.......... -- -- -- -- 62
Interest income................... 12 267 135 219 1,447
======== ======== ======== ======== ========
12 1,184 1,167 1,405 4,008
Operating Expenses
Research and development.......... 8,762 16,168 20,024 29,685 39,390
General and administrative........ 5,163 4,372 6,678 6,094 11,347
Interest.......................... 782 380 69 173 124
-------- -------- -------- -------- --------
Total operating expenses..... 14,707 20,920 26,771 35,952 50,861
-------- -------- -------- -------- --------
Net Loss.............................. $(14,695) $(19,736) $(25,604) $(34,547) $(46,853)
======== ======== ======== ======== ========
Pro forma net loss per common share(1) $ (2.13) $ (1.93)
======== ========
Pro forma weighted average common shares
outstanding(1).................. 16,195 24,261
======== ========
As of December 31,
------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments(2)...................... $ 945 $ 8,767 $ 3,396 $ 5,284 $ 16,419
Working capital (deficit)............. (301) 8,357 (1,713) 210 8,888
Total assets.......................... 5,187 15,243 11,989 19,618 41,537
Long-term debt, net of current portion 293 79 1,522 1,145 9,032
Convertible promissory notes payable.. 9,430 -- -- -- --
Deficit accumulated in the development (22,454) (42,190) (67,794) (102,341) (149,194)
Total stockholders' equity (deficit).. (7,069) 12,178 4,774 12,447 22,855
- --------------
(1) Computed on the basis described in Note 2(b) of Notes to Consolidated
Financial Statements attached as APPENDIX A hereto.
(2) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
35
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The Company is engaged in the discovery and development of genetic
medicines based primarily on antisense technology. The Company commenced
operations in February 1990 and since that time has been engaged primarily in
research and development efforts, development of its manufacturing capabilities
and organizational efforts, including recruitment of scientific and management
personnel, and raising capital. To date, the Company has not received revenue
from the sale of biopharmaceutical products developed by it. In order to
commercialize its own products, the Company will need to address a number of
technological challenges and comply with comprehensive regulatory requirements.
Accordingly, it is not possible to predict the amount of funds that will be
required or the length of time that will pass before the Company receives
revenues from sales of any of these products. All revenues received by the
Company to date have been derived from collaborative agreements, interest on
invested funds and revenues from the custom contract manufacturing of synthetic
DNA and reagent products by the Company's Hybridon Specialty Products Division.
The Company has incurred losses since its inception and expects to incur
significant operating losses in the future. The Company expects that its
research and development expenses will increase significantly during 1997 and
future years as it moves its principal research and development programs to more
advanced preclinical studies, clinical trials and later phase clinical trials.
In addition, the Company expects that its facilities costs will increase in 1997
and future years over 1996 levels as a result of the relocation of the Company's
executive offices and its primary research and development laboratories to
Cambridge, Massachusetts in February 1997. The Company also expects that its
personnel and patent costs will increase significantly in the future. Costs
associated with the Company's patent applications are expected to increase as
the Company continues to file and prosecute such applications. Patent costs also
would increase significantly if the Company became involved in litigation or
administrative proceedings involving its patents or those of third parties. The
Company has incurred cumulative losses from inception through December 31, 1996
of approximately $149.2 million.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward- looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
The Company had total revenues of $4.0 million in 1996, $1.4 million in
1995 and $1.2 million in 1994. During the years ended December 31, 1996, 1995
and 1994, the Company received revenues from research and development
collaborations of $1.4 million, $1.2 million and $1.0 million, respectively.
Research and development collaboration revenue includes revenues earned under a
collaborative agreement with Roche, which included milestone payments for the
designation of lead compounds in the human papilloma virus and hepatitis C
programs in the years ended December 31, 1996 and 1995, respectively. For the
year ended December 31, 1996, collaborative revenues also included revenues
earned under a collaborative agreement with Searle. Revenues from the custom
contract manufacturing of synthetic DNA and reagent products by the Hybridon
Specialty Products Division were $1.1 million for the year ended December 31,
1996. Revenues from interest income for the years ended December 31, 1996, 1995
and 1994 were $1.4 million, $219,000 and $135,000, respectively. The increase in
interest income in the year ended December 31, 1996 was the result of
36
37
substantially higher cash balances available for investment as a result of the
Company's initial public offering completed on February 2, 1996.
During the years ended December 31, 1996, 1995 and 1994, the Company
expended $39.4 million, $29.7 million and $20.0 million, respectively, on
research and development activities. The increases in research and development
expenses in 1996, 1995 and 1994 reflect increasing expenses related primarily to
ongoing clinical trials of the Company's product candidates. Clinical trials for
GEM 91 were initiated in France in October 1993 and in the U.S. in May 1994.
During the year ended December 31, 1996, GEM 132 for the treatment of systemic
CMV and CMV retinitis entered into clinical trials. Research and development
staffing and related costs also increased significantly in 1996 and 1995 as the
number of employees engaged in research and development increased to 206 at
December 31, 1996 from 124 at December 31, 1995 and from 102 at December 31,
1994. In addition, due to increased activity in preclinical studies and the
initiation of clinical trials, expenditures for outside testing services,
laboratory supplies and consulting fees increased significantly in 1996 and
1995. Patent expenses also increased in 1996, as the Company continued to
develop a patent portfolio both domestically and internationally and prosecuted
its patent applications. The Company expects to invest significant resources in
1997 in connection with the ongoing trials of GEM 91 and GEM 132 and the
performance of preclinical studies and the preparation of IND applications with
respect to additional antisense compounds.
The Company incurred general and administrative expenses of $11.3 million,
$6.1 million and $6.7 million in the years ended December 31, 1996, 1995 and
1994, respectively. The increase in general and administrative expenses in 1996
from 1995 was primarily attributable to an increase in expenses for business
development activity, public relations and legal expenses incurred primarily as
a result of being a public company and salaries and related costs. The decrease
in general and administrative expenditures in 1995 from 1994 was primarily
attributable to decreases in staffing and related costs and in outside
consultants previously used to develop a presence in foreign markets, offset
partially by an increase in occupancy costs of certain new facilities.
Interest expense was $124,000 in 1996, $173,000 in 1995 and $69,000 in
1994. Interest expense in 1996, 1995 and 1994 was comprised primarily of
interest incurred on borrowings to finance the purchase of property and
equipment and leasehold improvements. The decrease in interest expense in 1996
reflects a decrease in the outstanding balance of borrowings to finance the
purchase of property and equipment. The increase in interest expense in 1995
over 1994 reflects an increase in the average long-term debt outstanding during
1995. The Company's future interest expense will increase significantly as a
result of the Notes.
As a result of the above factors, the Company incurred net losses of $46.9
million, $34.5 million and $25.6 million for the years ended December 31, 1996,
1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1996, the Company has financed its
operations, including capital expenditures, through a public offering of common
stock, private placements of equity securities and the exercise of stock options
and warrants with gross proceeds totalling $175.4 million, as well as through
bank and other borrowings of $9.5 million and capital leases of $3.2 million.
The Company has utilized approximately $127.8 million to fund operating
activities and $30.5 million to finance capital expenditures, including
leasehold improvements at the Company's Cambridge, Massachusetts corporate
headquarters and at its manufacturing facility in Milford, Massachusetts and a
$5.5 million investment in the partnership which owns the Cambridge facility.
On March 26, 1997, the Company entered into a Purchase Agreement pursuant
to which it agreed to issue and sell $50.0 million of the Notes to certain
investors. The Notes bear interest at a rate of 9% per annum and have a
maturity date of April 1, 2004. Under the terms of the
37
38
Notes, the Company will be required to make semiannual interest payments on the
outstanding principal balance of the Notes on April 1 and October 1 of each
year during which the Notes are outstanding. The Notes will be convertible at
the option of the holder into the Company's Common Stock at any time prior to
maturity, unless previously redeemed or repurchased by the Company under
certain specified circumstances, at a conversion price of $7.0125 per share
(subject to adjustment). In connection with the execution of the agreement, the
Company also granted a 60-day option (which expires on May 25, 1997) to
purchase up to an additional $10.0 million principal amount of the Notes.
During the year ended December 31, 1996, the Company utilized
approximately $42.1 million to fund operating activities and approximately $8.9
million for capital expenditures. The primary use of cash for operating
activities was to fund the cash operating loss of $43.7 million. Capital
expenditures during the year ended December 31, 1996 included amounts expended
for the build-out and equipping of the Company's corporate headquarters and
primary research and development laboratories in Cambridge, Massachusetts and of
its leased manufacturing facility in Milford, Massachusetts. During the fourth
quarter of 1996, the build-out of the Company's leased manufacturing facility in
Milford, Massachusetts was completed. The Company plans to equip the facility in
phases as necessary to satisfy its production requirements. The Company plans to
expend approximately $2.3 million for its equipment requirements for this
facility in 1997. The Company also expects to incur an additional $2.0 million
to complete the Cambridge facility and approximately $1.0 million for other
capital expenditures in 1997.
In December 1996, the Company entered into a four-year $7.5 million credit
facility with a bank to finance the leasehold improvements of its Milford
manufacturing facility. The Bank Credit Facility is payable in equal monthly
payments of $62,500 plus interest with a balloon payment of $3.8 million due on
January 1, 2002. Interest is payable at the lesser of (i) such financial
institution's prime rate plus 1%, or (ii) such financial institution's LIBOR
rate plus 3.5%. The Bank Credit Facility contains certain financial covenants,
including minimum liquidity and net worth requirements, and prohibits the
payment of dividends. The Company has secured its obligations under the Bank
Credit Facility with a lien on all of its assets. If, at specified times, the
Company's minimum liquidity is less than $15.0 million, $10.0 million or $5.0
million, the Company is required to pledge cash collateral to the bank equal to
25%, 50% and 100%, respectively, of the then outstanding balance due under the
Bank Credit Facility pursuant to a cash pledge agreement.
In 1996, the Company financed the purchase of manufacturing equipment and
other equipment at the Milford manufacturing facility through a sale/leaseback
transaction of approximately $1.7 million under a $2.8 million lease line with a
leasing company in the fourth quarter of 1996. These borrowings are payable in
48 monthly payments ranging from $36,000 to $50,000.
In 1994 and 1995, the Company financed the purchase of certain property
and equipment through a $500,000 secured note payable to a financial
institution, a $750,000 note payable to one of its landlords and $1.5 million of
capital lease obligations. The $500,000 secured note was repaid in 1995,
$661,000 of the $750,000 note is outstanding at December 31, 1996 and bears
interest at a rate of 13% per annum and $457,000 of the capital lease
obligations is currently outstanding and bears interest at a rate of 4.29% per
annum.
The Company has entered into a lease for its corporate headquarters and
primary research and development laboratories in Cambridge, Massachusetts and
moved its operations to this facility in the first quarter of 1997. The
Company's facilities costs increased significantly upon occupying the Cambridge
facility. As part of the lease agreement, the Company has elected to treat $5.5
million of payments to the landlord (primarily related to tenant improvements)
as contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord. All other expenses
incurred to equip and build-out the facility in excess of $5.5 million are
included in
38
39
leasehold improvements and are not exchangeable for a partnership interest under
the lease. The Cambridge landlord is an affiliate of three directors of the
Company.
The Company had cash, cash equivalents and short-term investments of $16.4
million at December 31, 1996. Based on its current operating plan, the Company
believes that its existing capital resources, together with the committed
collaborative research and development payments from Searle, anticipated sales
of the Hybridon Specialty Products Division and margins on such sales, which
are expected to increase significantly over historic levels, and the net
proceeds from the sale of the Notes and the interest earned thereon, will be
adequate to fund the Company's capital requirements through at least the first
quarter of 1998.
The Company'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 manufactured on a custom
contract basis by the Hybridon Specialty Products Division and the margins on
such sales, the time and costs involved in obtaining regulatory approvals, the
costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the ability of the Company to establish
and maintain collaborative academic and commercial research, development and
marketing relationships, the ability of the Company to obtain third party
financing for leasehold improvements and other capital expenditures and the
costs of manufacturing scale-up and commercialization activities and
arrangements.
