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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For annual and transitional reports pursuant to sections
13 or 15(d) of the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27352
HYBRIDON, INC.
(Exact name of Registrant as specified
in its certificate of incorporation)
Delaware 04-3072298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Fortune Blvd.
Milford, Massachusetts 01757
(Address of principal executive offices) (Zip Code)
(508) 482-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $27,593,715 million as of March 28, 2000.
For purposes of determining this number, 6,056,444 shares of common stock held
by affiliates are excluded.
As of March 28, 2000, the registrant had 16,323,873 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Items 10, 11, 12 and 13
Statement with respect to the Annual of Part III.
Meeting of Stockholders to be held on
June 12, 2000.
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HYBRIDON, INC.
FORM 10-K
INDEX
PART I 6
ITEM 1. BUSINESS...........................................................6
HYBRIDON...........................................................6
TECHNOLOGY OVERVIEW................................................6
Conventional Drugs............................................7
Antisense Drugs...............................................7
HYBRIDON TECHNOLOGY................................................8
Medicinal Chemistries.........................................8
Manufacturing Technology......................................8
Proprietary Analytical Tools..................................9
Regulatory Know-How...........................................9
DRUG DEVELOPMENT AND DISCOVERY.....................................9
The Drug Development and Approval Process.....................9
Hybridon Drug Development and Discovery Programs.............10
CLINICAL PROGRAMS.................................................10
Cancer.......................................................10
HIV-1 and AIDS...............................................11
PRECLINICAL PROGRAMS..............................................11
HYBRIDON SPINOUTS.................................................12
MethylGene, Inc..............................................12
OriGenix Technologies Inc....................................12
CORPORATE COLLABORATIONS..........................................12
G.D. Searle & Co.............................................13
Medtronic, Inc...............................................13
HYBRIDON SPECIALTY PRODUCTS.......................................13
MARKETING STRATEGY................................................14
ACADEMIC AND RESEARCH COLLABORATIONS..............................15
DRUG DEVELOPMENT SERVICES.........................................15
PATENTS, TRADE SECRETS, AND LICENSES..............................15
GOVERNMENT REGULATION.............................................17
FDA Approvals................................................17
Other Regulation.............................................17
COMPETITION.......................................................18
EMPLOYEES.........................................................18
ITEM 2. PROPERTIES........................................................19
ITEM 3. LEGAL PROCEEDINGS.................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF HYBRIDON..........19
Executive Officers................................................19
Significant Employees.............................................19
PART II 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................21
ITEM 6. SELECTED FINANCIAL DATA...........................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................25
GENERAL...........................................................25
RESULTS OF OPERATIONS.............................................25
Revenues.....................................................25
Research and Development Expenses............................25
3
General and Administrative Expenses..........................26
Interest Expense.............................................26
Restructuring Charge.........................................26
Net Loss.....................................................26
LIQUIDITY AND CAPITAL RESOURCES...................................27
General......................................................27
Cash Resources...............................................27
1998 FINANCING ACTIVITIES.........................................28
Credit Facility..............................................28
Facility Leases..............................................29
Net Operating Loss Carryforwards.............................29
RISK FACTORS.................................................................29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................31
PART III 32
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT
EMPLOYEES OF HYBRIDON.............................................32
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32
PART IV 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...32
SIGNATURES 38
POWER OF ATTORNEY AND SIGNATURES.............................................38
4
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such risks and uncertainties include the risks detailed in the Risk
Factors section of this Annual Report on Form 10-K. Hybridon does not undertake
to update any forward-looking statements.
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PART I
ITEM 1. BUSINESS
HYBRIDON
Hybridon, Inc., established in 1989, is involved in the discovery and
development of genetic drugs, which are drugs that treat diseases by acting on a
particular gene or protein. The genetic drugs being developed by Hybridon are
based on "antisense" technology, in that they use synthetic genetic material,
also called oligonucleotides, with the aim of inhibiting or reducing the body's
production of proteins that directly or indirectly cause a given disease.
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries (relating to the design and manufacture of
new antisense compounds), analytical chemistry (relating to the detection and
identification of compounds inside and out of the body), and manufacturing
technology.
Hybridon also has rights to technology allowing the chemical
modification of oligonucleotides, has particular expertise in the efficient
design and development of antisense drugs, and has devised innovations in the
manufacture of oligonucleotides. In addition, it has one of the few large-scale
oligonucleotide manufacturing facilities.
These aspects of Hybridon's business are discussed below.
TECHNOLOGY OVERVIEW
Introduction
The heart, brain, liver and other organs in the human body function
together to support life. Each microscopic cell within these organs produces
proteins that affect how that cell functions within its organ, and ultimately
how efficiently each organ functions within the body. Almost all human diseases
are caused by abnormal production or performance of proteins within individual
cells. In some instances, cell proteins act directly to cause or support a
disease. In other instances, cell proteins interfere with other proteins that
prevent or combat disease. Traditional drugs are designed to interact with
protein molecules that cause or support diseases. Antisense drugs are designed
to work at an earlier stage, in that they are designed to stop the production of
disease-causing or disease-supporting proteins.
The information that controls a cell's production of a specific protein
is contained in the gene relating to that protein. Each gene is made up of two
intertwined strands of DNA that form a structure called a "double helix." Each
strand of DNA consists of a string of individual DNA building blocks, called
nucleotides, arranged in a specific sequence. One of the paired strands contains
the information that directs the composition of a specific protein, and is
called the "coding" strand. The other strand, the "non-coding" strand, contains
a different but complementary sequence of nucleotides. Each strand is made of
linked molecules, known as the "backbone," and attached to the backbone are
molecules known as "bases." It is the sequence of bases that contains genetic
information.
The full complement of human genes, known as the human "genome,"
consists of over 100,000 genes and contains the information required to produce
all human proteins. A copy of the complete human genome is present in each cell,
and each cell makes proteins based on its copy of the genome. Cells make
proteins in a two-stage process. First, the cell creates a molecule of messenger
RNA consisting of a string of nucleotides in a sequence complementary to the
sequence of the coding strand of DNA. This is called the "sense" sequence. A
sequence that is complementary to the sense sequence is called the "antisense"
sequence. The cell then produces proteins based on the information contained in
the messenger RNA. The
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number of copies of messenger RNA the cell produces will affect how many copies
of a given protein it produces.
A normal cell produces a given set of normal proteins in the right
amount for the body to function properly. A diseased cell produces inappropriate
or mutant proteins, or produces the wrong amount of normal proteins. A cell
produces mutant proteins when its DNA changes, either through mutation, as in
many types of cancer cells, or by infection with a virus.
Conventional Drugs
Most drugs are chemicals that stimulate or suppress the function of a
particular molecule, usually a protein, with tolerable side effects. Most side
effects arise when a drug interacts with other proteins in addition to the
target protein. Generally, the fewer other proteins a drug interacts with, the
fewer the side effects.
Conventional drugs generally aim to bind only two or three points of
the target molecule. Frequently, however, sites on other non-target molecules
resemble the target binding site enough to permit the conventional drug to bind
to some degree to those non-target molecules. This lack of selectivity can
result in unwanted side effects, potentially leading to decreased effectiveness.
A further characteristic of conventional drugs is that developing them
is a time-consuming and expensive process. For every compound that is found to
be effective and have tolerable side effects, thousands may be investigated and
rejected.
Antisense Drugs
An oligonucleotide with a sequence exactly complementary to that of the
messenger RNA of a specific gene can bind to and inhibit the expression of
messenger RNA, thereby decreasing or eliminating the production of
disease-causing or disease-supporting proteins. Antisense technology involves
the design and synthesis of such oligonucleotides. Hybridon believes that drugs
based on antisense technology may be more effective, cause fewer side effects,
and have a greater range of applications than conventional drugs because
antisense drugs are designed to intervene in the production of proteins, rather
than after the proteins are made, and in a highly specific fashion.
Advances in mapping the human genome, including work conducted by
academic institutions, biotechnology companies and pharmaceutical companies,
have allowed many targets for antisense drugs to be identified. Once a gene
associated with a disease-associated protein is identified, an antisense
oligonucleotide can be designed, and the pharmaceutical effects of that
oligonucleotide can be improved by chemical modification. Chemically-modified
oligonucleotides can be composed of DNA, RNA, or a combination of the two.
Because the nucleotide sequence of a chemically-modified antisense
oligonucleotide is complementary to its target sequence on the messenger RNA of
a given gene, the antisense oligonucleotide forms a large number of bonds at the
target site, typically between 40 and 60. This allows it to form a strong bond
with the messenger RNA. A few identical messenger RNA molecules can cause the
cell to produce many copies of a protein; similarly, a few identical
chemically-modified antisense oligonucleotides can stop this process. This is
due in part to an enzyme called RNase H that can destroy messenger RNA bound to
an oligonucleotide without destroying the oligonucleotide itself, thus freeing
the oligonucleotide to bind with, and cause the destruction of, other messenger
RNA molecules. This process is generally known as catalytic activity. All of
Hybridon's drugs are designed to take advantage of this catalytic activity so
that a relatively small number of antisense molecules can effectively inhibit
production of disease-associated proteins.
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HYBRIDON TECHNOLOGY
Hybridon's antisense chemistry builds on the pioneering work in the
antisense field begun in the 1970s by Dr. Paul C. Zamecnik, a founder,
consultant and director of Hybridon. Development of Hybridon's antisense
chemistry has been directed by Dr. Sudhir Agrawal, Hybridon's Chief Scientific
Officer, and now also President and Acting Chief Executive Officer. It has been
based on what is referred to in this prospectus as "advanced chemistries,"
namely Hybridon's ability to alter the chemical makeup of the oligonucleotide
backbone in a manner that makes oligonucleotides safer and more stable without
adversely affecting their ability to promote the destruction of messenger RNA.