The Company intends to seek additional equity, debt and lease financing to
fund future operations. The Company also intends to seek additional
collaborative development and commercialization relationships with potential
corporate partners in order to fund certain of its programs. Except for research
and development funding from Searle under Hybridon's 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 products that it
is developing (as opposed to sales of DNA products and reagents manufactured on
a custom contract basis by the Hybridon Specialty Products Division). If the
Company is unable to obtain necessary additional funds, it would be required to
scale back or eliminate certain of its research and development programs or
license to third parties certain technologies which the Company would otherwise
pursue on its own.
As of December 31, 1996, the Company had approximately $138.2 million and
$3.0 million of net operating loss and tax credit carryforwards, respectively,
which expire at various dates between 2005 and 2011. The Tax Reform Act of 1986
(the "Tax Act") contains certain provisions that may limit the Company's ability
to utilize net operating loss and tax credit carryforwards in any given year if
certain events occur, including cumulative changes in ownership interests in
excess of 50% over a three-year period. The Company has completed several
financings since the effective date of the Tax Act, which, as of December 31,
1996, have resulted in ownership changes in excess of 50%, as defined under the
Tax Act. The Company does not believe that such ownership changes will
significantly impact the Company's ability to utilize the net operating loss and
credit carryforward existing at December 31, 1996. There can be no assurance
that ownership changes in future periods will not significantly limit the
Company's use of net operating loss and tax credit carryforwards.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
39
40
Early Stage of Development; Technological Uncertainty
Hybridon's potential pharmaceutical products are at various stages of
research, preclinical testing or clinical development. There are a number of
technological challenges that the Company must successfully address to complete
any of its development efforts. To date, most of the Company's resources have
been dedicated to applying oligonucleotide chemistry and cell biology to the
research and development of potential pharmaceutical products based upon
antisense technology. As in most drug discovery programs, the results of in
vitro, tissue culture and preclinical studies by the Company may be inconclusive
and may not be indicative of results that will be obtained in human clinical
trials. In addition, results attained in early human clinical trials by the
Company may not be indicative of results that will be obtained in later clinical
trials. Neither the Company, nor to its knowledge, any other company has
successfully completed human clinical trials of a product based on antisense
technology, and there can be no assurance that any of the Company's products
will be successfully developed.
The success of any of the Company's potential pharmaceutical products
depends in part on the molecular target on the genetic material chosen as the
site of action of the oligonucleotide. There can be no assurance that the
Company's choice will be appropriate for the treatment of the targeted disease
indication in humans or that mutations in the genetic material will not result
in a reduction in or loss of the efficacy or utility of a Company product.
Uncertainty Associated with Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of
its pharmaceutical products under development, the Company must undertake
extensive and costly preclinical studies and clinical trials to demonstrate that
such products are safe and efficacious. The results from preclinical studies and
early clinical trials are not necessarily predictive of results that will be
obtained in later stages of testing or development, and there can be no
assurance that the Company's clinical trials will demonstrate the safety and
efficacy of any pharmaceutical products or will result in pharmaceutical
products capable of being produced in commercial quantities at reasonable cost
or in a marketable form.
Although the Company is conducting clinical trials of certain
oligonucleotide compounds and is developing several oligonucleotide compounds on
which it plans to file IND applications with the FDA and equivalent filings
outside of the U.S., there can be no assurance that necessary preclinical
studies on these compounds will be completed satisfactorily or that the Company
otherwise will be able to make its intended filings. Further, there can be no
assurance that the Company will be permitted to undertake and complete human
clinical trials of any of the Company's potential products, either in the U.S.
or elsewhere, or, if permitted, that such products will not have undesirable
side effects or other characteristics that may prevent or limit their commercial
use.
The rate of completion of the Company's human clinical trials, if
permitted, will be dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the protocol, the availability of
alternative treatments, the proximity to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment might result in
increased costs and delays, which could have a material adverse effect on the
Company. The Company or the FDA or other regulatory agencies may suspend
clinical trials at any time if the subjects or patients participating in such
trials are being exposed to unacceptable health risks.
40
41
Future Capital Needs; Uncertainty of Additional Funding
The Company'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
manufactured on a custom contract basis by the Hybridon Specialty Products
Division and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the ability of
the Company to establish and maintain collaborative academic and commercial
research, development and marketing relationships, the ability of the Company to
obtain third-party financing for leasehold improvements and other capital
expenditures and the costs of manufacturing scale-up and commercialization
activities and arrangements.
Based on its current operating plan, the Company believes that its
existing capital resources, together with the committed collaborative research
and development payments from Searle, anticipated sales of the Hybridon
Specialty Products Division and margins on such sales, which are expected to
increase significantly over historic levels, and the net proceeds from the sale
of the Notes and the interest earned thereon, will be adequate to fund the
Company's capital requirements through at least the first quarter of 1998. The
Company anticipates that it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financings, to support the Company's operations beyond
that time. No assurance can be given that additional financing will be
available, or, if available, that it will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders will result. Additionally, the terms of any such
additional financing may adversely affect the holdings or rights of then
existing stockholders. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research, drug discovery or
development programs, or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own. See "Item 1. Business -- Hybridon Drug Development
and Discovery Programs."
History of Operating Losses and Accumulated Deficit
Hybridon has incurred net losses since its inception. At December 31,
1996, the Company's accumulated deficit was approximately $149.2 million. Such
losses have resulted principally from costs incurred in the Company's research
and development programs and from general and administrative costs associated
with the Company's development. No revenues have been generated from sales of
pharmaceutical products developed by the Company and no revenues from the sale
of such products are anticipated for a number of years, if ever. The Company
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase significantly as the Company's research
and development and clinical trial efforts expand. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial. Although the Company's Hybridon Specialty Products Division has
begun to generate revenues from the sale of synthetic DNA products and reagents
manufactured by it on a custom contract basis, there can be no assurance that
demand for and margins on these products will not be lower than anticipated. The
Company's ability to achieve profitability is dependent in part on obtaining
regulatory approvals for its pharmaceutical products and entering into
agreements for drug discovery, development and commercialization. There can be
no assurance that the Company will obtain required regulatory approvals, enter
into any additional agreements for drug discovery, development and
commercialization or ever achieve sales or profitability.
41
42
Patents and Proprietary Rights
The Company's success will depend in part on its ability to develop
patentable products and obtain and enforce patent protection for its products
both in the U.S. and in other countries. The Company has filed and intends to
file applications as appropriate for patents covering both its products and
processes. However, the patent positions of pharmaceutical and biotechnology
firms, including Hybridon, are generally uncertain and involve complex legal and
factual questions. No assurance can be given that patents will issue from any
pending or future patent applications owned by or licensed to Hybridon. Since
patent applications in the U.S. are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions covered by pending patent
applications or that it was the first to file patent applications for such
inventions. Further, there can be no assurance that the claims allowed under any
issued patents will be sufficiently broad to protect the Company's technology.
In addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide competitive advantages to the
Company.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to competitors or others nor breaching the
technology licenses upon which the Company's products might be based. The
Company's licenses of patents and patent applications impose various
commercialization, sublicensing, insurance and other obligations on the Company.
Failure of the Company to comply with these requirements could result in
termination of the license. The Company is aware of patents and patent
applications belonging to competitors, and it is uncertain whether these patents
and patent applications will require the Company to alter its products or
processes, pay licensing fees or cease certain activities. In particular,
competitors of the Company and other third parties hold issued patents and
pending patent applications relating to antisense and other gene expression
modulation technologies which may result in claims of infringement against the
Company or other patent litigation. There can be no assurance that the Company
will be able successfully to obtain a license to any technology that it may
require or that, if obtainable, such technology can be licensed at a reasonable
cost or on an exclusive basis. See "Item 1. Business -- Patents, Trade Secrets
and Licenses."
The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of others' proprietary rights. The Company also
may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office, which could result in substantial cost to the Company, to
determine the priority of inventions. Furthermore, the Company may have to
participate at substantial cost in International Trade Commission proceedings to
abate importation of products which would compete unfairly with products of the
Company.
Hybridon engages in collaborations, sponsored research agreements and
other agreements with academic researchers and institutions and government
agencies. Under the terms of such agreements, third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. See "Item 1. Business -- Patents, Trade
Secrets and Licenses."
42
43
Risks Associated with Hybridon Specialty Products Division
Through its Hybridon Specialty Products Division, the Company manufactures
oligonucleotide compounds on a custom contract basis for third parties. The
results of operations of the Hybridon Specialty Products Division will be
dependent upon the demand for and margins on these products, which may be lower
than anticipated by the Company. The results of operations of the Hybridon
Specialty Products Division also may be affected by the price and availability
of raw materials. It is possible that Hybridon's manufacturing capacity may not
be sufficient for production of oligonucleotides both for the Company's internal
needs and for sale to third parties. The Company's manufacturing facility must
comply with GMP and other FDA regulations. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results -- Limited Manufacturing Capability."
The Company will be competing against a number of third parties, as well
as the possibility of internal production by the Company's customers, in
connection with the operations of the Hybridon Specialty Products Division. Many
of these third parties are likely to have greater financial, technical and human
resources than the Company. Key competitive factors will include the price and
quality of the products as well as manufacturing capacity and ability to comply
with specifications and to fulfill orders on a timely basis. The Company may be
required to reduce the cost of its product offerings to meet competition. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Certain Factors That May Affect Future Results -- Competition."
Failure to manufacture oligonucleotide compounds in accordance with the
purchaser's specifications could expose the Company to breach of contract and/or
product liability claims from the purchaser or the purchaser's customers. The
Company has limited experience in sales, marketing and distribution and is
relying in part upon the efforts of a third party, Perkin-Elmer, in connection
with the marketing and sale of products by the Hybridon Specialty Products
Division. See "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Certain Factors That May Affect Future
Results -- Absence of Sales and Marketing Experience."
Need to Establish Collaborative Commercial Relationships; Dependence on Partners
Hybridon's business strategy includes entering into strategic alliances or
licensing arrangements with corporate partners, primarily pharmaceutical and
biotechnology companies, relating to the development and commercialization of
certain of its potential products. Although the Company is a party to corporate
collaborations with Searle, Roche and Medtronic, there can be no assurance that
these collaborations will be scientifically or commercially successful, that the
Company will be able to negotiate additional collaborations, that such
collaborations will be available to the Company on acceptable terms or that any
such relationships, if established, will be scientifically or commercially
successful. The Company expects that under certain of these arrangements, the
collaborative partner will have the responsibility for conducting human clinical
trials and the submission for regulatory approval of the product candidate with
the FDA and certain other regulatory agencies. Should the collaborative partner
fail to develop a marketable product, the Company's business may be materially
adversely affected. There can be no assurance that the Company's collaborative
partners will not be pursuing alternative technologies or developing alternative
compounds either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
targeted by these collaborative programs. The Company's business also will be
affected by the performance of its corporate partners in marketing any
successfully developed products within the geographic areas in which such
partners are granted marketing rights. The Company's plan is to retain
manufacturing rights for many of the products it may license pursuant to
arrangements with corporate partners. However, there can be no assurance that
the Company will be able to retain such rights on acceptable terms, if at all,
or that the Company will have the ability to produce the quantities of product
required under the terms of such
43
44
arrangements. See "Item 1. Business -- Hybridon Drug Development and Discovery
Programs" and "-- Corporate Collaborations."
No Assurance of Regulatory Approval; Government Regulation
The Company's preclinical studies and clinical trials, as well as the
manufacturing and marketing of the potential products being developed by it and
the products sold by the Hybridon Specialty Products Division, are subject to
extensive regulation by numerous federal, state and local governmental
authorities in the U.S. Similar regulatory requirements exist in other countries
where the Company intends to test and market its drug candidates. Preclinical
studies of the Company's product development candidates are subject to GLP
requirements and the manufacture of any products by the Company, including
products developed by the Company and products manufactured for third parties on
a custom contract basis by the Hybridon Specialty Products Division, will be
subject to GMP requirements prescribed by the FDA.