Medicinal Chemistries. Hybridon's first antisense drug, GEM(R) 91,
targets the messenger RNA that codes for an essential protein in Type 1 Human
Immunodeficiency Virus, or "HIV-1." GEM(R) 91 is based on first-generation
phosphorothioate chemistry, which altered the naturally-occurring, or native,
form of oligonucleotides by replacing certain oxygen atoms in the backbone with
sulfur atoms. GEM(R) 91 was more stable than native DNA, but was still able to
trigger the action of RNaseH, leading to catalytic activity. However, there were
side effects caused by the administration of this modified DNA into the body. In
particular, in the last clinical trial of GEM(R) 91 treatment of three of the
nine patients with advanced HIV disease was interrupted due to unacceptable
decreases in platelet counts. As a result, Hybridon discontinued the GEM(R) 91
program. Hybridon has, however, used the information gained from the human
clinical trials of GEM(R) 91 to design its advanced oligonucleotide chemistries.
Hybridon's scientists have designed and made over twenty families of
advanced oligonucleotide chemistries, including DNA/RNA combinations, also
called hybrid or mixed backbone chemistries. Hybridon believes that antisense
compounds based on these advanced chemistries will show favorable pharmaceutical
characteristics and significantly improve therapeutic value compared to earlier
antisense drug candidates. These compounds are likely to have the following
desirable characteristics:
o fewer side effects
o greater stability in the body, thereby permitting a patient to take
doses less frequently
o greater potency, thereby permitting a patient to take lower doses
o potential for multiple routes of administration (such as by injection,
orally, or topically)
Immunostimulatory Technology. It is well-known that the first
generation phosphorothioate oligonucleotides containing the dinucleotide
sequence CpG mobilize the body's immune defense system. This is called
immunostimulation. Hybridon has found that selectively changing the backbone
chemistry at specific points relative to the CpG in the molecule will cause
significant decreases or increases in the immunostimulatory activities. These
discoveries are being used to both enhance and suppress this activity depending
on the therapeutic use. For example, an oligonucleotide causing enhanced
immunostimulation could be used as an anti-cancer therapy, or used together with
other components of a vaccine. Modifications that decrease immunostimulation are
used to reduce the side-effects of some antisense oligonucleotide compounds.
Drug Potentiation Technology. Hybridon has discovered that certain
oligonucleotides are able to enhance the activity of irinotecan, a marketed
anti-cancer drug, when the two are used together in animal models of cancer. The
observed increase in activity is not solely due to an antisense mechanism. This
discovery is being further studied to determine the mechanism of the effect and
to possibly prepare for human clinical trials.
Manufacturing Technology. Hybridon's expertise in the synthesis of
chemically modified oligonucleotides has served as the foundation of its
manufacturing technology and know-how. Hybridon has developed proprietary
technology, including equipment, to increase the purity of its oligonucleotides,
8
make the production process more efficient, increase the scale of production,
and significantly reduce the cost of oligonucleotide-based drugs.
Proprietary Analytical Tools. Hybridon has established analytical tools
and processes that enable it to test the purity of oligonucleotides more quickly
and accurately than would be feasible using traditional methods. Hybridon uses
the resulting information to improve quality control, to assist it in complying
with regulatory requirements, and to monitor absorption and stability of its
drugs in preclinical and clinical trials.
Regulatory Know-How. Hybridon drug development and manufacturing
personnel have extensive experience in working with the FDA and other drug
regulatory agencies in an efficient and cost-effective manner. Hybridon has
assisted customers of Hybridon Specialty Products ("HSP"), Hybridon's contract
manufacturing division, in preparing essential components of their submissions
to the FDA.
DRUG DEVELOPMENT AND DISCOVERY
The Drug Development and Approval Process
The process of taking a compound from the laboratory to human patients
generally takes 10 to 15 years. This process is extremely expensive and is
rigorously regulated by governmental agencies, including, in the U.S., the Food
and Drug Administration, or the "FDA". Each drug must undergo a series of trials
(preclinical and clinical) before the FDA will consider approving it for
commercial sale. The FDA or any company conducting drug trials can discontinue
those trials at any time if it feels that patients are being exposed to an
unacceptable health risk or if there is not enough evidence that the drug is
effective. The FDA may also require a company to provide additional information
or conduct additional tests before it will permit a drug to proceed from one
phase of trials to the next.
The phases of preclinical and clinical trials are described below:
o Preclinical Studies. Preclinical trials involve the testing of a given
compound in animals to provide data on the activity and safety of the
compound before the compound is administered to humans.
o Investigational New Drug Application. If the data from research and
preclinical trials are promising, Hybridon may file an Investigational
New Drug Application, or "IND," with the FDA. The IND contains the
results of the preclinical trials and the protocol for the first
clinical trial. The IND becomes active in 30 days unless the FDA
disapproves it or requires additional information. Once the IND becomes
active, Hybridon can begin clinical trials in the U.S.
o Phase I Clinical Trials. In Phase I trials, the drug is given to a
small group of healthy individuals or patients with the disease. These
trials are designed to produce data on the drug's safety, the maximum
safe dose, and how the drug is absorbed, distributed, metabolized and
excreted over time. In some cases, Phase I trials can give an early
indication of a drug's effectiveness. A limited Phase I trial is
sometimes called a Pilot Phase I trial.
o Phase I/II Clinical Trials. In Phase I/II trials, the drug is given to
patients with the diseases to evaluate safety and to get an early
indication of a drug's effectiveness. This type of trial is commonly
used in the evaluation of oncology drugs.
o Phase II Clinical Trials. In Phase II trials, the drug is given to a
larger group of patients with the disease for purposes of evaluating
the drug's effectiveness and side effects at varying doses and
schedules of administration and thereby determining the optimal dose
and schedule for the larger Phase III trials that follow.
9
o Phase III Clinical Trials. These trials generally have a large number
of patients. The primary purpose of a Phase III trial is to confirm the
drug's effectiveness and produce additional information on side
effects.
o New Drug Application. Once Phase III trials are complete, Hybridon will
file a New Drug Application, or "NDA," with the FDA. The NDA contains
all of the information gathered from the Phase I, I/II, II and III
trials. Based on the FDA's review of the NDA, the FDA may approve the
drug for commercial sale. The FDA may deny an NDA if the applicable
regulatory requirements are not met. The FDA may also require
additional tests before approving an NDA. Even after approval by the
FDA, Hybridon must file additional reports about the drug with the FDA
from time to time. The FDA may withdraw product approvals if a company
fails to comply with ongoing regulatory standards or if problems occur
after a company starts marketing a drug.
o Accelerated Approval. The FDA is authorized to grant accelerated review
to NDAs for drugs that are intended to treat persons with debilitating
and life-threatening illnesses, especially if no satisfactory
alternatives are available. The more severe the disease, the more
likely it is that the drug will qualify for accelerated review. If a
new drug is approved after accelerated review, the FDA may require
Hybridon to conduct specific post-marketing studies regarding the
drug's safety, benefits and optimal use.
The regulatory process in other countries is generally similar to the
U.S. regulatory process.
Hybridon Drug Development and Discovery Programs
Hybridon is focusing its drug development and discovery efforts on
developing antisense compounds for the treatment of diseases in three major
therapeutic areas: cancer, viral infections and diseases of the eye.
Hybridon believes there are significant additional opportunities for
the use of antisense, particularly in the treatment of cancer. Compared to
conventional anti-cancer drugs, antisense may provide:
o more specific therapy
o more rapid development of drugs targeting newly-discovered
cancer-related proteins
o fewer toxic side effects, thereby allowing repeat and long-term
therapy, either alone or in combination with other cancer therapies
(such as radiation or chemotherapy)
o when used in combination therapy, therapeutic effects that complement
the benefits of conventional drugs
For these reasons, Hybridon is exploring new antisense targets relevant
to the treatment of cancer.
CLINICAL PROGRAMS
Hybridon has conducted clinical trials with antisense drugs targeting
the following diseases. Hybridon is seeking partners for each of its compounds
in clinical development.
Cancer
Unlike normal human cells, cancer cells grow in an uncontrolled and
harmful manner. The protein molecule protein kinase A, or "PKA," has been
implicated in the formation and growth of various solid tumors, including colon,
ovarian, breast, and lung tumors. There are two kinds of PKA. It is normal to
find type I in developing fetuses, but abnormal to find it in adults. By
contrast, PKA type II is found in, and is
10
necessary to the health of, normal adults. Certain cancer cells produce PKA type
I in adults. Hybridon is developing a cancer drug, GEM(R) 231, that is designed
to reduce the production of the harmful PKA type I without interfering with the
production of PKA type II. Current drug candidates based on conventional
mechanisms have unacceptable side effects.
Hybridon has conducted a Phase I clinical trial to evaluate the safety
of GEM(R) 231 at multiple doses, and has found that patients tolerate it well.
This trial explored the maximum tolerated dose of GEM(R) 231 for both single
doses and multiple doses, and even high doses of GEM(R) 231 did not show the
side effects normally seen with current cancer treatments. This trial was not
conducted for the purpose of evaluating the efficiency of GEM(R) 231.