The regulatory process, which includes preclinical studies, clinical
trials and post-clinical testing of each compound to establish its safety and
effectiveness, takes many years and requires the expenditure of substantial
resources. Delays may also be encountered and substantial costs incurred in
foreign countries. There can be no assurance that, even after the passage of
such time and the expenditure of such resources, regulatory approval will be
obtained for any drugs developed by the Company. Data obtained from preclinical
and clinical activities are subject to varying interpretations which could
delay, limit or prevent regulatory approval by the FDA or other regulatory
agencies. The Company, an IRB, the FDA or other regulatory agencies may suspend
clinical trials at any time if the participants in such trials are being exposed
to unacceptable health risks. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Failure to comply with applicable regulatory requirements can,
among other things, result in fines, suspension of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
FDA policy may change and additional government regulations may be established
that could prevent or delay regulatory approval of the Company's potential
products. In addition, a marketed drug and its manufacturer are subject to
continual review, and subsequent discovery of previously unknown problems with a
product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market and withdrawal
of the right to manufacture the product. All of the foregoing regulatory matters
also will be applicable to development, manufacturing and marketing undertaken
by any strategic partners or licensees of the Company. See "Item 1. Business --
Government Regulation."
Competition
There are many companies, both private and publicly traded, that are
conducting research and development activities on technologies and products
similar to or competitive with the Company's antisense technologies and proposed
products. For example, many other companies are actively seeking to develop
products, including antisense oligonucleotides, with disease targets similar to
those being pursued by the Company. Some of these competitive products are in
clinical trials. The Company believes that the industry-wide interest in
investigating the potential of gene expression modulation technologies will
continue and will accelerate as the techniques which permit the design and
development of drugs based on such technologies become more widely understood.
There can be no assurance that the Company's competitors will not succeed in
developing products based on oligonucleotides or other technologies, existing or
new, which are more effective than any that are being developed by the Company,
or which would render Hybridon's antisense technologies obsolete and
noncompetitive. Moreover, there currently are commercially available products
for the treatment of many of the disease targets being pursued by the Company.
44
45
Competitors of the Company engaged in all areas of biotechnology and drug
discovery in the U.S. and other countries are numerous and include, among
others, pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions. Many of the Company's competitors have
substantially greater financial, technical and human resources than the Company.
In addition, many of these competitors have significantly greater experience
than the Company 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. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience. Accordingly, the Company's competitors may succeed in
obtaining FDA or other regulatory approvals for products or in commercializing
such products more rapidly than the Company. See "Item 1. Business --
Competition."
Limited Manufacturing Capability
While the Company believes that its existing production capacity will be
sufficient to enable it to satisfy its current research needs and to support the
Company's preclinical and clinical requirements for oligonucleotide compounds,
the Company will need to purchase additional equipment to expand its
manufacturing capacity in order to satisfy its future requirements, subject to
obtaining regulatory approvals, for commercial production of its product
candidates. In addition, Hybridon Specialty Products Division is using the
Company's existing production capacity to custom contract manufacture synthetic
DNA products for commercial sale. As a result, depending on the level of sales
by the Hybridon Specialty Products Division, and the success of the Company's
product development programs, Hybridon's manufacturing capacity may not be
sufficient for production for both its internal needs and sales to third
parties. In addition, in order to successfully commercialize its product
candidates or achieve satisfactory margins on sales, the Company may be required
to reduce further the cost of production of its oligonucleotide compounds, and
there can be no assurance that the Company will be able to do so.
The manufacture of the Company's products is subject to GMP requirements
prescribed by the FDA or other standards prescribed by the appropriate
regulatory agency in the country of use. To the Company's knowledge, therapeutic
products based on chemically-modified oligonucleotides have never been
manufactured on a commercial scale. There can be no assurance that the Company
will be able to manufacture products in a timely fashion and at acceptable
quality and price levels, that it or its suppliers can manufacture in compliance
with GMP or other regulatory requirements or that it or its suppliers will be
able to manufacture an adequate supply of product. The Company has in the past
relied in part and may in the future rely upon third party contractors in
connection with the manufacture of some compounds. Reliance on such third
parties entails a number of risks, including the possibility that such third
parties may fail to perform on an effective or timely basis or fail to abide by
regulatory or contractual restrictions applicable to the Company. See "Item 1.
Business -- Manufacturing Technology and the Hybridon Specialty Products
Division."
There are three sources of supply for the nucleotide building blocks used
by the Company in its current oligonucleotide manufacturing process. This
process is covered by issued patents either held by or licensed to these three
companies. Therefore, these companies are likely the sole suppliers to Hybridon
of these nucleotide building blocks. The inability of Hybridon to obtain these
nucleotide building blocks from one of these suppliers could have a material
adverse effect on Hybridon.
45
46
Absence of Sales and Marketing Experience
The Company expects to market and sell certain of its products directly
and certain of its products through co-marketing or other licensing arrangements
with third parties. The Company has limited experience in sales, marketing or
distribution, and does not expect to establish a sales and marketing plan or
direct sales capability with respect to the products being developed by it until
such time as one or more of such products approaches marketing approval. In
addition, although the Company does have a limited direct sales capability with
respect to the sales of custom contract manufactured DNA products to third
parties by the Hybridon Specialty Products Division, the Company has entered
into a sales and marketing arrangement with Perkin-Elmer with respect to such
products and is reliant in part on the efforts of Perkin-Elmer to promote these
products. In order to market the products being developed by it directly, the
Company will be required to develop a substantial marketing staff and sales
force with technical expertise and with supporting distribution capability.
There can be no assurance that the Company will be able to build such a
marketing staff or sales force, that the cost of establishing such a marketing
staff or sales force will be justifiable in light of any product revenues or
that the Company's direct sales and marketing efforts will be successful. In
addition, if the Company succeeds in bringing one or more products to market, it
may compete with other companies that currently have extensive and well-funded
marketing and sales operations. There can be no assurance that the Company's
marketing and sales efforts would enable it to compete successfully against such
other companies. To the extent the Company enters into co- marketing or other
licensing arrangements, any revenues received by the Company will be dependent
in part on the efforts of third parties and there can be no assurance that such
efforts will be successful. See "Item 1. Business -- Marketing Strategy."
No Assurance of Market Acceptance
Pharmaceutical products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years. There can be no assurance that, if approved for marketing, such
products will achieve market acceptance. The degree of market acceptance will
depend upon a number of factors, including the receipt of regulatory approvals,
the establishment and demonstration in the medical community of the clinical
efficacy and safety of the Company's products and their potential advantages
over existing treatment methods and reimbursement policies of government and
third-party payors. There is no assurance that physicians, patients, payors or
the medical community in general will accept or utilize any products that may be
developed by the Company.
Product Liability Exposure and Insurance
The use of any of the Company's potential products in clinical trials and
the commercial sale of any products, including the products being developed by
it and the DNA products and reagents manufactured and sold on a custom contract
basis by the Hybridon Specialty Products Division, may expose the Company to
liability claims. These claims might be made directly by consumers, health care
providers or by pharmaceutical and biotechnology companies or others selling
such products. Hybridon has product liability insurance coverage, and such
coverage is subject to various deductibles. Such coverage is becoming
increasingly expensive, and no assurance can be given that the Company will be
able to maintain or obtain such insurance at reasonable cost or in sufficient
amounts to protect the Company against losses due to liability claims that
could have a material adverse effect on the Company.
46
47
Hazardous Materials
The Company's research and development and manufacturing activities
involves the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could have a material adverse
effect on the Company.
Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement
The Company's ability to commercialize its pharmaceutical products
successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of such products and related treatment are
obtained from government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products and
services. Also the trend towards managed health care in the U.S. and the
concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reduce government insurance programs, may all
result in lower prices for the Company's products. The cost containment measures
that health care providers are instituting could affect the Company's ability to
sell its products and may have a material adverse effect on the Company.
Uncertainty of Health Care Reform Measures
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) have proposed or are reportedly
considering proposing a variety of reforms to the health care systems in the
U.S. and abroad. The Company cannot predict what health care reform legislation,
if any, will be enacted in the U.S. or elsewhere. Significant changes in the
health care system in the U.S. or elsewhere are likely to have a substantial
impact over time on the manner in which the Company conducts its business. Such
changes could have a material adverse effect on the Company. The existence of
pending health care reform proposals could have a material adverse effect on the
Company's ability to raise capital. Furthermore, the Company's ability to
commercialize its potential products may be adversely affected to the extent
that such proposals have a material adverse effect on the business, financial
condition and profitability of other companies that are prospective corporate
partners with respect to certain of the Company's proposed products.
Attraction and Retention of Key Employees and Scientific Collaborators
The Company is highly dependent on the principal members of its management
and scientific staff, including E. Andrews Grinstead, III, the Company's
Chairman of the Board, President and Chief Executive Officer, and Sudhir
Agrawal, the Company's Senior Vice President of Discovery and Chief Scientific
Officer, the loss of whose services could have a material adverse effect on the
Company. Furthermore, recruiting and retaining qualified scientific personnel to
perform research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain such personnel on acceptable terms given the competition for
experienced scientists among numerous pharmaceutical, biotechnology and health
care companies, universities and non-profit research institutions.
The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as clinical testing, governmental
approvals, production and marketing, are expected to require the addition of new
management personnel and the development of additional expertise by
47
48
existing management personnel. The failure to acquire such services or to
develop such expertise could have a material adverse effect on the Company.
The Company'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 there can be no assurance that the Company will be able to develop
and maintain such relationships on acceptable terms. The Company has entered
into a number of such collaborative relationships relating to specific disease
targets and other research activities in order to augment its internal research
capabilities and to obtain access to the specialized knowledge or expertise of
its collaborative partners. The loss of any such collaborative relationship
could have an adverse effect on the Company's ability to conduct research and
development in the area targeted by such collaboration. See "Item 1. Business --
Hybridon Drug Development and Discovery Programs" and "-- Academic and Research
Collaborations."
Concentration of Ownership by Directors and Executive Officers
The Company's directors and executive officers and their affiliates
beneficially own approximately 18.89% of the Company's outstanding Common Stock
(including 4,217,857 shares issuable upon the exercise of outstanding warrants
and options held by the Company's directors and executive officers and their
affiliates which are exercisable within the 60-day period following February 28,
1997). As a result, these stockholders, if acting together, may have the ability
to influence the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
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 May 19, 1997 (the "1997 Proxy
Statement") under the caption "Proposal 1--Election of Directors," which section
is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The response to this item is contained in the 1997 Proxy Statement under
the caption "Proposal 1--Election of Directors," which section is incorporated
herein by this reference.
48
49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The response to this item is contained in the 1997 Proxy Statement under
the caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The response to this item is contained in the 1997 Proxy Statement under
the caption "Certain Transactions," which section is incorporated herein by this
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a) The following documents are filed as APPENDIX A hereto and are
included as part of this Annual Report on Form 10-K:
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) The Company is not filing any financial statement schedules as part
of this Annual Report on Form 10-K because they are not applicable or
the required information is included in the financial statements or
notes thereto.
(c) The list of Exhibits filed as a part of this Annual Report on Form
10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(d) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
last quarter of the Company's fiscal year ended December 31, 1996.
49
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HYBRIDON, INC.
By: /s/ E. ANDREWS GRINSTEAD, III
-------------------------------------
E. Andrews Grinstead, III
Chairman of the Board, President and
Chief Executive Officer
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ E. Andrews Grinstead, II Chairman of the Board, President March 24, 1997
- -------------------------- and Chief Executive Officer and
E. Andrews Grinstead, III Director (Principal Executive
Officer)
/s/ Anthony J. Payne Senior Vice President of Finance March 24, 1997
- -------------------------- and Administration, International
Anthony J. Payne Operations, Treasurer, Secretary
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Sudhir Agrawal Director March 24, 1997
- --------------------------
Sudhir Agrawal
Director March __, 1997
- --------------------------
J. Robert Buchanan
/s/ Mohamed El-Khereiji Director March 24, 1997
- --------------------------
Mohamed El-Khereiji
50
51
/s/ Youssef El-Zein Director March 24, 1997
- --------------------------
Youssef El-Zein
/s/ Nasser Menhall Director March 24, 1997
- --------------------------
Nasser Menhall
/s/ Jerry A. Weisbach Director March 24, 1997
- ---------------------------
Jerry A. Weisbach
/s/ James B. Wyngaarden Director March 24, 1997
- ---------------------------
James B. Wyngaarden
/s/ Paul C. Zamecnik Director March 24, 1997
- ---------------------------
Paul C. Zamecnik
51
52
APPENDIX A
----------
INDEX
PAGE
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and
unaudited pro forma balance sheet as of December 31, 1996 F-3
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1996, and for the period from
May 25, 1989 (inception) to December 31, 1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
period from May 25, 1989 (inception) to December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1996, and for the period from
May 25, 1989 (inception) to December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hybridon, Inc.:
We have audited the accompanying consolidated balance sheets of Hybridon, Inc.