Hybridon is currently conducting additional studies with GEM(R) 231 in
patients with solid tumors that had not been cured by prior therapy. These
studies include a pilot Phase II trial and a Phase I/II trial. In addition,
Hybridon has begun the first in a series of Phase I/II trials treating patients
with solid tumors with GEM(R) 231 in combination with the anti-cancer therapies
Taxol(R) and Taxotere(R).
HIV-1 and AIDS
Acquired Immune Deficiency Syndrome, "AIDS," is caused by infection
with HIV-1 and leads to severe, life-threatening impairment of the immune
system. AIDS therapy using a combination of drugs has resulted in decreased
rates of death and improvement in the quality of life for patients who are
HIV-positive or have AIDS. There are however, increasing reports that this
therapy may be failing to give sustained clinical benefit. Hybridon believes
this underscores the need for new AIDS therapies.
Hybridon has completed a Pilot Phase I clinical study in Europe of
GEM(R) 92, Hybridon's advanced chemistry compound for the treatment of HIV-1
infection and AIDS. This study was designed to explore the safety of GEM(R) 92
and to provide information on its absorption after oral dosing and injection.
The patients tolerated well all doses that they were given in the pilot study.
Further, GEM(R) 92 was detected in the blood after both oral dosing and
injection, suggesting that it may be possible to develop GEM(R) 92 as an oral
drug. Hybridon believes this was the first study of the oral administration of
an antisense molecule to humans. In in-vitro studies, beneficial effects were
observed when GEM(R) 92 was used in combination with several marketed AIDS
drugs. Importantly, both its medicinal approach and genetic target are unique,
in that no antisense drug has been approved for the treatment of AIDS, and no
other drug has the same target on the HIV-1 genome.
PRECLINICAL PROGRAMS
Hybridon has also conducted preclinical studies in the following areas:
- ----------------------------------------------------------------------------------------------
Primary
Target Therapeutic Indication(s) Status
- ----------------------------------------------------------------------------------------------
MDM2 (a protein involved in programmed Cancer Seeking partner
cell death)
- ----------------------------------------------------------------------------------------------
Vascular Endothelial Growth Factor (a Cancer Seeking partner
protein that can cause abnormal
formation of new blood vessels) Retinopathies (e.g. macular Seeking partner
degeneration and diabetic
retinopathy)
- ----------------------------------------------------------------------------------------------
Hepatitis C Virus Hepatitis C (which can lead Seeking partner
to liver cancer)
- ----------------------------------------------------------------------------------------------
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HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund applications of its
antisense technology that it cannot develop at present without external funding.
Hybridon has used one such strategy, formation of spinout companies, to form
MethylGene, Inc. and OriGenix Technologies Inc. for the continued development of
certain product candidates.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene. Hybridon owns approximately 30% of MethylGene. Hybridon has granted
exclusive worldwide licenses and sublicenses to MethylGene to develop and market
(1) antisense compounds to inhibit the protein DNA methyltransferase for the
treatment of any disease, (2) other methods of inhibiting DNA methyltransferase
for the treatment of any disease, and (3) antisense compounds to inhibit up to
two additional targets for the treatment of cancers. Research has shown that DNA
methyltransferase, a protein, is overproduced in some tumors, such as
non-small-cell lung cancer, colon cancer, and breast cancer tumors. MethylGene
is obligated to purchase from Hybridon at specified prices all bulk
oligonucleotides that MethylGene requires. Hybridon is also performing drug
development and other services for MethylGene.
The Canadian investors who invested in MethylGene have the right to
exchange all (but not less than all) of the shares of stock in MethylGene that
they initially purchased for shares of Hybridon common stock on the basis of
37.5 MethylGene shares (for which they paid approximately U.S. $56.25) for one
share of Hybridon common stock (subject to adjustment for stock splits, stock
dividends and the like). This option expires no later than 2001.
MethylGene commenced Phase I clinical trials of its first compound,
MG98, for the treatment of cancer in May 1999.
OriGenix Technologies Inc.
In January 1999, Hybridon and three Canadian institutional investors
formed OriGenix to develop and market drugs for the treatment of infectious
diseases, with an initial focus on viral diseases. Hybridon owns approximately
40% of OriGenix.
Hybridon has granted to OriGenix worldwide exclusive licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human papillomavirus, or "HPV," and hepatitis B virus infections. HPV infection
can cause a variety of warts, including benign genital warts. HPV infection can
also lead to cervical cancer. Hepatitis B infections can lead to liver cirrhosis
and cancer of the liver. OriGenix may in the future negotiate with Hybridon for
licenses or sublicenses relating to additional targets. In addition, OriGenix is
obligated to purchase from Hybridon at specified prices all bulk
oligonucleotides it requires. Hybridon may also perform drug development and
other services for OriGenix.
CORPORATE COLLABORATIONS
An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements, or other
strategic alliances with others, primarily biotechnology and pharmaceutical
corporations, to develop certain products. Subject to sufficient funds being
available, Hybridon intends to proceed with Phase II clinical trials of its
cancer drug GEM(R) 231. Otherwise, Hybridon does not anticipate proceeding with
any of its other clinical programs beyond their current stages of development
without a collaborative arrangement with a corporate partner. Hybridon expects
to retain the rights to manufacture many of the products it may license pursuant
to its existing and any future collaborations.
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G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a research and
development collaboration for the development of antisense compounds. Hybridon
and Searle were investigating antisense inhibitors of MDM2, a protein involved
in programmed cell death, or apoptosis. In March 2000, Searle elected not to
extend this research and development collaboration. Hybridon will seek a new
development partner for this program.
It is believed that MDM2 may play an important role in many types of
cancer. As part of the agreement, Searle will return to Hybridon all licenses
granted to Searle, including the recently issued U.S. patent 6,013,786, which
covers specific antisense inhibitors of human MDM2. Searle also grants to
Hybridon use of Searle's agreement-related patent rights, including all
antisense rights relating to MDM2.
Through January 2000, Searle was making annual research payments to
Hybridon of $600,000. A royalty will be paid to Searle if antisense compounds
discovered under the collaboration are commercialized successfully.
Pursuant to their collaboration, Searle also purchased 200,000 shares
of common stock in Hybridon's initial public offering.
Medtronic, Inc.
In May 1994, Hybridon and Medtronic agreed to test a device for
delivering Hybridon's antisense oligonucleotides for the treatment of
Alzheimer's disease. The agreement provides that Hybridon is responsible for the
development of, and will hold all rights to, any drug developed as a result of
this agreement and Medtronic is responsible for the development of, and will
hold all rights to, any delivery system developed as a result of this agreement.
The parties may agree to extend this collaboration to other neurodegenerative
disease targets. Hybridon is not currently conducting any activities under this
agreement.
As part of their collaboration, Medtronic purchased a total of 131,667
shares of Hybridon common stock.
HYBRIDON SPECIALTY PRODUCTS
In 1996, Hybridon formed HSP to manufacture oligonucleotide compounds
both for Hybridon's internal use, for use by its collaborators and for sale to
third parties. Hybridon believes that the current interest in genetic medicine
or drugs based on genetic information will continue, and even increase, as the
potential of these technologies for the development of new classes of drugs
becomes more widely understood, and that as a result demand for oligonucleotide
compounds will increase. Hybridon's strategy is to position HSP to take
advantage of this increased demand. There can be no assurance that this strategy
will be successful or that demand will increase as anticipated. HSP is, however,
attempting to minimize this risk by manufacturing oligonucleotides for many
applications, at different stages of development. HSP is currently manufacturing
oligonucleotides for genomic, diagnostic and therapeutic applications, and
Hybridon believes HSP's customers are developing over 20 oligonucleotide drugs,
with at least eight currently in clinical studies.
HSP manufactures oligonucleotides at its 36,000-square-foot leased
facility, which is capable of manufacturing oligonucleotides on a large scale.
HSP first began producing oligonucleotide compounds for sale in June 1996 and
had revenues of approximately $1.1 million in 1996, $1.9 million in 1997, $2.8
million in 1998 and $5.8 in 1999. HSP's principal customers in 1999 included
Genta Incorporated, MethylGene, Inc. and Ribozyme Pharmaceuticals, Inc. Each of
those customers accounted for more than 10% of HSP's 1999 revenues.
13
HSP has developed a manufacturing technology platform that combines
multiple methods to improve the production process and increase the amount of
compounds produced in a single batch, thereby permitting economies of scale. HSP
has developed two separate machines, called synthesizers, for the large-scale
synthesis of oligonucleotides. One of these machines was developed by Hybridon
alone and the other in collaboration with Pharmacia Biotech. Pharmacia has the
right to make and sell synthesizers based on the design developed in the
collaboration but must also pay Hybridon royalties. Hybridon believes that its
synthesizers are the first commercial-scale oligonucleotide synthesizers
designed for advanced oligonucleotide chemistries. In addition, HSP has
developed purification processes that use water in place of chemical solvents,
thereby decreasing the impact of the process on the environment and permitting
HSP to purify large quantities of oligonucleotides. HSP has also developed
processes and unique chemicals used in the process, which HSP believes may
further lower its production costs.
In 1996, Hybridon entered into a four-year sales and supply agreement
with the Applied Biosystems Division of Perkin-Elmer, pursuant to which
Perkin-Elmer agreed to refer potential customers to HSP, and Hybridon agreed to
purchase certain raw materials from Perkin-Elmer for the manufacture of
oligonucleotides sold to those customers. Hybridon is required to pay
Perkin-Elmer a percentage of the sales price paid by those customers. In
addition, Perkin-Elmer licensed to Hybridon its oligonucleotide synthesis
patents.
HSP is targeting three market areas for oligonucleotides: antisense
therapeutics, non-antisense therapeutics, and diagnostic/genomic DNA probes,
which are oligonucleotides designed to detect the presence of specific genes.
Within each area there is a large number of potential products. HSP is currently
manufacturing oligonucleotides for customers in each of these three market
areas.
The production of oligonucleotides is similar in many respects to the
chemical synthesis used to produce conventional drugs. However, unlike many
conventional drugs, one can with the same chemical building blocks and
essentially the same manufacturing processes and equipment make different
antisense compounds for treating different diseases. As a result, the knowledge
and experience that HSP obtains manufacturing one oligonucleotide compound can
be applied to the manufacture of other oligonucleotide compounds. Furthermore,
since several different oligonucleotide compounds can be manufactured in one
facility, Hybridon anticipates that HSP will have the ability to manufacture
multiple marketed oligonucleotide-based drugs without having to build a separate
plant for each such compound.
In order to meet Hybridon's needs and satisfy outside demand, HSP may
need to increase its manufacturing capacity by adding more oligonucleotide
synthesizers. In addition, in order for Hybridon to successfully commercialize
its drugs or for HSP to achieve a satisfactory profit on sales, HSP may need to
reduce its production costs further.
Hybridon believes that it is currently manufacturing oligonucleotides
according to FDA Good Manufacturing Practices, or "GMP". The FDA has not
formally reviewed HSP's facility and procedures, and Hybridon may need to revise
those procedures in the future as production increases. Since 1996, HSP has
undergone multiple significant audits for GMP compliance conducted by
biotechnology and pharmaceutical companies. No significant deficits have been
identified. In addition, in 1997, HSP was one of two biotechnology companies
chosen to participate in the FDA's Biotechnology PAI Pilot Initiative, a pilot
program that allows FDA regulatory officials to provide advice to the selected
companies on compliance with FDA standards before they submit drug approval
filings. The FDA would have informed Hybridon of any substantial issues if any
had arisen.
MARKETING STRATEGY
Hybridon plans to market the drugs it is developing either directly,
using its own sales force, or through co-marketing, licensing, distribution or
similar arrangements with other pharmaceutical and biotechnology companies,
particularly if the products are intended to serve a large,
geographically-diverse patient population. Direct marketing of any of its
proposed drugs would require a substantial marketing
14
staff and sales force supported by a distribution system. Co-marketing or other
arrangements with other pharmaceutical or biotechnology companies would allow
Hybridon to avoid the significant cost involved in direct marketing, but would
make Hybridon reliant on the efforts of others. While Hybridon has developed
general marketing strategies, it has not begun to implement any of these
strategies.
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon has entered into a number of collaborative research
relationships with independent researchers and leading academic and research
institutions and U.S. government agencies, including the National Institutes of
Health, or "NIH". Such research relationships allow Hybridon to augment its
internal research capabilities and obtain access to specialized knowledge or
expertise.
In general, Hybridon's collaborative research agreements require
Hybridon to pay various amounts to support the research. Hybridon usually
provides the oligonucleotides, which the collaborator then tests. If in the
course of conducting research under its agreement with Hybridon a collaborator,
solely or jointly with Hybridon, creates any invention, Hybridon generally has
an option to negotiate an exclusive, worldwide, royalty-bearing license to the
invention. Inventions developed solely by Hybridon's scientists in connection
with a collaborative relationship generally are owned exclusively by Hybridon.
Most of these collaborative agreements are nonexclusive and can be cancelled on
short notice.
Since July 1997, as part of its restructuring, Hybridon has allowed a
number of its collaborative research agreements to expire and has terminated
certain others, but has maintained those that it believes support its current
drug discovery and development programs.
DRUG DEVELOPMENT SERVICES
Hybridon's Drug Development Department has experience in the design and
conduct of preclinical and clinical trials and has prepared and submitted
reports and other regulatory documents in connection with the three Hybridon
advanced chemistry antisense compounds that have entered clinical studies.
Pursuant to a contract with MethylGene, Hybridon's Drug Development Department
has also used its expertise to help design and monitor the preclinical trials of
MethylGene's antisense compound, MG98, that led to MethylGene's submission of
IND applications in Canada and the U.S. MethylGene compensated Hybridon for
these services. Hybridon may perform similar services for OriGenix.
PATENTS, TRADE SECRETS, AND LICENSES
Hybridon's success will largely depend on its ability to:
o obtain U.S. and foreign patent protection for drug candidates and
processes
o preserve trade secrets
o operate without infringing the proprietary rights of third parties
Hybridon's policy is to file patent applications to protect technology,
inventions and improvements that it considers important to development of its
business, and to obtain licenses to other patents that could help Hybridon
maintain or enhance its competitive position. As of March 28, 2000, Hybridon
owned or exclusively licensed in excess of 98 U.S. and foreign issued and
allowed patents, of which 81 are U.S. patents. Hybridon also has 56 other U.S.
and 120 other foreign patent applications. The foreign patent counts include
Japan, Canada and Europe as a whole, as well as other non-European individual
countries. These patents and applications cover various chemically advanced
oligonucleotides, target sequences, oligonucleotide products, methods for making
and purifying oligonucleotides, analytical methods, and methods for antisense
treatment of various diseases. The patents expire on dates ranging from 2006 to
2015.
15
Hybridon is the worldwide exclusive licensee under several U.S. issued
patents or allowed patent applications owned by University of Massachusetts
Medical Center, or "UMMC" (formerly the Worcester Foundation), relating to
oligonucleotides and hybrid or mixed backbone chemistries. Many of these patents
and patent applications have corresponding patents issued by, or corresponding
patent applications on file in, other major industrial countries. One of the
issued U.S. patents and one of the issued European patents cover antisense
oligonucleotides as new compositions of matter for stopping the replication of
HIV. Coverage of the other issued U.S. patents includes composition and use of
oligonucleotides based on advanced chemistries, methods of oligonucleotide
production, composition of certain modified oligonucleotides that are useful for
diagnostic tests or assays, and methods of purifying oligonucleotides. The UMMC
patents licensed to Hybridon expire at various dates starting in 2006.
Hybridon is the exclusive licensee under various other U.S. and foreign
patents and patent applications, including two U.S. patent applications owned by
McGill University relating to oligonucleotides and DNA methyltransferase.
Hybridon and Massachusetts General Hospital jointly own one issued U.S. patent
applicable to Alzheimer's disease. Hybridon holds an exclusive license to
Massachusetts General Hospital's interests under this patent.
Hybridon is a nonexclusive licensee of certain patents held by the
National Institutes of Health, or "NIH," relating to oligonucleotide
phosphorothioates and is a nonexclusive licensee of an NIH patent covering the
phosphorothiolation of oligonucleotides. The field of each of these licenses
extends to a wide variety of genetic targets. Hybridon is also a nonexclusive
licensee of certain patents exclusively licensed to Genzyme covering certain
technology relating to MDM2.
The U.S. Patent and Trademark Office, or "PTO," has informed Hybridon
that certain patent applications exclusively licensed by Hybridon from UMMC will
be submitted to the Board of Patent Appeals and Interferences of the PTO to
determine whether an interference should be declared with issued U.S. patents
held by the NIH relating to oligonucleotide phosphorothioates. An interference
proceeding is a proceeding to determine who was the first to invent, and thus
who is entitled to a patent for, a claimed invention. McDonnell Boehnen Hulbert
& Berghoff, a U.S. patent counsel for Hybridon, is of the opinion that the UMMC
patent application has a prima-facie case for priority against the NIH for an
invention that includes phosphorothioate-modified oligonucleotides. There can be
no assurance, however, that the PTO will declare an interference, or if it does,
what the outcome will be. If Hybridon were to lose the interference, its
nonexclusive license from the NIH of the NIH phosphorothioate patents would not
be affected. If Hybridon were to win the interference, others making, using or
selling certain phosphothioate-modified oligonucleotides would be required to
obtain a license from Hybridon.
The PTO also declared a four-way interference involving two UMMC U.S.
patents, for which Hybridon is the exclusive licensee, relating to a particular
type of modified oligonucleotides. The other parties to this interference were
Integrated DNA Technologies, or "IDT," Isis Pharmaceuticals, Inc. and Gilead
Sciences, Inc. This interference was settled in early 1999. In connection with
the settlement, Hybridon has obtained a nonexclusive license to certain patents
and patent applications owned by IDT that broadly claim chemical modifications
to oligonucleotides. Hybridon has also granted a nonexclusive license to IDT to
make, use, and sell limited quantities of oligonucleotides incorporating certain
of Hybridon's advanced chemistries.
Under its licenses, Hybridon is obligated to pay royalties on its net
sales of products or processes covered by the licensed technology and, in some
cases, to pay a percentage of sublicense income that it receives. These licenses
impose various commercialization, sublicensing, insurance and other obligations
on Hybridon. If Hybridon fails to comply with these requirements, the license
could be terminated.
Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under such patents are still developing. As a result, Hybridon's ability to
obtain and enforce patents that protect its drugs is uncertain and involves
complex legal and factual questions.
16
That Hybridon owns or licenses pending or future patent applications
does not mean that patents based on those applications will ultimately be
issued. First, to obtain a patent on an invention, one must be the first to
invent it or the first to file a patent application for it. Patent applications
in the U.S. are maintained in secrecy until patents are issued, and publication
of any given discovery in the scientific or patent literature tends to lag
behind the actual date of that discovery by several months. Consequently,
Hybridon cannot be certain that the inventors of subject matter covered by
patents and patent applications that it owns or licenses were the first to
invent, or the first to file patent applications for, those inventions.