(a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1995 and 1996, 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, 1996 and for the period from May 25,
1989 (inception) to December 31, 1996. 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, 1995 and 1996 and for the period from May 25, 1989
(inception) to December 31, 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 21, 1997 (except with respect to
the matter discussed in Note 1, as to
which the date is March 26, 1997)
F-2
54
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
PRO FORMA
DECEMBER 31, DECEMBER 31,
1995 1996 1996
(Unaudited)
(See Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 5,284,262 $ 12,633,742 $ 59,633,742
Short-term investments - 3,785,146 3,785,146
Prepaid expenses and other current assets 951,526 2,119,220 2,119,220
------------- ------------- -------------
Total current assets 6,235,788 18,538,108 65,538,108
------------- ------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 1,965,754 9,257,516 9,257,516
Laboratory equipment 5,153,550 5,884,861 5,884,861
Equipment under capital leases 1,507,535 2,904,688 2,904,688
Office equipment 1,149,141 1,496,639 1,496,639
Furniture and fixtures 321,763 499,957 499,957
Construction-in-progress 3,236,330 2,193,400 2,193,400
------------- ------------- -------------
13,334,073 22,237,062 22,237,062
Less--Accumulated depreciation and amortization 4,202,543 6,596,294 6,596,294
------------- ------------- -------------
9,131,530 15,640,768 15,640,768
------------- ------------- -------------
OTHER ASSETS:
Restricted cash 1,025,856 437,714 437,714
Notes receivable from officers 308,133 317,978 317,978
Deferred financing costs and other assets 1,217,804 1,152,034 4,152,034
Investment in real estate partnership 1,698,448 5,450,000 5,450,000
------------- ------------- -------------
4,250,241 7,357,726 10,357,726
------------- ------------- -------------
$ 19,617,559 $ 41,536,602 $ 91,536,602
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease $ 418,713 $ 1,308,511 $ 1,308,511
obligations
Accounts payable 2,053,438 4,064,419 4,064,419
Accrued expenses 3,454,625 4,190,766 4,190,766
Deferred revenue 86,250 86,250 86,250
Amounts payable to related parties 12,500 - -
------------- ------------- -------------
Total current liabilities 6,025,526 9,649,946 9,649,946
------------- ------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 1,145,480 9,031,852 9,031,852
------------- ------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE - - 50,000,000
------------- ------------- -------------
COMMITMENTS (Notes 10, and 15)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value-
Authorized--23,026,323 shares at December 31, 1995 and no
shares at December 31, 1996
Issued and outstanding-- 15,982,179 and no shares at
December 31, 1995 and 1996, respectively (converted into
16,856,649 shares of common stock in February 1996) 159,822 - -
Preferred stock, $.01 par value-
Authorized--5,000,000 shares at December 31, 1996
Issued and outstanding--None - - -
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding-- 1,843,666 and 25,146,577 at
December 31, 1995 and 1996, respectively 1,844 25,147 25,147
Additional paid-in capital 114,626,062 173,227,358 173,227,358
Deficit accumulated during the development stage (102,341,175) (149,193,775) (149,193,775)
Deferred compensation - (1,203,926) (1,203,926)
------------- ------------- -------------
Total stockholders' equity 12,446,553 22,854,804 22,854,804
------------- ------------- -------------
$ 19,617,559 $ 41,536,602 $ 91,536,602
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
55
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE
FROM MAY 25,
1989 (INCEPTION)
YEARS ENDED DECEMBER 31, TO DECEMBER 31,
1994 1995 1996 1996
REVENUES:
Research and development $ 1,032,083 $ 1,186,124 $ 1,419,389 $ 4,554,263
Product revenue - - 1,080,175 1,080,175
Royalty income - - 62,321 62,321
Interest income 134,828 218,749 1,446,762 2,141,617
------------ ------------ ------------ -------------
1,166,911 1,404,873 4,008,647 7,838,376
------------ ------------ ------------ -------------
OPERATING EXPENSES:
Research and development 20,024,310 29,684,707 39,390,525 118,631,900
General and administrative 6,677,717 6,094,085 11,346,670 36,789,868
Interest 69,045 172,757 124,052 1,610,383
------------ ------------ ------------ -------------
26,771,072 35,951,549 50,861,247 157,032,151
------------ ------------ ------------ -------------
Net loss $(25,604,161) $(34,546,676) $(46,852,600) $(149,193,775)
============ ============ ============ =============
PRO FORMA NET LOSS PER COMMON SHARE (Note
2(b)) $ (2.13) $ (1.93)
============ ============
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 2(b)) 16,195,100 24,260,702
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
56
F-5
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER $.01 NUMBER $.001 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
INITIAL ISSUANCE OF COMMON STOCK - $ - 668,500 $ 669 $ -
Issuance of Series A convertible preferred stock, net of cash 875,000 8,750 - - 848,250
issuance costs of $18,000
Issuance of Series B convertible preferred stock, net of cash 648,147 6,481 - - 1,731,616
issuance costs of $11,900
Issuance of common stock - - 667,300 667 -
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1990 1,523,147 15,231 1,335,800 1,336 2,579,866
Issuance of Series C convertible preferred stock, net of cash 520,000 5,200 - - 2,571,603
issuance costs of $23,197
Repurchase of common stock - - (262,500) (263) -
Deferred compensation related to restricted stock awards - - - - 2,328,764
Amortization of deferred compensation - - - - -
Compensation expense related to stock option grants - - - - 669,433
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1991 2,043,147 20,431 1,073,300 1,073 8,149,666
Issuance of Series C convertible preferred stock, net of cash 920,000 9,200 - - 4,570,509
issuance costs of $20,291
Issuance of common stock related to restricted stock awards - - 500,266 501 122,243
Issuance of common stock related to the exercise of stock - - 173,075 173 3,165
options
Issuance of warrants - - - - 2,776,130
Deferred compensation related to stock options and restricted - - - - 2,249,428
stock awards
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1992 2,963,147 29,631 1,746,641 1,747 17,871,141
Issuance of Series D convertible preferred stock in exchange
for convertible promissory notes payable, including accrued 1,891,757 18,918 - - 9,581,633
interest, net of cash issuance costs of $113,955
Issuance of Series E convertible preferred stock, net of cash 1,379,310 13,793 - - 9,924,954
issuance costs of $61,251
Issuance of Series F convertible preferred stock, net of cash 2,039,000 20,390 - - 18,272,006
issuance costs of $2,097,604
Issuance of common stock related to the exercise of stock - - 43,625 43 26,645
options
Reduction in deferred compensation due to stock option - - - - (290,287)
termination prior to vesting
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1993 8,273,214 82,732 1,790,266 1,790 55,386,092
Issuance of Series F convertible preferred stock, net of cash 584,500 5,845 - - 5,759,478
issuance costs of $79,677
Issuance of Series G convertible preferred stock, net of cash 1,591,512 15,915 - - 11,709,340
issuance costs of $1,006,841
Issuance of common stock related to the exercise of stock - - 24,000 24 13,376
options
Cancellation of warrants - - - - (68,000)
Reduction in deferred compensation due to stock option - - - - (14,062)
termination prior to vesting
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1994 10,449,226 104,492 1,814,266 1,814 72,786,224
Issuance of Series G convertible preferred stock, net of cash 5,532,953 55,330 - - 41,798,368
issuance costs of $2,409,926
Issuance of common stock related to the exercise of stock - - 29,400 30 41,470
options
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------- --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1995 15,982,179 159,822 1,843,666 1,844 114,626,062
Issuance of common stock related to initial public offering,
net of issuance costs of $ 5,268,756 - - 5,750,000 5,750 52,225,494
Conversion of convertible preferred stock to common stock (15,982,179) (159,822) 16,856,649 16,857 142,965
Issuance of common stock related to the exercise of stock - - 288,700 289 1,089,387
options
Issuance of common stock related to the exercise of warrants - - 407,562 407 3,176,334
Deferred compensation related to grants of common stock - - 1,967,116
options to non-employees
Amortization of deferred compensation relating to grants of
common stock options to non-employees - - - - -
Net loss - - - - -
------------ --------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1996 - $ - 25,146,577 $ 25,147 $173,227,358
============ ========= ========== ======== ============
DEFICIT
ACCUMULATED TOTAL
DURING THE DEFERRED STOCKHOLDERS'
DEVELOPMENT COMPENSATION EQUITY
STAGE (DEFICIT)
INITIAL ISSUANCE OF COMMON STOCK $ - $ - $ 669
Issuance of Series A convertible preferred stock, net of cash - - 857,000
issuance costs of $18,000
Issuance of Series B convertible preferred stock, net of cash - - 1,738,097
issuance costs of $11,900
Issuance of common stock - - 667
Net loss (1,110,381) - (1,110,381)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1990 (1,110,381) - 1,486,052
Issuance of Series C convertible preferred stock, net of cash - - 2,576,803
issuance costs of $23,197
Repurchase of common stock - - (263)
Deferred compensation related to restricted stock awards - (2,328,764) -
Amortization of deferred compensation - 727,738 727,738
Compensation expense related to stock option grants - - 669,433
Net loss (6,648,899) - (6,648,899)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1991 (7,759,280) (1,601,026) (1,189,136)
Issuance of Series C convertible preferred stock, net of cash - - 4,579,709
issuance costs of $20,291
Issuance of common stock related to restricted stock awards - - 122,744
Issuance of common stock related to the exercise of stock - - 3,338
options
Issuance of warrants - - 2,776,130
Deferred compensation related to stock options and restricted - (2,249,428) -
stock awards
Amortization of deferred compensation - 1,332,864 1,332,864
Net loss (14,694,693) - (14,694,693)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1992 (22,453,973) (2,517,590) (7,069,044)
Issuance of Series D convertible preferred stock in exchange
for convertible promissory notes payable, including accrued - - 9,600,551
interest, net of cash issuance costs of $113,955
Issuance of Series E convertible preferred stock, net of cash - - 9,938,747
issuance costs of $61,251
Issuance of Series F convertible preferred stock, net of cash - - 18,292,396
issuance costs of $2,097,604
Issuance of common stock related to the exercise of stock - - 26,688
options
Reduction in deferred compensation due to stock option - 290,287 -
termination prior to vesting
Amortization of deferred compensation - 1,124,839 1,124,839
Net loss (19,736,365) - (19,736,365)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1993 (42,190,338) (1,102,464) 12,177,812
Issuance of Series F convertible preferred stock, net of cash - - 5,765,323
issuance costs of $79,677
Issuance of Series G convertible preferred stock, net of cash - - 11,725,255
issuance costs of $1,006,841
Issuance of common stock related to the exercise of stock - - 13,400
options
Cancellation of warrants - - (68,000)
Reduction in deferred compensation due to stock option - 14,062 -
termination prior to vesting
Amortization of deferred compensation - 764,228 764,228
Net loss (25,604,161) - (25,604,161)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1994 (67,794,499) (324,174) 4,773,857
Issuance of Series G convertible preferred stock, net of cash - - 41,853,698
issuance costs of $2,409,926
Issuance of common stock related to the exercise of stock - - 41,500
options
Amortization of deferred compensation - 324,174 324,174
Net loss (34,546,676) - (34,546,676)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1995 (102,341,175) - 12,446,553
Issuance of common stock related to initial public offering,
net of issuance costs of $ 5,268,756 - - 52,231,244
Conversion of convertible preferred stock to common stock - - -
Issuance of common stock related to the exercise of stock - - 1,089,676
options
Issuance of common stock related to the exercise of warrants - - 3,176,741
Deferred compensation related to grants of common stock - (1,967,116) -
options to non-employees
Amortization of deferred compensation relating to grants of
common stock options to non-employees - 763,190 763,190
Net loss (46,852,600) - (46,852,600)
------------- ----------- ------------
BALANCE, DECEMBER 31, 1996 $(149,193,775) $(1,203,926) $ 22,854,804
============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
57
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
MAY 25, 1989
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,604,161) $(34,546,676) $(46,852,600) $(149,193,775)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 1,110,167 2,023,553 2,393,751 6,697,735
Compensation on grant of stock options,
warrants and restricted stock 764,228 324,174 763,190 7,807,731
Amortization of discount on convertible
promissory notes payable - - - 690,157
Amortization of deferred financing costs 34,000 - - 216,732
Noncash interest on convertible
promissory notes payable - - - 260,799
Changes in assets and liabilities-
Prepaid and other current assets (292,710) (769,562) (1,167,693) (2,119,219)
Notes receivable from officers 87,126 8,446 (9,845) (317,978)
Amounts payable to related parties (333,925) (80,351) (12,500) (200,000)
Accounts payable and accrued expenses 2,781,934 483,585 2,747,122 8,255,185
Deferred revenue 2,917 - - 86,250
------------ ------------ ------------ -------------
Net cash used in operating (21,450,424) (32,556,831) (42,138,575) (127,816,383)
------------ ------------ ------------ -------------
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments - - (3,785,146) (3,785,146)
Purchases of property and equipment (3,656,640) (4,889,624) (8,902,989) (21,802,710)
(Increase) decrease in restricted cash and
other assets (1,481,829) (44,912) 401,990 (1,664,183)
Investment in real estate partnership - (1,698,448) (3,751,552) (5,450,000)
----------- ------------- ------------- -------------
Net cash used in investing (5,138,469) (6,632,984) (16,037,697) (32,702,039)
------------- ------------- ------------- -------------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
preferred stock 19,775,578 41,853,698 - 96,584,154
Proceeds from issuance of common stock
related to stock options and restricted
stock grants 13,400 41,500 1,089,676 1,174,602
Net proceeds from issuance of common stock - - 52,231,244 52,355,324
Repurchase of common stock - - - (263)
Proceeds from notes payable 750,000 - 7,500,000 9,450,000
Proceeds from issuance of convertible
promissory notes payable - - - 9,191,744
Proceeds from long-term debt - - - 662,107
Proceeds from issuance of common stock
related to stock warrants - - 3,176,741 3,176,741
Proceeds from sale/leaseback 1,073,183 - 1,722,333 2,795,516
Payments on long-term debt and capital (394,585) (537,977) (446,163) (1,801,612)
leases
(Increase) decrease in deferred financing - (278,927) 251,921 (436,149)
------------ ------------ ------------ -------------
costs
Net cash provided by financing
activities 21,217,576 41,078,294 65,525,752 173,152,164
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,371,317) 1,888,479 7,349,480 12,633,742
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
8,767,100 3,395,783 5,284,262 -
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,395,783 $ 5,284,262 $ 12,633,742 $ 12,633,742
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
58
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware on
May 25, 1989. The Company is engaged in the discovery and development of
novel genetic medicines based primarily on antisense technology.