Others, including Hybridon's competitors, also hold issued patents and
patent applications relating to antisense technology or particular genetic
targets. Holders of any of these patents or patent applications may be able to
require Hybridon to change or cease making or using certain products or
processes, or obtain an exclusive or nonexclusive license in return for
licensing fees, which may be substantial. Hybridon may not be able to obtain any
such licenses at a reasonable cost. Furthermore, such licenses may be made
available to competitors of Hybridon on an exclusive or nonexclusive basis.
Failure to obtain such licenses could have a material adverse effect on
Hybridon. Previously, a competitor was granted another European patent relating
to certain types of stabilized synthetic oligonucleotides for use as therapeutic
agents for selectively blocking the translation of a messenger RNA into a
targeted protein by binding with a portion of the messenger RNA to which the
stabilized synthetic oligonucleotide is substantially complementary. This
European patent was revoked in its entirety in an opposition proceeding before
the European Patent Office in September 1995. The holder of this patent appealed
this decision. This appeal was dismissed on February 18, 1999.
Hybridon requires its employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual is to be kept
confidential, subject to specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual are the
exclusive property of Hybridon. These agreements may not, however, provide
meaningful protection for Hybridon's trade secrets or adequate remedies in the
event of breach.
Consistent with pharmaceutical industry and academic standards,
Hybridon's agreements with academic and research institutions and U.S.
government agencies may provide that the results of a given collaboration, or
any developments that derive from the collaboration, will be freely published,
that information or materials supplied by Hybridon will not be treated as
confidential, and that Hybridon must negotiate a license to developments and
results in order to commercialize products incorporating them. There can be no
assurance that Hybridon will be able successfully to obtain any such license at
a reasonable cost or that such developments and results will not be made
available to competitors of Hybridon on an exclusive or nonexclusive basis. See
"Business--Academic and Research Collaborations."
GOVERNMENT REGULATION
Hybridon's research, clinical development and production activities are
regulated for safety, effectiveness and quality by numerous governmental
authorities in the U.S. and other countries. Hybridon believes that it is in
material compliance with all applicable federal, state and foreign legal and
regulatory requirements.
FDA Approvals. In addition to product approvals by the FDA, as
described above, the FDA may require that it inspect Hybridon's manufacturing
facilities for compliance with GMP and other applicable rules and regulations
before it will permit a product manufactured by Hybridon to be marketed in the
U.S. Any material change by Hybridon in its manufacturing process or equipment,
including relocation of the manufacturing facility, would necessitate additional
FDA review and approval.
Other Regulation. In addition to regulations enforced by the FDA,
Hybridon also is subject to regulation under the Occupational Safety and Health
Act and other present and potential future federal, state or local regulations.
Furthermore, because Hybridon uses hazardous materials, chemicals, viruses, and
17
various radioactive compounds, it must comply with U.S. Department of
Transportation and Environmental Protection Agency regulations and other
federal, state, and foreign laws and regulations regarding hazardous waste
disposal, air emissions, and waste-water discharge. Although Hybridon believes
that it complies with these laws and regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials.
COMPETITION
There are a number of companies, both privately and publicly held, that
are conducting research and development activities on technologies and products
aimed at therapeutic regulation of gene expression, including antisense drugs.
One competitor of Hybridon has recently received FDA approval to market an
antisense therapeutic product for the treatment of CMV retinitis. Hybridon
believes that the interest in these technologies and products will increase. It
is possible that Hybridon's competitors will succeed in developing products that
are more effective than Hybridon's. Furthermore, Hybridon's proposed drugs will
be competing with other kinds of drugs. Given the fundamental differences
between antisense technology and other drug technologies, antisense drugs may be
less effective at treating some diseases than other kinds of drugs.
Biotechnology and related pharmaceutical technologies have undergone
and continue to be subject to rapid and significant change. Hybridon expects
that the technologies associated with biotechnology research and development
will continue to develop rapidly. Hybridon's future will depend in large part on
its ability to compete with these technologies
Hybridon has many competitors, including major pharmaceutical and
chemical companies, biotechnology firms, and universities and other research
institutions. Many of these competitors have substantially greater financial,
technical, and human resources than Hybridon, and many have significantly
greater experience than Hybridon in undertaking preclinical studies and clinical
trials of new pharmaceutical products and obtaining FDA and other regulatory
approvals. Accordingly, Hybridon's competitors may succeed in obtaining
regulatory approvals for products more rapidly than Hybridon. Furthermore, if
Hybridon receives approval to commence commercial sales of products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited experience.
HSP also faces competition, as Hybridon's customers may begin to
produce oligonucelotides internally or may find other sources. Hybridon may be
forced to reduce the cost of its products to meet the competition.
EMPLOYEES
As of March 29, 2000, Hybridon employed 46 individuals full-time, of
whom 16 held advanced degrees. Eight of these employees are engaged in research
and development activities and eleven are employed in finance, corporate
development, and general administrative activities. In addition, 27 of these
employees are employees of HSP, of whom five are employed in quality control.
Many of Hybridon's management and professional employees have had prior
experience with pharmaceutical, biotechnology, or medical products companies.
None of Hybridon's employees is covered by a collective bargaining agreement,
and management considers relations with its employees to be good.
On February 15, 2000, Hybridon announced that E. Andrews Grinstead,
III, currently Hybridon's Chief Executive Officer, had taken an unexpected
medical leave of absence of indefinite duration due to a serious illness and
that Mr. Grinstead had been replaced as President.
18
ITEM 2. PROPERTIES
Hybridon leases its 36,000 square foot facility in Milford,
Massachusetts under a lease that expires in 2004. Hybridon has an option to
extend this lease for two additional five-year terms. The option to renew this
lease must be exercised during the six-month period commencing March 1, 2002.
In addition, Hybridon leases approximately 26,000 square feet of
supplemental laboratory space in Cambridge, Massachusetts under a lease that
expires April 30, 2007. The annual rent for this space is approximately $23 per
square foot. Hybridon is currently subleasing approximately 20,000 square feet
of this to a third party under a sublease that expires September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could damage
Hybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1999.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF HYBRIDON
The executive officers and significant employees of Hybridon as of
March 29, 2000 are as follows:
Executive Officers
NAME AGE POSITION
- ---- --- --------
E. Andrews Grinstead, III.................... 54 Director and Chief Executive Officer
Sudhir Agrawal, D. Phil...................... 46 President and Acting Chief Executive
Officer, Senior Vice President of
Discovery, Chief Scientific Officer, and
Director
Robert G. Andersen........................... 49 Vice President of Operations and Planning
and Chief Financial Officer
Significant Employees
NAME AGE POSITION
- ---- --- --------
R. Russell Martin, M.D. 64 Senior Vice President of Drug Development
Frederick M. Miesowicz, Ph.D. 49 Senior Vice President and General
Manager, Hybridon Specialty Products
Jin-Yan Tang, Ph.D. 56 Vice President of Production
E. Andrews Grinstead, III joined Hybridon 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. Mr. Grinstead resigned as Chairman in December 1999. On February 15, 2000,
19
Hybridon announced that Mr. Grinstead had taken an unexpected medical leave of
absence of indefinite duration due to a serious illness and that Mr. Grinstead
had been replaced as President. Prior to joining Hybridon, Mr. Grinstead served
as Managing Director and Group Head of the life sciences group at Paine Webber,
Incorporated, an investment banking firm, from 1987 to October 1990; Managing
Director and Group Head of the life sciences group at Drexel Burnham Lambert,
Inc., an investment banking firm, from 1986 to 1987; and Vice President at
Kidder, Peabody & Co. Incorporated, an investment banking firm, from 1984 to
1986, where he developed the life sciences corporate finance specialty group.
Mr. Grinstead served in a variety of operational and executive positions with
Eli Lilly and Company, an international pharmaceutical company, from 1976 to
1984, most recently as General Manager of Venezuelan Pharmaceutical, Animal
Health and Agricultural Chemical Operations and at Eli Lilly Corporate Staff as
Administrator, Strategic Planning and Acquisitions. Since 1991, Mr. Grinstead
has served as a director of Pharmos Corporation, a development stage company
engaged in the development of novel pharmaceutical compounds and drug delivery
systems. Mr. Grinstead also serves as a director of Meridian Medical
Technologies, Inc., a pharmaceutical and medical device company. Mr. Grinstead
was appointed to The President's Council of the National Academy of Sciences and
the Institute of Medicine in January 1992 and the board of the Massachusetts
Biotech Council in 1997. Since 1994, Mr. Grinstead has served as a member of the
board of trustees of the Albert B. Sabin Vaccine Foundation, a charitable
foundation dedicated to disease prevention. Mr. Grinstead received an A.B. from
Harvard College in 1967, a J.D. from the University of Virginia School of Law in
1974 and an M.B.A. from the Harvard Graduate School of Business Administration
in 1976.
Sudhir Agrawal joined Hybridon 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, Senior Vice President of Discovery in March
1994, and President and Acting Chief Executive Officer in February 2000. He has
served on the board of directors since March 1993. Prior to joining Hybridon,
Dr. Agrawal served as a Foundation Scholar at the Worcester Foundation from 1987
through 1991. Dr. Agrawal served as a Research Associate at Research Council
Laboratory of Molecular Biology in Cambridge, England from 1985 to 1986,
studying synthetic oligonucleotides. Dr. Agrawal received a B.Sc. in chemistry,
botany and zoology in 1973, an M.Sc. in organic chemistry in 1975 and a D. Phil.
in chemistry in 1980 from Allahabad University in India.
Robert G. Andersen joined Hybridon in November 1996 and served as Vice
President of Systems Engineering and Management Information Systems prior to
being appointed Vice President of Operations and Planning in 1997, Treasurer in
January 1998, and Chief Financial Officer of Hybridon in February 2000. Prior to
joining Hybridon, 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 Business Unit. 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 for Otis
Elevator Company's European Operations. Mr. Andersen received his B.E.E. in
Electrical Engineering from The City College of New York in 1972 and an M.S. in
Management from Northeastern University in 1978. He is also a graduate of the
United Technologies Advanced Studies Program.
R. Russell Martin joined Hybridon in April, 1994 as Vice President of
Clinical Research and is presently the Senior Vice President of Drug Development
for Hybridon, Inc. in Milford, MA. He was Vice President of Clinical Research
(Infectious Diseases) for Bristol-Myers Squibb from 1989-1993, and from 1983
until 1993, he was responsible for worldwide registrational trials (phase I
through III) for new infectious diseases therapies for that company. During that
period, he held appointments in medicine and infectious diseases at Baylor
College of Medicine, University of Connecticut School of Medicine, and Yale
University School of Medicine. Prior to joining the pharmaceutical industry, he
was an Associate Professor and then Professor of Medicine, Microbiology and
Immunology at Baylor College of Medicine from 1971-1983. He received an A.B.
from Yale University in 1956 and M.D. degree from the Medical College of Georgia
in 1960. He is a Fellow of the American College of Physicians and of the
Infectious Diseases Society of America.
20
Frederick M. Miesowicz joined Hybridon in July 1999 as Senior Vice
President and General Manager of Hybridon Specialty Products. Prior to joining
Hybridon, Dr. Miesowicz served as Senior Vice President of Scientific Affairs at
Cellcor from 1992 to 1995 and as Vice President and General Manager of Cellcor,
a subsidiary of Cytogen Inc., from 1995 to 1998, where he directed all
operations related to Cellcor's cellular immunotherapy programs. Dr. Miesowicz
has an extensive background in cellular therapies and medical devices. Prior to
joining Cellcor, he managed the U.S. and European SteriCell Division of Terumo
Medical Corporation after it was acquired from DuPont and was with E.I. DuPont
de Nemours & Company for over 14 years managing both immunotherapy and
immunodiagnostic R&D groups. In 1986, he assumed development responsibility for
DuPont's cellular therapy business, working with the National Cancer Institute
and others on ex vivo immunotherapies and medical devices to process lymphocytes
for therapeutic use. He holds a BS degree in Chemistry from Siena College and
received a Ph.D. in Chemistry in 1977 from Harvard University.
Jin-YanTang joined Hybridon in 1991 and served as Senior Research
Scientist from 1991 to 1993, Director of Oligonucleotide Chemistry from 1993 to
1994 and Executive Director of Process Chemistry from 1994 to April 1995 prior
to being appointed Vice President of Process Development in April 1995. In
November of 1997, Dr. Tang was appointed Vice President of Production. Prior to
joining Hybridon, 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
From January 24, 1996 until December 2, 1997, Hybridon's common stock
was traded on the Nasdaq National Market under the symbol "HYBN." Prior to
January 24, 1996, there was no established public trading market for Hybridon's
common stock.
On December 2, 1997, Hybridon's common stock was removed from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Quotes on the NASD OTC Bulletin Board may reflect inter-dealer prices, without
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
On December 10, 1997 Hybridon effected a one-for-five reverse stock
split of its common stock. As a result of the reverse stock split, each five
shares of common stock was automatically converted into one share of common
stock, with cash payments for any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the common stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the NASD OTC Bulletin
Board since January 1, 1998:
HIGH LOW
---- ---
1998
First Quarter................................... $3.359 $1.000
Second Quarter................................... 2.750 1.609
Third Quarter.................................... 2.516 1.125
Fourth Quarter................................... 3.250 1.125
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1999
First Quarter.................................... $1.875 1.000
Second Quarter................................... 1.500 0.250
Third Quarter.................................... 1.500 0.350
Fourth Quarter................................... 1.750 0.406
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on March 28, 2000 was $2.6875 per share.
(b) Holders
The number of common stockholders of record on March 28, 2000 was 365.
(c) Dividends
The convertible preferred stock pays dividends at 6.5% per year,
payable semi-annually in arrears. These dividends may be paid either in cash or
in additional shares of convertible preferred stock, at the discretion of
Hybridon.
Hybridon has never declared or paid cash dividends on its capital
stock, and Hybridon does not expect to pay any dividends on its common stock or
any cash dividends on the convertible preferred stock in the foreseeable future.
The indenture under which Hybridon issued 9% convertible subordinated notes on
April 2, 1997, limits Hybridon's ability to pay dividends or make other
distributions on its common stock or to pay cash dividends on the convertible
preferred stock. As of March 29, 2000, $1.3 million in total principal amount of
the 9% notes remained outstanding.
In addition, Hybridon is currently prohibited from paying cash dividends under
the loan held by the Lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--1998 Financing Activities--Credit
Facility."
(d) Recent Sales of Unregistered Securities
Sales by Hybridon during the quarterly period ended December 31, 2000,
of securities that were not registered under the Securities Act of 1933, as
amended were as follows:
(1) In October 1999, Hybridon sold approximately $455,000 principal
amount of promissory notes at face value to certain "accredited investors," in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act relating to sales by an issuer not involving any public offering.
(2) In September and November 1999, Hybridon sold an aggregate of $1.5
million principal amount of promissory notes at face value to E. Andrews
Grinstead, III, Hybridon's Chief Executive Officer, in reliance upon the
exemption from registration under Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering.
(3) On December 13, 1999, Hybridon sold an aggregate of $5.1 million
principal amount of 8% Notes to purchasers in a private placement transaction.
These 8% Notes were offered and sold to "accredited investors" in reliance upon
the exemption from registration under Section 4(2) of the Securities Act
relating to sales by an issuer not involving any public offering.
(4) As of December 31, 1999, the $455,000 indebtedness under the
October 1999 loan agreement were converted into 8% Notes, in reliance upon the
exemption from registration under Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering.
22
(5) As of December 31, 1999, the $1.5 million principal amount of
promissory notes held by Mr. Grinstead, automatically converted into 8% Notes,
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act relating to sales by an issuer not involving any public offering.
(6) As of December 7, 1999, in connection with the Subordination and
Intercreditor Agreement by and among Hybridon, the representative of the
purchasers of the 8% Notes, Forum and the entities advised by Pecks, whereby,
among other things, the $6,000,000 Forum loan was subordinated to the 8% Notes,
Hybridon issued warrants to purchase an aggregate of 2.75 million shares of
Hybridon common stock to designees of Pecks and Forum. These warrants were
offered and sold to "accredited investors" in reliance upon the exemption from
registration under Section 4(2) of the Securities Act relating to sales by an
issuer not involving any public offering.
(7) In connection with the December 13, 1999 private placement of 8%
Notes, Hybridon agreed, subject to certain conditions, to issue to Pillar
Investment Limited or its designees, 8% Notes in an aggregate principal amount
equal to 9% of the aggregate principal amount of 8% Notes sold to investors
introduced to Hybridon by Pillar and warrants to purchase an aggregate principal
amount of 8% Notes equal to 10% of the 8% Notes sold to investors introduced to
Hybridon by Pillar. These notes and warrants were offered and sold to
"accredited investors" in reliance upon the exemption from registration under
Section 4(2) of the Securities Act relating to sales by an issuer not involving
any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from
Hybridon's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. The financial data should be read
along with, and are qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Hybridon's
consolidated financial statements and notes thereto and the Report of
Independent Public Accountants included elsewhere in this Annual Report on Form
10-K.
23
Years Ended December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(In Thousands, except per share data)
Statement of Operations Data:
Revenues:
Product and service revenue................... $ - $ - $1,080 $1,877 $3,254 $6,186
Research and development...................... 1,032 1,186 1,419 945 1,100 600
Royalty income................................ - - 62 48 - -
Interest income............................... 135 219 1,447 1,079 148 215
----- ----- ------- ------- ------- -------
Total revenues........................ 1,167 1,405 4,008 3,949 4,502 7,001
----- ----- ------- ------- ------- -------
Operating Expenses:
Research and development...................... 20,024 29,685 39,390 46,828 20,977 13,090
General and administrative.................... 6,678 6,094 11,347 11,026 6,573 3,664
Interest...................................... 69 173 124 4,536 2,932 750
Restructuring................................. - - - 11,020 - -
-------- ------- ------- -------- -------- -------
Total operating expenses...................... 26,771 35,952 50,861 73,410 30,482 17,504
-------- -------- -------- -------- -------- -------
Loss from operations............................... (25,604) (34,547) (46,853) (69,461) (25,980) (10,503)
Extraordinary item:
Gain on conversion of 9% convertible
Subordinated notes payable.................... - - - - 8,877 -
-------- --------- -------- --------- -------- --------
Net loss........................................... (25,604) (34,547) (46,853) (69,461) (17,103) (10,503)
Accretion of preferred stock dividend.............. - - - - (2,689) (4,232)
-------- --------- -------- --------- -------- --------
Net loss to common stockholders.................... $(25,604) $(34,547) $(46,853) $(69,461) $(19,792) $(14,735)
======== ======== ======== ========= ========= =========
Basic and diluted net loss per common share from:
Operations.................................... $(70.77) $(94.70) $(10.24) $(13.76) $ (2.19) $ (0.66)
Extraordinary gain............................ - - - - 0.75 -
--------- ------ -------- -------- ------- -------
Net loss per share............................ (70.77) (94.70) (10.24) (13.76) (1.44) (0.66)
Accretion of preferred stock dividends - - - - (0.23) (0.27)
-------- -------- --------- -------- -------- --------
Net loss per share applicable to common $(70.77) $(94.70) $ (10.24) $(13.76) $(1.67) $ (0.93)
======= ======= ======== ======== ======= ========
Stockholders..................................