The Company is in the development stage. Since inception, the Company has
devoted substantially all of its efforts toward product research and
development and raising capital. Management anticipates that
substantially all future revenues will be derived from the sale of
proprietary biopharmaceutical products under development or to be
developed in the future, and custom contract manufacturing of synthetic
DNA products and reagent products (by the Hybridon Specialty Products
Division (HSPD)), 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 equity securities, debt financings
and research and development collaborations in order to fund future
operations.
On March 26, 1997, the Company entered into a binding Agreement to
issue $50,000,000 of 9% convertible subordinated notes (the Notes). The
closing on the issuance of the Notes is to occur in April 1997. Under
the terms of the Notes, the Company must make semiannual interest
payments on the outstanding principle balance through the maturity date
of April 1, 2004. If the Notes are converted prior to April 1, 2000, the
Noteholders are entitled to receive accrued interest from the date of
the most recent interest payment through the conversion date. The Notes
are subordinate to substantially all of the Company's existing
indebtedness. The Notes are convertible at any time prior to the
maturity date at a conversion price equal to $7.0125, subject to
adjustment under certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the 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 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 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 Notes at 150% of the
original issuance price.
The unaudited pro forma consolidated balance sheet as of December
31, 1996 shows the financial position of the Company assuming that the
Notes were issued on December 31, 1996.
In January 1997, the Company entered into a five year $1,169,000 lease
with a leasing company to finance certain furniture and fixtures in the
Cambridge facility. The lease bears interest at a rate of 13.7% and is
payable in 60 equal monthly installments of principle and interest of
approximately $26,500 through February 2002.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates in the Preparation of Financial Statements
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.
F-7
59
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Pro Forma Net Loss per Common Share
Pro forma net loss per common share is computed using the weighted
average number of shares of common stock outstanding during the
period. Pursuant to the requirements of the Securities and
Exchange Commission, common stock issued by the Company during the
12 months immediately preceding its initial public offering on
February 2, 1996, plus shares of common stock that became issuable
during the same period pursuant to the grant of common stock
options and preferred and common stock warrants, has been included
in the calculation of pro forma weighted average number of common
shares outstanding for all periods presented (using the
treasury-stock method and the initial public offering price of $10
per share). In addition, the calculation of the pro forma weighted
average number of common shares outstanding also includes shares
of common stock as if all shares of preferred stock were converted
into common stock on the respective original dates of issuance.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
results of the Company and its subsidiaries, Hybridon S.A.
(Europe), a French corporation and Hybridon Canada, Inc. (an
inactive majority-owned subsidiary). The consolidated financial
statements also reflect the Company's 49% interest in MethylGene,
Inc. (MethylGene), a Canadian corporation which is accounted for
under the equity method (See Note 12). All material intercompany
balances and transactions have been eliminated in consolidation.
(d) Cash Equivalents and Short-Term Investments
The Company applies Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Under SFAS No. 115, debt securities that the
Company has the positive intent and ability to hold to maturity
are reported at amortized cost and are classified as
held-to-maturity securities. These securities include cash
equivalents and short term investments. At December 31, 1995 and
1996, the Company has classified all investments as
held-to-maturity. The Company considers all highly liquid
investments with maturities of three months or less when purchased
to be cash equivalents. Short-term investments mature within one
year of the balance sheet date. Cash and cash equivalents and
F-8
60
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Cash Equivalents and Short-Term Investments (Continued)
short-term investments at December 31, 1995 and 1996 consisted of
the following (at amortized cost, which approximates fair market
value):
DECEMBER 31,
1995 1996
Cash and Cash Equivalents-
Cash and money market funds $5,284,262 $10,144,367
U.S. government securities - 2,489,375
---------- -----------
Total Cash and Cash Equivalents $5,284,262 $12,633,742
========== ===========
Short-Term Investments-
U.S. government securities $ - $ 3,785,146
========== ===========
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Laboratory equipment 5 Years
Leasehold improvements Life of lease
Equipment under capital lease 5 Years
Office equipment 3-5 Years
Furniture and fixtures 5 Years
F-9
61
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Accrued Expenses
Accrued expenses on the accompanying consolidated balance sheets
consist of the following:
DECEMBER 31,
1995 1996
Payroll and related costs $1,327,057 $1,593,451
Outside research and clinical costs 1,132,860 1,381,124
Professional and consulting fees 214,788 390,440
Construction costs 205,920 -
Other 574,000 825,751
---------- ----------
$3,454,625 4,190,766
========== ==========
(g) Revenue Recognition
The Company has recorded revenue under the consulting and research
agreements discussed in Notes 6 and 7. Revenue is recognized as
earned on a straight-line basis over the term of the agreement,
which approximates when work is performed and costs are incurred.
Revenues from product sales are recognized when the products are
shipped. Product revenue for the year ended December 31, 1996
represents revenues from the sale of DNA and reagent products
manufactured on a custom contract basis by HSPD.
(h) Research and Development Expenses
The Company charges research and development expenses to
operations as incurred.
(i) Patent Costs
The Company charges patent expenses to operations as incurred.
(j) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current
periods presentation.
F-10
62
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) NOTES RECEIVABLE FROM OFFICERS
At December 31, 1995, and 1996 the Company had notes receivable,
including accrued interest, from officers of $308,133, and $317,978
respectively. The notes bear interest at rates varying between 6% and
6.5% per annum and mature at various dates through April 2001.
(4) RESTRICTED CASH
At December 31, 1995, the Company classified $225,000 as restricted cash
related to the lease of its manufacturing plant discussed in Note 5(b).
The restricted cash was in the form of a two-year letter of credit held
in escrow until June 1996 in favor of the lessor of the manufacturing
facility. In addition at December 31, 1995 and 1996, the Company had
$800,856 and $437,714, respectively, in restricted cash related to the
capital lease obligations as discussed in Note 5(c). The Company's cash
balances may become subject to restrictions in accordance with the terms
of its note payable to a bank (see Note 5(a)).
(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(a) Note Payable to a Bank
In December 1996, the Company entered into a four year $7,500,000
note payable with a bank. The note bears interest at either the
bank's prime rate plus 1% or LIBOR plus 3.5% (9.25% at December
31, 1996), at the Company's election. The note is payable in 59
equal installments or $62,500 commencing on February 1, 1997 with
a balloon payment of $3,812,500, due on January 1, 2002. The note
contains certain financial covenants that require the Company to
maintain minimum tangible net worth and minimum liquidity and
prohibits the payment of dividends. The Company has secured the
obligations under the note with a lien on all of its assets. If,
at specified times, the Company's minimum liquidity is less than
$15,000,000, $10,000,000, or $5,000,000, the Company is required
to pledge cash collateral to the bank equal to 25%, 50% or 100%,
respectively, of the then outstanding balance under the note,
pursuant to a cash pledge agreement. The notes also contain
certain non-financial covenants. Also, in connection with the
note, the Company issued 5 year warrants to purchase 65,000 shares
of common stock at an exercise price of $6.90 per share. These
warrants are fully exercisable at December 31, 1996.
F-11
63
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
(b) Note Payable to Landlord
In December 1994, the Company issued a $750,000 promissory note to
its landlord to fund specific construction costs associated with
the development of its manufacturing plant in Milford,
Massachusetts. The promissory note bears interest at 13% per annum
and is to be paid in equal monthly installments of principal and
interest over the remainder of the 10-year lease term.
(c) Capital Lease Obligations
The Company has entered into various capital leases for equipment.
Under a lease line agreement with a leasing company, the Company
can borrow up to $1,200,000. In 1994, the Company borrowed
$1,073,000 under this agreement as a part of a sale/leaseback
transaction. These amounts are subject to interest at an effective
rate of 4.29% and are being paid in equal installments of
principal and interest over 48-months through June 1998.
In connection with this lease agreement, the Company is required
to maintain a certain amount of cash in escrow as collateral. At
December 31, 1996, the Company had $437,714 in escrow related to
the agreement.
In December 1996, the Company sold certain laboratory equipment to
a leasing company, at its original cost of $1,722,333 under a
$2,800,000 lease line. In connection with this transaction, the
Company entered into a capital lease to lease the equipment from
this leasing company for 48 monthly payments ranging from $36,169
to $49,948. The sale of the equipment resulted in a gain of
$291,960 which has been offset against the cost of the asset in
the accompanying consolidated balance sheet and will be amortized
over the life of the lease.
F-12
64
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
Future minimum payments due under various notes payable and capital lease
obligations are as follows at December 31, 1996:
CALENDAR YEAR AMOUNT
1997 $ 1,495,389
1998 1,444,345
1999 1,420,324
2000 1,328,882
2001 841,832
Thereafter 4,112,956
-----------
Total minimum lease payments 10,643,728
Less--Amount representing interest 303,365
-----------
Principal obligations 10,340,363
Less--Current portion 1,308,511
-----------
$ 9,031,852
===========
(6) G.D. SEARLE & CO. AGREEMENT
In January 1996, the Company and G.D. Searle & Co. (Searle) entered into
a collaboration relating to research and development of therapeutic
antisense compounds directed at up to eight molecular targets in the
field of inflammation/immunomodulation (the Searle Field).