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1) 362 365 4,576 5,050 11,859 15,811
======== ======= ======== ======= ======= =======
Balance Sheet Data:
December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Cash, cash equivalents and short-term
investments(2).................................. $3,396 $5,284 $ 16,419 $2,202 $5,607 $2,552
Working capital (deficit) ......................... (1,713) 210 8,888 (24,100) (5,614) (6,338)
Total assets....................................... 11,989 19,618 41,537 35,072 16,536 11,935
Long-term debt and capital lease
obligations, net of current portion........... 1,522 1,145 9,032 3,282 473 392
8% convertible notes payable - - - - - 6,100
9% convertible subordinated
notes payable ..................................... - - - 50,000 1,306 1,306
Accumulated deficit ............................... (67,794) (102,341) (149,194) (218,655) (238,448) (253,183)
Total stockholders' equity (deficit)............... 4,774 12,447 22,855 (46,048) 2,249 (6,072)
---------- --------- -------- -------- --------- ---------
(1) Computed on the basis described in Notes 2(k) of Notes to consolidated
financial statements appearing elsewhere in this prospectus.
(2) Short-term investments consisted of U.S. government securities with
maturities greater than ninety days but less than one year from the
purchase date.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hybridon is involved in the discovery and development of genetic
medicines based on antisense technology. Hybridon began operations in February
1990 and since that time has been involved primarily in research and development
efforts, developing its manufacturing capabilities, and raising capital. In
order to commercialize its therapeutic products, Hybridon will need to address a
number of technological challenges and comply with comprehensive regulatory
requirements. All revenues received by Hybridon to date have been from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by Hybridon
Specialty Products.
Hybridon has incurred total losses of approximately $253.2 million
through December 31, 1999. Hybridon adopted a restructuring plan in the second
half of 1997 that has significantly reduced its operating expenses. However,
Hybridon expects that its research and development and general and
administrative expenses will be significant in 2000 and future years as it
pursues its core drug development programs and expects to continue to incur
operating losses and significant capital needs beyond its internally generated
funds.
Hybridon's existing cash resources are expected to be sufficient to
fund operations only until June 2000. However, if the noteholders force default
proceedings due to events of non-compliance, Hybridon's existing cash resources
may not be sufficient to fund operations into June 2000. Hybridon's ability to
continue operations beyond that time will depend on its success in obtaining new
funding, either through additional financing or new partnerships or
collaborations with third parties, that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own. If Hybridon is unable to obtain substantial
additional new funding by June 2000, Hybridon will have to terminate operations
or seek relief under applicable bankruptcy laws.
RESULTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
Revenues
Hybridon had total revenues of $3.9 million in 1997, $4.5 million in
1998, and $7.0 million in 1999. During 1997, 1998 and 1999, Hybridon received
revenues from research and development collaborations of $0.9 million, $1.1
million and $0.6 million, respectively. Research and development collaboration
revenues increased in 1998 from 1997, primarily due to Hybridon receiving
certain payments under its license agreement with MethylGene, Inc. Research and
development collaboration revenues decreased in 1999 from 1998, primarily due to
a reduction in revenues recorded under this license agreement. Also, in March
2000, Hybridon announced that Searle, a collaborative partner of Hybridon, was
terminating its collaboration agreement with Hybridon.
Product and service revenues were $1.9 million in 1997, $3.3 million in
1998 and $6.2 million in 1999. Substantially all of Hybridon's product and
service revenue is generated by its wholly owned subsidiary, Hybridon Specialty
Products (HSP). The increase in revenues in 1998 over those in 1997 was
primarily the result of (1) an expansion of customer base, (2) increased sales
to certain existing customers, and (3) $0.4 million of service revenue from
MethylGene, an entity in which Hybridon has an approximately 30% equity
interest. The increase in revenues in 1999 were primarily the result of
increased sales to HSP customers and receipt of service revenues from
MethylGene, Inc, and OriGenix Technologies, Inc., entities in which Hybridon has
an equity interest. The service revenues received from MethylGene decreased from
$0.4 million to $0.3 million and increased for OriGenix from zero to $0.1
million for 1998 and 1999, respectively.
Revenues from interest income were $1.1 million in 1997, $0.1 million
in 1998 and $0.2 million in 1999. The decrease in interest income in 1998 from
1997 was the result of lower cash balances available for investment. The
increase in interest income in 1999 from 1998, was the result of higher cash
balances available for investment.
Research and Development Expenses
During 1997, 1998 and 1999, Hybridon expended $46.8 million, $21.0
million and $13.1 million, respectively, on research and development activities.
25
The decreases in research and development expenses each year reflect
Hybridon's reduction of its operating expenses in 1997 and 1998 pursuant to the
restructuring that began in 1997 and was completed in 1998 and the lower levels
of cash available for expenditures in 1999. The restructuring included the
termination of operations at Hybridon's facilities in Europe, and also resulted
in significant reductions in employees and employee-related expenses, clinical
and outside testing, consulting, materials and lab expenses.
In addition, the facilities expense included in research and
development expenses decreased significantly in 1998 and 1999 as a result of
moving Hybridon's corporate offices and lab space in July 1998 from Cambridge to
Milford, Massachusetts and the sublease of its remaining unused Cambridge
facilities.
Research and development salaries and related costs decreased in 1998
from 1997 due to the substantial reduction in the number of employees involved
in research and development in 1998. Research and development salaries and
related costs remained at approximately the same level in 1999 as 1998.
Hybridon's patent expenses remained at approximately the same level in
1997 as 1998 and 1999.
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $11.0 million
in 1997, $6.6 million in 1998 and $3.7 million in 1999. The decreases reflect
Hybridon's reduction of its operating expenses in 1997 and 1998 pursuant to the
restructuring which began in 1997 and completed in 1998 and which resulted in
significant reduction in employees and employee-related expenses and consulting
expenses. General and administrative expenses related to business development,
public relations and legal and accounting expenses also decreased in 1999.
In addition, the facilities expense included in general and
administrative expenses also decreased significantly in 1999 as a result of
moving Hybridon's corporate offices to Milford, Massachusetts in 1998.
Interest Expense
Interest expense was $4.5 million in 1997, $2.9 million in 1998 and
$0.7 million in 1999. The decreases are attributable to the exchange of
approximately $48.7 million of the 9% convertible subordinated notes issued in
the second quarter of 1997 for Series A preferred stock on May 5, 1998. In
addition, the outstanding balance of loans needed to finance the purchase of
property and equipment was reduced in May 1998, resulting in a subsequent
reduction in interest expense. Due to the issuance of the 8% convertible
subordinated notes in December 1999, Hybridon's interest expense will increase
beginning in 2000.
Restructuring Charge
As a part of its restructuring plan, Hybridon recorded an $11.0 million
restructuring charge in 1997 to provide for (i) the termination costs of certain
research programs and other contracts, (ii) the loss of certain leased
facilities, net of sublease income and other contracts, (iii) severance,
benefits and related costs for terminated employees and (iv) the write down of
assets to net realizable value.
Net Loss
As a result of the above factors, Hybridon incurred net losses from
operations before extraordinary items of $69.5 million in 1997, $26.0 million in
1998 and $10.5 million in 1999. Hybridon had extraordinary income of $8.9
million in 1998 resulting from the conversion of $48.7 million principal amount
of its 9% notes to Series A preferred stock in the second quarter of 1998. In
accordance with Statement of Financial Accounting Standards No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings, Hybridon recorded an
extraordinary gain of approximately $8.9 million related to the exchange. The
extraordinary gain represents the difference between the carrying value of the
9% notes offered for exchange and the fair value of the Series A preferred stock
issued upon the exchange, as determined by the per share sales price of such
stock sold in May 1998 in the private offering described below. As a result of
this extraordinary gain, Hybridon's net loss was reduced to $17.1 million for
1998.
Hybridon had recorded preferred stock dividends on the Series A
convertible preferred stock of $2.7 million and $4.2 million in 1998 and 1999,
respectively, resulting in a net loss applicable to common stockholders of $19.8
million and $14.7 million for 1998 and 1999, respectively. The net loss
applicable to common stockholders for 1997 was $69.5 million.
26
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, Hybridon has incurred significant losses, which it has
funded through the issuance of equity securities, debt issuances, sales by
Hybridon Specialty Products, and through research and development collaborations
and licensing arrangements.
During the year ended December 31, 1999, Hybridon utilized
approximately $8.6 million to fund operating activities and approximately $9,000
for capital expenditures. The primary use of cash for operating activities was
to fund Hybridon's loss of $10.5 million. Hybridon expects to purchase a minimal
amount of capital equipment in 2000 as part of its effort to conserve cash
resources.