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the
Searle Field designated by Searle. In this project, Searle is funding
certain research and development efforts by the Company, and each of
Searle and the Company have committed certain of its own personnel to the
collaboration. The initial phase of research and development activities
relating to the initial target will be conducted through the earlier of
(i) the achievement of certain product candidate milestones or (ii) 36
months after commencement of the collaboration, subject to early
termination by Searle (although in any event Searle is required to pay 18
months of research and development funding). The parties may extend the
initial collaboration by mutual agreement, including agreement as to
additional research funding by Searle.
F-13
65
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) G.D. SEARLE & CO. AGREEMENT (Continued)
In addition, Searle has the right, at its option, to designate up to six
additional molecular targets in the Searle Field (the Additional Targets)
for collaborative research and development with the Company on terms
substantially consistent with the terms of the collaboration applicable
to the initial molecular target. This right is exercisable by Searle with
respect to each of the Additional Targets upon the payment by Searle of
certain research payments (beyond the project-specific payments relating
to the particular Additional Target) and the purchase of additional
common stock from the Company by Searle (at the then fair market value).
The aggregate amount to be paid by Searle for such research payments and
equity investment in order to designate each of the Additional Targets is
$10,000,000 per Additional Target. In the event that Searle designates
all of the Additional Targets, the aggregate amount to be paid by Searle
for research payments will be $24,000,000, and the aggregate amount to be
paid by Searle in equity investment will be $36,000,000. If Searle has
not designated all of the Additional Targets by the time it advances the
product candidate for the initial molecular target to certain stages of
preclinical development, Searle will be required to purchase an
additional $10,000,000 of common stock (at the then fair market value) on
specified dates in order to maintain its right to designate any of the
Additional Targets that it has not yet designated. The payment for any
such common stock will be creditable against the equity investment
portion of the payments to be made by Searle with respect to the
designation of any of the Additional Targets that Searle has not yet
designated.
Searle also has the right, at its option, to designate a molecular target
in the Searle Field to develop a therapeutic agent for cancer that acts
through immunomodulation (the Searle Cancer Target) for collaborative
research and development with the Company on terms substantially
consistent with the terms of the collaboration applicable to the initial
molecular target. At the time of such designation, Searle will be
required to make certain research payments to the Company and purchase
additional common stock from the Company (at the then fair market value).
The aggregate amount to be paid by Searle for such research payments and
equity investment will range from $12,000,000 (composed of $5,000,000 in
research payments and $7,000,000 in equity investment) if the Searle
Cancer Target is designated in 1997 to $26,000,000 (composed of
$21,000,000 in research payments and $5,000,000 in equity investment) if
the Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests
and clinical trials of the product candidate and will be responsible for
regulatory approvals for and marketing of the product. In certain
instances and for specified periods of time, the Company has agreed to
perform research and development work in the Searle Field exclusively
with Searle. In addition, as to each product candidate, the Company will
be entitled to milestone payments from Searle 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
F-14
66
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) G.D. SEARLE & CO. AGREEMENT (Continued)
collaboration. Subject to satisfying certain conditions relating to its
manufacturing capacities and capabilities, the Company will retain
manufacturing rights, and Searle will be required to purchase its
requirements of products from the Company on an exclusive basis at
specified transfer prices. Upon a change in control of the Company,
Searle would have the right to terminate the Company's manufacturing
rights, although the royalty payable would be increased in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional
Targets or in certain other instances relating to Hybridon's failure to
satisfy certain requirements relating to its manufacturing capacities and
capabilities, Searle will have the right, exercisable in its sole
discretion, to require Hybridon to form a joint venture with Searle for
the development of products in the Searle Field (other than products
relating to molecular targets that have already been designated by
Searle) to which each party will contribute $50,000,000 in cash, although
the Company's cash contribution would be reduced by the value of the
technology and other rights contributed by the Company to the joint
venture. 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.
As of December 31, 1996, the Company has received $400,000 in research
and development revenues from Searle. Under the collaboration, Searle
also purchased 1,000,000 shares of common stock in the Company's initial
public offering of common stock at the initial public offering price as
discussed in Note 13(b).
(7) F. HOFFMANN-LA ROCHE LTD. COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of Hybridon's antisense oligonucleotide
chemistry to the development of compounds for the treatment of hepatitis
B, hepatitis C and human papilloma virus.
Under this collaboration, Roche funded research and development efforts
relating to the collaboration and committed personnel of its own to the
collaboration. In 1995, Roche notified the Company that it had selected
an antisense oligonucleotide directed at hepatitis C as a lead compound
for further development and made a milestone payment to the Company in
connection with such designation. In the third quarter of 1996, Roche
notified the Company that it had selected an antisense oligonucleotide
directed at human papilloma virus as a lead compound for further
development, and in the fourth quarter of 1996, made a milestone payment
to the Company in connection with such designation. At such time, Roche
also notified the Company that Roche had elected not to continue the
hepatitis B
F-15
67
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) F. HOFFMANN-LA ROCHE LTD. COLLABORATION (Continued)
program under the research and development collaboration. As a result, in
light of the selection by Roche of lead compounds directed at hepatitis C
and human papilloma virus for further development and its determination
to discontinue the hepatitis B program, Roche notified the Company that
Roche was exercising its option to terminate the research and development
phase of the collaboration as of March 31, 1997. The Company and Roche
are engaged in ongoing discussions as to the manner in which they will
collaborate in connection with the further development of the two
antisense oligonucleotides that have been selected by Roche as lead
compounds.
The Company had licensed to Roche any products resulting from the
collaboration on a royalty-bearing, worldwide exclusive basis. Subject to
compliance with certain production cost requirements, Roche is required
to purchase from the Company, and the Company is required to supply to
Roche, Roche's requirements of products at specified transfer prices. The
Company has recorded $1,032,083, $1,186,124, and $1,019,389 of research
and development revenue related to this collaboration in the years ended
December 31, 1994, 1995, and 1996, respectively.
In conjunction with the Roche Collaboration, Roche purchased 818,390
shares of common stock for $6,000,000. Roche was also issued five-year
warrants for the purchase of 551,724 shares of common stock at an initial
price of $11.50 per share, such exercise price increases commencing on
August 12, 1995 on an annual basis at a compound rate of 25%. At December
31, 1996, the exercise price of these warrants are $17.969 per share. The
warrants expire on February 12, 1998 (subject to early expiration if the
Roche Collaboration is terminated).
(8) 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 Company will be responsible for the
development of, and hold all rights to, any drug developed pursuant to
this collaboration, and Medtronic will be responsible for the development
of, and hold all rights to, any delivery system developed pursuant to
this collaboration. The parties may extend this collaboration by mutual
agreement to other neurodegenerative disease targets. The research and
development to be conducted is determined and supervised by a committee
comprised of an equal number of designees of the Company and Medtronic.
As part of the Medtronic Agreement, Medtronic purchased 658,333 shares of
common stock for $5,000,000. In addition, the Company issued to
Medtronic, Inc. a warrant expiring on May 10, 1997 to purchase 53,333
shares of common stock at $7.50 per share.
F-16
68
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc. (the Worcester Foundation),
under which the Company has received exclusive licenses to technology in
certain patents and patent applications. The Company is required to make
royalty payments based on future sales of products employing the
technology or falling under claims of a 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. In addition, in the year
ended December 31, 1993, the terms of the license agreement were amended
and, in conjunction with such amendment, the Company agreed to make a
$500,000 contribution to the Worcester Foundation. The Company paid
$210,000 in both 1993 and 1994; the remaining $80,000 was paid in 1995.
The Company expensed the $500,000 contribution in the year ended December
31, 1993.
(10) PHARMACIA BIOTECH, INC. AGREEMENT
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, the collaboration expired in December 1996, and Pharmacia
retained the right to sell the machine to third parties, subject to an
obligation to pay the Company royalties on such third party sales. For
the year ended December 31, 1996, the Company has received $62,321 of
royalty income related to such third party sales.
(11) PERKIN-ELMER CORPORATION SUPPLY AGREEMENT
In September 1996 the Company and the Applied Biosystems Division of
Perkin-Elmer signed a four year sales and supply agreement under which
Perkin-Elmer agreed to refer potential customers to HSPD for the
manufacture of custom oligonucleotides and the Company agreed that
amidites for the manufacture of these oligonucleotides are 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 and agreed to discuss a future
collaboration with respect to the development, marketing and distribution
of the Company's proprietary intermediates.
(12) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and certain 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.
F-17
69
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12) INVESTMENT IN METHYLGENE, INC. (Continued)
The Company has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the methylgene
fields. These fields are defined as (i) antisense compounds to inhibit
DNA methyltransferase for the treatment of cancers, (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any indications,
and (iii) antisense compounds to inhibit a second molecular target other
than DNA methyltransferase for the treatment of cancers, to be agreed
upon by 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 500,000 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 corporation collaboration that meets
certain requirements. 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 100% of MethylGene's
losses in the accompanying consolidated statement of operations.
(13) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock,
$.001 par value, of which 25,146,577 shares were issued and
outstanding at December 31, 1996. Upon the consummation of the
Company's initial public offering of common stock in February 1996
all outstanding shares of preferred stock converted into
16,856,649 shares of common stock.
(b) Initial Public Offering
On February 2, 1996, the Company completed its initial public
offering of 5,750,000 shares of common stock at $10.00 per share.
The sale of common stock resulted in net proceeds to the Company
of approximately $52,231,000 after deducting expenses related to
the offering.
F-18
70
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(c) Warrants
The Company has the following warrants outstanding for the
purchase of common stock:
EXERCISE PRICE
PER SHARE
EXPIRATION DATE SHARES
February 12, 1998 551,724 $17.97
March 31, 1998- October 25, 2000 4,769,670 10.00
November 10, 1997 350,000 9.50
May 10, 1997- February 28, 2000 955,459 7.50
December 31, 2001 65,000 6.90
September 16, 1997 603,689 5.50
--------- ------
7,295,542
=========
Average price per share $ 9.85
======
In connection with the Roche Collaboration, the Company issued
Roche five-year warrants for the purchase of 551,724 shares of
common stock at an initial exercise price of $11.50 per share,
such exercise price increases commencing on August 12, 1995 on an
annual basis at a compound rate of 25% ($17.97 at December 31,
1996). The warrants expire on February 12, 1998, subject to
earlier expiration if the Roche Collaboration is terminated.
In connection with the Medtronic Agreement, the Company issued
Medtronic, Inc. a three-year warrant for the purchase of 53,333
shares of common stock at $7.50 per share.
As a component of the sale of preferred stock in 1994 and 1995,
the Company issued to the investors in such offering warrants for
the purchase of 2,927,124 shares of common stock at $8.00 to
$10.00 per share. Warrants to purchase 1,656,910 shares of common
stock at an exercise price of $10.00 per share expire on March 31,
1998, and the remaining warrants for the purchase of 1,270,214
shares of common stock at an exercise price of $8.00 per share
expire on October 25, 1996. During 1996, 396,336 of the $8.00
warrants were exercised and the unexercised $8.00 warrants expired
on October 25, 1996.
F-19
71
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(c) Warrants (Continued)
Five-year warrants to purchase 1,843,100 shares of common stock at
$10.00 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,
1,521,674 were issued to a company that is controlled by two
directors of the Company (See Note 14(b)). The remaining 321,426
warrants were issued to various other companies that acted as
placement agents.
All of the warrants included in the aforementioned table are
exercisable as of December 31, 1996 except for the warrants to
purchase 500,000 shares at $10.00 per share which expire on
February 4, 1999; these warrants became exercisable subsequent to
December 31, 1996.
In addition, warrants for common stock may be issued under a
certain consulting agreement if the Company meets certain product
registration requirements in any of certain European countries
prior to December 31, 1997. These warrants have not been included
in the aforementioned table.
(d) 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, 1996, options to purchase a total of 3,356,840 shares
of common stock remained outstanding under the 1990 Option Plan.
A total of 3,500,000 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
F-20
72
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(d) Stock Options (Continued)
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, 1996,
options to purchase a total of 2,280,100 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 250,000 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 5,000 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 5,000
shares of common stock will be granted to each eligible director
on 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, 1996, options to
purchase a total of 45,000 shares of common stock remained
outstanding under the Director Plan.
F-21
73
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(d) Stock Options (Continued)
All stock option activity since inception is summarized as
follows:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
Options granted 334,700 $ - $ -
Options exercised (167,300) - -
---------- --------------- -----
Outstanding, December 31, 1990 167,400 - -
Options granted 8,500 - -
Options terminated (2,700) - -
---------- --------------- -----
Outstanding, December 31, 1991 173,200 - -
Options granted 962,702 .25 - 5.00 1.98
Options exercised (173,075) - 1.00 .02
Options terminated (24,325) .50 - 1.00 .56
---------- --------------- -----
Outstanding, December 31, 1992 938,502 - 5.00 2.01
Options granted 1,440,538 3.50 - 12.50 8.38
Options exercised (43,625) - 1.00 .61
Options terminated (126,375) - 10.00 .79
---------- --------------- -----
Outstanding, December 31, 1993 2,209,040 - 12.50 6.26
Options granted 672,500 5.00 - 7.00 5.33
Options exercised (24,000) - 1.00 .56
Options terminated (75,000) - 5.00 3.83
---------- --------------- -----
Outstanding, December 31, 1994 2,782,540 - 12.50 6.10
Options granted 2,035,538 7.50 - 10.00 7.55
Options exercised (29,400) .50 - 5.00 1.41
Options terminated (1,097,641) .50 - 12.50 9.82
---------- --------------- -----
Outstanding, December 31, 1995 3,691,037 - 10.00 5.83
Options granted 2,380,100 5.00 - 13.12 9.91
Options exercised (288,700) - 7.50 3.77
Options terminated (100,497) 5.00 - 11.57 8.04
---------- --------------- -----
Outstanding, December 31, 1996 5,681,940 $ .25 - 13.12 $7.61
========== =============== =====
Exercisable, December 31, 1996 3,114,650 $ .25 - 11.57 $6.51
========== =============== =====
F-22
74
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(d) Stock Options (Continued)
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123 requires the measurement of the fair value of stock options or
warrants 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. The Company has recorded compensation expense of
$763,190 for options granted to non-employees. In addition, the
Company has recorded $1,203,926 of deferred compensation related
to these grants which will be amortized over the vesting period of
the options.
Options and warrants granted in 1995 and 1996 have been valued
using the Black-Scholes option pricing model prescribed by SFAS
No. 123. The weighted-average assumptions used for the year ended
December 31, 1995 and 1996 are as follows:
DECEMBER 31,
1995 1996
Risk free interest rate 6.41% 6.14%
Expected dividend yield - -
Expected lives 6 Years 6 Years
Expected volatility 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 volatility. Because the
Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-23
75
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) STOCKHOLDERS' EQUITY (Continued)
(d) Stock Options (Continued)
Had compensation cost for these plans been determined consistent
with SFAS No. 123, the Company's net loss and pro forma net loss
per common share would have been affected as follows:
DECEMBER 31,
1995 1996
Net Loss: As Reported $(34,546,676) $(46,852,600)
============ ============
Pro Forma $(41,447,381) $(52,890,455)
============ ============
Net Loss
Per Common Share: As Reported $ (2.13) $ (1.93)
============ ============
Pro Forma $ (2.56) $ (2.18)
============ ============
(e) Employee Stock Purchase Plan
In October 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the Purchase Plan), under which up to 500,000
shares of common stock may be issued to participating employees of
the Company or its subsidiaries. All full-time employees of the
Company, except those who would immediately after the grant own 5%
or more of the total combined voting power or value of the stock
of the Company or any subsidiary, are eligible to participate.
On the first day of a designated payroll deduction period (the
Offering Period), the Company will grant to each eligible employee
who has elected to participate in the Purchase Plan an option to
purchase shares of common stock as follows: the employee may
authorize an amount (a whole percentage from 1% to 10% of such
employee's regular pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering
Period, the employee is deemed to have exercised the option, at
the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the Purchase Plan, the option price
is an amount equal to 85% of the fair market value per share of
the common stock on either the first day or the last day of the
Offering Period, whichever is lower. In no event may an employee
purchase in any one Offering Period a number of shares which is
more than 15% of the employee's annualized base 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.
F-24
76
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) COMMITMENTS
(a) Operating Leases
The Company has entered into a lease for a production plant in
Milford, Massachusetts. The lease has a 10-year term, which
commenced on July 1, 1994, with certain extension options. In
addition, the Company entered into a nine-year lease for office
space in Paris, France, commencing on May 1, 1994. The Company
previously occupied office and laboratory space at the
Massachusetts Biotechnology Research Park in Worcester,
Massachusetts. The Company's extended lease agreement expired in
February 1997, at which time the Company moved to a new facility,
described below.
On February 4, 1994, the Company entered into a lease for an
approximately 90,000-square-foot building in Cambridge,
Massachusetts. In 1996, this lease was amended as discussed below
and is herein referred to as the Cambridge Lease. The Cambridge
Lease is with a partnership that is affiliated with three
directors of the Company. The Cambridge Lease has an initial term
of 10 years, commencing February 1, 1997, and may be extended for
three additional five-year terms at the option of the Company. The
Cambridge Lease provides for annual rent of $37.79 per square foot
for the first five years and $41.57 per square foot for the second
five years. As compensation for arranging this lease, the Company
issued Pillar Limited (see Note 14(b)) five-year warrants for the
purchase of 500,000 shares of the Company's common stock at an
exercise price of $10.00 per share. These warrants become
exercisable subsequent to December 31, 1996 and are exercisable
through February 4, 1999.
Under the terms of the Cambridge Lease, the Company elected to
treat $5,450,000 of its payments for a portion of the costs of the
construction of the leased premises (primarily relating to tenant
improvements) as contributions to the capital of the Cambridge
landlord in exchange for a limited partnership interest in the
Cambridge landlord (the Partnership Interest). The Company's
Partnership Interest represents a 32.15% interest in the Cambridge
Landlord. The Company's right to receive distributions of cash
generated from operations or from any sale or refinancing of the
property would be subordinate to the distribution to certain other
limited partners of priority amounts currently totaling
approximately $6,500,000 (approximately $3,500,000 of which is
subject to annual increase at a rate of between 12% and 15% as a
result of a cumulative return to one of the limited partners of
the Cambridge Landlord). In the case of a sale or refinancing of
the property, after payment of the priorities described in the
preceding sentence, the Company would be entitled to a return of
its capital contribution and, thereafter, to its pro rata share of
the remaining funds available for distribution. The Company has
the right, for a period of three years following completion of the
building, to sell the Partnership Interest back to certain limited
partners of the Cambridge Landlord for a price equal to the
greater of
F-25
77
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) COMMITMENTS (Continued)
(a) Operating Leases (Continued)
(i) the total paid for the Partnership Interest ($5,450,000) or
(ii) the fair market value of the Partnership Interest at the
time. The assets of these limited partners are limited to their
investment in the Cambridge Landlord.
Future approximate minimum rent payments as of December 31, 1996,
under the lease agreements discussed above are as follows:
CALENDAR YEAR AMOUNT
1996 $ 4,072,000
1997 4,091,000
1998 4,109,000
2000 4,118,000
2001 4,127,000
Thereafter 20,930,000
-----------
$41,447,000
===========
During the years ended December 31, 1994, 1995, 1996, facility
rent expense was approximately $1,142,000, $2,142,000, and
$2,352,000 respectively.
(b) Consulting Agreements with Affiliates of Stockholders and
Directors
The Company has entered into consulting agreements, stock
placement agreements and an advisory agreement with several
companies that are controlled by two shareholders and directors of
the Company. The terms of the agreements with the affiliated
companies, S.A. Pillar Investment N.V. (Pillar Investment), Pillar
S.A. (formerly Commerce Consult S.A.) and Pillar Investment
Limited (formerly Ash Properties Limited) (Pillar Limited), are
described below.
In March 1994, the Company entered into a consulting agreement
with Pillar S.A., which was amended in March 1995 (the 1994 Pillar
Consulting Agreement). Under the 1994 Pillar Consulting Agreement,
the Company agreed to pay to Pillar S.A. cash compensation for
financial advisory and managerial services in connection with the
Company's overseas operations, including support services in
connection with contracts, agreements and arrangements with the
Agence Nationale de Recherches sur le SIDA (ANRS), and for
overhead costs and reimbursement of certain authorized
out-of-pocket expenditures. The Company is
F-26
78
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) COMMITMENTS (Continued)
(b) Consulting Agreements with Affiliates of Stockholders and
Directors (Continued)
committed to pay Pillar S.A. a monthly fee of approximately
$96,000 with respect to this agreement. The agreement expires on
February 28, 1997. For the years ended December 31, 1994, 1995 and
1996, the Company had expensed $830,000, $1,226,000 and $1,106,000
under this consulting agreement, respectively.
In connection with the 1994 Pillar Consulting Agreement, the
Company issued to Pillar S.A. two, five-year warrants to purchase
up to 200,000 shares of the Company's common stock. The first
warrant was issued on March 1, 1994 at an exercise price of $10.00
per share and will expire on February 28, 1999. This warrant vests
in four equal quarterly installments in arrears commencing on
March 1, 1994. The second warrant was issued on March 1, 1995 at
an exercise price of $7.50 per share and will expire on February
28, 2000 and began vesting in four equal quarterly installments in
arrears commencing on June 1, 1995.
The 1994 Pillar Consulting Agreement also provides that if the
Company obtains all necessary governmental and regulatory
approvals for the commercial sale of an antisense drug for the
treatment of AIDS and HIV infection (the Drug) in one or more of
certain specified European countries prior to December 31, 1997,
the Company will issue Pillar S.A. a five-year warrant to purchase
a number of shares of common stock equal to 25,000 shares for each
quarter sooner than the last quarter of 1997 in which the Company
has approval for commercial sale of the Drug. The exercise price
will be equal to the average closing price of a share of the
Company's common stock for the 20 trading days preceding the last
day of the quarter preceding the quarter in which the Drug is
registered, or, if the Company's common stock is not publicly
traded, the fair market value of one share of common stock as
determined by the Company's Board of Directors. The Company will
expense the fair market value of these warrants as they are earned
by Pillar S.A. These warrants have not been included in the table
in Note 13(c).
All of the warrants issued to Pillar S.A. under the 1994 Pillar
Consulting Agreements and certain other warrants previously issued
to Pillar S.A. provide that within 15 days after the date of any
exercise, in full or in part, Pillar S.A. will pay to the Company
an amount in cash equal to the lesser of (i) 50% of all amounts
paid to Pillar S.A. as compensation under the various Pillar S.A.
consulting agreements and (ii) the positive difference, if any,
between the aggregate fair market value of the shares of common
stock purchased upon such exercise and the aggregate exercise
price for such shares.
F-27
79
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) COMMITMENTS (Continued)
(b) Consulting Agreements with Affiliates of Stockholders and
Directors (Continued)
On September 9, 1994, the Company entered into modifications to
its arrangements with Pillar S.A. and its affiliates, including:
(i) a reduction in the exercise price of certain warrants
previously issued to $10.00 per share; (ii) an amendment to the
terms of each of the warrants issued to Pillar S.A. and its
affiliates described above to provide for cashless exercise in
connection with a sale or change in control of the Company; (iii)
a grant of additional five-year warrants (the "Additional Pillar
Warrants") to purchase 114,000 shares of Common Stock at an
exercise price of $10.00 per share; and (iv) an amendment to the
1994 Pillar Consulting Agreement to provide for (a) a fixed term
of three years and (b) a right of first negotiation for Pillar
S.A. to provide seed financing for any spin-offs by the Company
which do not involve or relate to antisense therapeutic compounds.
On July 8, 1995, the Company entered into an agreement (the Pillar
Europe Agreement) with Pillar S.A. pursuant to which Pillar S.A.
agreed to provide to the Company certain consulting, advisory and
related services and serve as the Company's exclusive agent in
connection with potential corporate partnerships in Europe and as
a nonexclusive placement agent of the Company in connection with
future private placements of securities of the Company for a
period of two years. As discussed below, the Pillar Europe
Agreement was significantly amended on November 1, 1995.
The Company and Pillar S.A. agreed to modify the Pillar Europe
Agreement to provide that (i) Pillar would cease to serve as the
Company's exclusive agent in connection with potential corporate
partnerships in Europe but would continue to serve as a
nonexclusive agent in such respect; (ii) Pillar would receive a
retainer of $26,470 per month for the balance of the term of the
Pillar Europe Agreement; (iii) certain fees to be received by
Pillar in connection with European license or collaboration
agreements would only be payable to Pillar in connection with
potential collaborations with five specified French pharmaceutical
companies; and (iv) any compensation payable to Pillar S.A. in
connection with its services with respect to other corporate
collaborations or any placements of securities would be negotiated
on a case-by-case basis and would be subject to the approval of
the independent members of the Board of Directors of the Company.
In consideration of such modification, the Company paid Pillar a
fee totaling $300,000.
Pillar Limited acted as a placement agent for the Company for
certain sales of convertible preferred stock outside the United
States and, in addition, provided the Company with certain
financial advisory services with respect to the sale of such
preferred stock outside the United States. In connection with such
services, Pillar earned fees of $492,604 and $2,020,751 in the
F-28
80
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) COMMITMENTS (Continued)
(b) Consulting Agreements with Affiliates of Stockholders and
Directors (Continued)
years ended December 31, 1994 and 1995, respectively. Pillar
received payment for such fees through $2,435,883 of cash payments
and through the issuance of five-year warrants for the purchase of
2,191,334 shares of common stock at $10.00 per share, expiring on
various dates beginning on July 14, 1998 through October 25, 2000.
(c) Other Research and Development Agreements
The Company has entered into consulting and research agreements
with the Foundation, universities, research and testing
organizations and individuals, under which consulting and research
support is provided to the Company. These agreements are for
varying terms through 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, 1996 are approximately as follows:
CALENDAR YEAR AMOUNT
1997 $2,096,000
1998 339,000
1999 211,000
2000 82,000
----------
$2,728,000
==========
Total fees and expenses under these contracts were approximately
$2,715,000, $5,470,000, and $7,171,000 during the years ended
December 31, 1994, 1995 and 1996 respectively.
(d) Employment Agreements
The Company has entered into employment agreements with certain of
its executive officers which provide for, among other things, each
officer's annual salary, cash bonus, fringe benefits, and
vacation and severance arrangements. Under the agreements, the
officers are generally entitled to receive severance payments of
two to three year's base salary.
F-29
81
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(15) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1996, the Company had net operating loss and tax credit
carryforwards for income tax purposes of approximately $138,191,000 and
$2,989,000, 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, 1996, have resulted
in ownership changes in excess of 50%, as defined under the Act. The
Company does not believe that such ownership changes will significantly
impact the Company's ability to utilize the net operating loss and credit
carryforwards existing at December 31, 1996. Ownership changes in future
periods may limit 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 46,484,000 796,000
------------ ----------
$138,191,000 $2,989,000
============ ==========
F-30
82
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(15) INCOME TAXES (Continued)
The components of the deferred tax amounts, carryforwards and the
valuation allowance are approximately as follows:
DECEMBER 31,
1995 1996
Operating loss carryforwards $ 36,664,000 $ 55,276,000
Temporary differences 1,108,000 851,000
Tax credit carryforwards 2,193,000 2,989,000
------------ ------------
39,965,000 59,116,000
Valuation allowance (39,965,000) (59,116,000)
------------ ------------
$ - $ -
============ ============
A valuation allowance has been provided, as it is uncertain if the
Company will realize the deferred tax asset. The net change in the total
valuation allowance during the year ended December 31, 1996 was an
increase of approximately $19,151,000.
(16) 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 $77,000, $125,000, and $224,000 for the years ended
December 31, 1994, 1995, and 1996, respectively, for such matching
contributions.
F-31
83
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(17) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The accompanying consolidated financial statements include the following
noncash investing and financing activities:
CUMULATIVE FROM
MAY 25, 1989
(INCEPTION) TO
DECEMBER 31. DECEMBER 31,
--------------------------------------------- 1996
1994 1995 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for $ 69,045 $ 172,757 $ 124,052 $ 365,854
interest
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Purchase of property and equipment
under capital leases 1,343,720 90,562 1,722,333 3,229,868
========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Issuance of Series C convertible
preferred stock in exchange for
convertible promissory notes $ - $ - $ - $ 1,700,000
Issuance of convertible promissory
notes in exchange for
subscriptions receivable - - - 937,000
Issuance of stock warrants in
exchange for deferred financing - - 238,000
costs
Issuance of Series D convertible
preferred stock in exchange for
convertible promissory notes and
accrued interest - - - 9,382,384
Issuance of Series E convertible
preferred stock in exchange for
subscriptions receivable - - - 555,117
Issuance of Series F convertible
preferred stock in exchange for
subscriptions receivable 250,000 - - 2,535,000
Issuance of Series G convertible
preferred stock in exchange for
subscriptions receivable - - - 906,016
Cancellation of warrants and
reduction of deferred financing 68,000 - - 68,000
costs
Conversion of preferred stock into
common stock - - 159,822 159,822
========== =========== ============ ============
F-32
84
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
3.1** Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.* Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.
+10.1* License Agreement dated February 21, 1990 and restated as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2* Patent License Agreement dated September 21, 1995 between the
Registrant and National Institutes of Health.
+10.3* License Agreement effective as of October 13, 1994 between the
Registrant and McGill University.
+10.4* License Agreement effective as of October 25, 1995 between the
Registrant and The General Hospital Corporation.
+10.5* License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6* Agreement dated as of December 30, 1992 between the Registrant
and Hoffmann- La Roche Inc.
+10.7* Research and License Agreement effective as of December 30, 1992
between the Registrant and F. Hoffmann-La Roche Ltd.
+10.8* Collaborative Study Agreement effective as of December 30, 1992
between the Registrant and Medtronic, Inc.
+10.9* System Design and Procurement Agreement dated as of December 16,
1994 between the Registrant and Pharmacia Biotech, Inc.
10.10* Lease dated April 9, 1992 between Worcester Business Development
Corporation and the Registrant for offices and laboratory space
located in Two Biotech Park, Worcester, Massachusetts.
10.11* Lease dated February 15, 1991 between Worcester Business
Development Corporation and the Registrant, as amended, for
offices and laboratory space located in Three Biotech Park,
Worcester, Massachusetts.
10.12* Sublease dated November 1, 1994 between EcoScience Corporation
and the Registrant, as amended, for offices and laboratory space
located in Four Biotech Park, Worcester, Massachusetts.
10.13* 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.
85
10.14* Lease dated February 4, 1994 between the Registrant and Charles
River Building Limited Partnership for space located at 620
Memorial Drive, Cambridge, Massachusetts.
10.15* Loan and Security Agreement dated as of March 29, 1991 between
the Registrant and Technology Funding Secured Investors II.
10.16* Series G Convertible Preferred Stock and Warrant Purchase
Agreement dated as of September 9, 1994 among the Registrant and
certain Purchasers, as amended (the "Series G Agreement").
10.17* Registration Rights Agreement dated as of February 21, 1990
between the Registrant, the Worcester Foundation for Biomedical
Research, Inc. and Paul C. Zamecnik.
10.18* Registration Rights Agreement dated as of June 25, 1990 between
the Registrant and Nigel L. Webb.
10.19* Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.20* Registration Rights Agreement dated as of February 6, 1992
between the Registrant and Anthony J. Payne.
++10.21* 1990 Stock Option Plan, as amended.
++10.22* 1995 Stock Option Plan.
++10.23* 1995 Director Stock Plan.
++10.24* 1995 Employee Stock Purchase Plan.
10.25* Form of Warrant to purchase shares of Series C Convertible
Preferred Stock originally issued to Pillar Investment Limited
(formerly known as Ash Properties Limited), as amended.
10.26* Form of Warrant to purchase shares of Common Stock issued in
connection with the issuance of the Registrant's series of notes
known as its 10% Convertible Subordinated Notes due September 16,
1993 and the Registrant's 10% Convertible Subordinated Note Due
March 19, 1993, as amended.
10.27* Warrant issued to Pillar S.A. to purchase up to 175,000 shares of
Common Stock dated as of December 1, 1992, as amended.
10.28* Warrant issued to F. Hoffmann-La Roche Ltd. to purchase 551,724
shares of Common Stock dated as of February 12, 1993.
10.29* Form of Warrant originally issued to Pillar Investment Limited to
purchase 427,126 shares of Common Stock dated as of February 15,
1993, as amended.
10.30* Form of Warrant originally issued to Pillar Investment Limited to
purchase 350,000 shares of Common Stock dated as of February 15,
1993, as amended.
10.31* Warrant issued to Pillar Investment Limited to purchase 500,000
shares of Common Stock dated as of February 4, 1994, as amended.
86
10.32* Form of Warrant issued to Pillar Investment Limited to purchase
shares of Common Stock issued as placement commissions in
connection with the sale of shares of Series F Convertible
Preferred Stock and in consideration of financial advisory
services, as amended.
10.33* Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1994, as amended.
10.34* Form of Warrant to purchase shares of Common Stock issued as part
of the Units (as defined in the Series G Agreement) issued and
sold to investors pursuant to the Series G Agreement on or prior
to March 31, 1995, as amended.
10.35* Form of Warrant to purchase shares of Common Stock issued as part
of the Units issued and sold to investors pursuant to the Series
G; Agreement after March 31, 1995.
10.36* Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1995.
10.37* 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.
++10.38 Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.39* Indemnification Agreement dated as of February 6, 1992 between
the Registrant and E. Andrews Grinstead, III.
++10.40 Employment Agreement dated as of March 1, 1997 between the
Registrant and Anthony J. Payne.
10.41* Indemnification Agreement dated as of February 6, 1992 between
the Registrant and Anthony J. Payne.
++10.42 Employment Agreement dated March 1, 1997 between the Registrant
and Dr. Sudhir Agrawal.
++10.43* Employment Agreement dated October 1, 1993 between the Registrant
and Dr. Paul Schechter.
++10.44* Consulting Agreement dated as of February 21, 1990 between the
Registrant and Dr. Paul C. Zamecnik.
10.45* Consulting Agreement dated as of March 1, 1994 between the
Registrant and Pillar S.A.
10.46* Consulting Agreement dated as of July 8, 1995 between the
Registrant and Pillar S.A., as amended.
10.47* Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
87
10.48* First Amendment to Lease dated as of November 30, 1995 between
the Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
+10.49** Research, Development and License Agreement dated as of January
24, 1996 between the Registrant and G.D. Searle & Co.
+10.50** Manufacturing and Supply Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.51** Registration Rights Agreement dated as of January 24, 1996
between the Registrant and G.D. Searle & Co.
10.52** Second Amendment to Lease dated as of February 23, 1996 between
the Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.53** Third Amendment to Lease dated as of February 28, 1996 between
the Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.54 Fourth Amendment to Lease dated as of July 25, 1996 between the
Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.55 Fifth Amendment to Lease dated as of March 14, 1997 between the
Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.56 Loan and Security Agreement dated as of December 31, 1996 between
the Registrant and Silicon Valley Bank.
10.57 Warrant issued to Silicon Valley Bank to purchase 65,000 shares
of Common Stock dated as of December 31, 1996.
10.58 Registration Rights Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
10.59 Master Equipment Lease Agreement dated as of October 25, 1996
between the Registrant and Finova Technology Finance, Inc.
+++10.60 Supply and Sales Agreement dated as of September 1, 1996 between
the Registrant and P.E. Applied Biosystems.
11. Computation of pro forma net loss per common share.
21.* Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
88
23.2 Consent of Banner & Witcoff, Ltd.
27 Financial Data Schedule [EDGAR]
- --------------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-99024).
** Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
+ 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 this Annual Report on Form 10-K.
+++ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.