Cash Resources
Hybridon had cash and cash equivalents of $2.6 million at December 31,
1999. However, since that date, Hybridon has spent a portion of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On March 27, 2000, Hybridon's obligations
included $1.3 million principal amount of 9% notes, a $6.0 million loan with
Forum Capital Markets, LLC and others (collectively, the "Lenders"),
approximately $7.7 million in 8% convertible notes and accrued interest as
described below, and approximately $1.3 million of accounts payable. Because of
Hybridon's financial condition, many trade creditors are only willing to provide
Hybridon with products and services on a cash on delivery basis. The note to the
Lenders contains certain financial covenants that require Hybridon to maintain
minimum tangible net worth and minimum liquidity requirements. Hybridon
currently meets the minimum liquidity requirements, but is not in compliance
with the minimum tangible net worth requirement. However, the Lenders have
granted Hybridon a waiver of compliance with the minimum tangible net worth and
the minimum liquidity requirements at December 31, 1999 and have agreed not to
require that Hybridon comply with those requirements for any periods commencing
January 1, 2000 through March 31, 2000.
Hybridon sold an aggregate of $1,500,000 principal amount of promissory
notes to E. Andrews Grinstead, III, Hybridon's Chief Executive Officer, at face
value during September and November of 1999. These notes accrued interest at 12%
per annum and in December 1999 were converted into 8% notes due 2002. Hybridon
also sold an aggregate of approximately $525,000 of debt to purchasers in a
private placement transaction in October and November 1999; as of December 13,
1999, this debt automatically converted into 8% notes.
On December 13, 1999, Hybridon sold an aggregate of an additional $4.1
million principal amount of 8% notes to purchasers in a private placement
transaction. At December 31, 1999, including the 8% notes issued upon conversion
of the debt issued to Mr. Grinstead and other purchasers, the principal amount
of 8% notes outstanding was $6.1 million. After the financing was completed in
the first quarter of 2000, the principal amount of 8% notes outstanding,
including financing costs and accrued interest, was approximately $7.7 million.
The terms of the offering were as follows: (a) three-year term; (b) interest
rate of 8%, payable semi-annually in arrears; (c) interest payable in cash or in
additional notes, at Hybridon's option; (d) convertible into common stock at
$0.60 per share; (e) prepayable by Hybridon, in whole or in part, at any time in
cash; (f) if prepaid at Hybridon's election, Hybridon will issue a number of
warrants to purchase common stock equal to the number of shares into which the
amount prepaid was convertible, with a $0.60 strike price; and (g) secured by
substantially all assets. The securities offered have not been registered under
the Securities Act and may not be offered or sold in the U.S. absent
registration or an applicable exemption from registration requirements.
In connection with the offering of these notes, the Lenders entered
into a Subordination and Intercreditor Agreement with Hybridon and the
representative of the purchasers of these notes whereby, among other things,
they agreed to subordinate their loan to the notes, subject to certain
conditions. Also in connection with this offering, Hybridon agreed to issue
warrants to purchase an aggregate of 2.75 million shares of Hybridon's common
stock to designees of Pecks and Forum. These warrants are exercisable from
December 31, 2000 until December 31, 2002 at $.60 per share.
The 8% notes permit the noteholders' representative to declare an event
of default, among other things, if Hybridon fails to maintain, as of the last
day of any calendar month, consolidated cash on hand (and cash equivalents and
marketable securities) of at least $1.5 million. As of February 29, 2000,
Hybridon met this requirement, and expects that it will meet this requirement as
of March 31, 2000. However, if Hybridon is unable to raise additional funding
during 2000, Hybridon will be unable to maintain compliance with the minimum
cash requirement. If an event of default under the notes were declared and not
cured in the requisite time period, then the respective representatives of the
8%
27
noteholders and the creditor's committee, made up of representatives of Pecks,
Forum and Pillar, to represent the creditor's committee, could declare their
debt securities immediately due and payable, in which case Hybridon may be
required to sell substantial assets to raise funds for this repayment and, if
the proceeds of those sales together with any other funds available are
insufficient, Hybridon could be forced to declare bankruptcy.
Hybridon's existing cash resources are expected to be sufficient to
fund operations only until June 2000. However, if the noteholders force default
proceedings due to events of non-compliance, Hybridon's existing cash resources
may not be sufficient to fund operations into June 2000. Hybridon's ability to
continue operations beyond that time will depend on its success in obtaining new
funding, either through additional financing or new partnerships or
collaborations with third parties, that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own. If Hybridon is unable to obtain substantial
additional new funding by June 2000, Hybridon will have to terminate operations
or seek relief under applicable bankruptcy laws.
Even though Hybridon has obtained sufficient cash to fund its
operations until June 2000, it will be required to raise substantial additional
funds through external sources, including through collaborative relationships
and public or private financing, to support its operations throughout 2000 and
beyond. Hybridon has no committed external sources of capital, and, as discussed
above, expects no product revenues for several years from sales of the
therapeutic products that it is developing (as opposed to sales of DNA products
and reagents manufactured and sold by HSP). No guarantee can be given that
additional funds will be available to fund operations for the balance of 2000 or
in future years, or, if available, that such funds will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of any such additional financing may adversely affect the holdings or
rights of then existing stockholders.
Hybridon's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties by HSP
and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, Hybridon's
ability to establish and maintain collaborative academic and commercial
research, development and marketing relationships, its ability to obtain
third-party financing for leasehold improvements and other capital expenditures
and the costs of manufacturing scale-up and commercialization activities and
arrangements.
1998 FINANCING ACTIVITIES
On February 6, 1998, Hybridon commenced an offer to the holders of the
9% notes to exchange the 9% notes for Series A preferred stock and certain
warrants of Hybridon. On May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of interest tendered such principal and accrued
interest to Hybridon for 510,505 shares of Series A preferred stock and warrants
to purchase 3,002,958 shares of common stock with an exercise price of $4.25 per
share.
On May 5, 1998, Hybridon completed a private offering of equity
securities raising total gross proceeds of approximately $26.7 million from the
issuance of 9,597,476 shares of common stock, 114,285 shares of Series A
preferred stock and warrants to purchase 3,329,486 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of approximately $5.9
million of accounts payable, capital lease obligations and other obligations
into common stock. Hybridon incurred approximately $1.6 million of cash expenses
related to the private offering and issued 597,699 shares of common stock and
warrants to purchase 1,720,825 shares of common stock at $2.40 per share to the
placement agents. In addition, Hybridon was obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see note 10(b) of the notes to consolidated statements.
Credit Facility
In December 1996, Hybridon entered into a five-year $7,500,000 note
payable with a bank. The note contained certain financial obligations that
required Hybridon to maintain a minimum worth and a minimum liquidity and
prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 beginning on February 1, 1997, with a balloon payment of
the then remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make certain prepayments of principal during 1998, the
outstanding principal balance of the loan at November 16, 1998 was approximately
$2.8 million. Effective November 20, 1998, the Lenders purchased the loan from
the bank. Forum and Pecks are affiliates of two members of Hybridon's board of
directors. In connection with
28
this purchase, Forum and Pecks lent an additional $3.2 million to Hybridon so as
to increase the outstanding principal amount of the note to $6,000,000. In
addition, the terms of the note payable were amended as follows:
o the maturity was extended to November 30, 2003
o the interest rate was decreased to 8%
o interest is payable monthly in arrears, with the principal due in full
at maturity
o the note payable is convertible, at the option of Forum and Pecks, in
whole or in part, into shares of common stock of Hybridon at a
conversion price equal to $2.40 a share
o the threshold of the minimum liquidity obligation was reduced from
$4,000,000 to $2,000,000
o the note payable may not be prepaid, in whole or in part, at any time
prior to December 1, 2000
The other terms of the note payable were unchanged.
Facility Leases
As of December 31, 1999, Hybridon had future operating lease
commitments of approximately $6.9 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 1999, Hybridon had approximately $228.7 million and
$4.2 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 contains certain provisions that may limit Hybridon's
ability to utilize net operating loss and tax credit carryforwards in any given
year if certain events occur, including cumulative changes in ownership
interests in excess of 50% over a three-year period. Hybridon has completed
several financings since the effective date of the Tax Act, which, as of
December 31, 1999, have resulted in ownership changes in excess of 50%, as
defined under the Tax Act and which will limit Hybridon's ability to utilize its
net operating loss carryforwards.
RISK FACTORS
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
Hybridon's Financial Condition and Need for Substantial Additional Funding
If Hybridon does not secure additional funding by June, 2000, Hybridon will be
forced to cease doing business or file for bankruptcy.
If by June 2000 Hybridon does not secure additional funding, whether
through debt or equity financing, the sale of assets, establishment of a
suitable partnership or collaboration with a third party, or a combination
thereof, Hybridon could be forced to cease doing business or file for
bankruptcy, and shareholders may lose their entire investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Shareholders could be substantially diluted if Hybridon issues shares to obtain
financing Hybridon needs.
In order to obtain the funds Hybridon currently needs to continue
Hybridon's operations, and the additional funds Hybridon will need in the
future, Hybridon may need to issue shares of common stock or debt or equity
securities convertible into shares of common stock. Hybridon will probably need
to issue a significant number of shares in order to raise sufficient funds to
pay Hybridon's creditors, meet covenants of Hybridon's credit facility and
continue Hybridon's operations. This will result in substantial dilution to
shareholders investment.
29
Hybridon is not in compliance with some of the covenants in Hybridon's loan
agreement and note offering. If our lenders and noteholders foreclose, Hybridon
will have few, or no, assets to distribute to Hybridon shareholders.
Hybridon has taken out a $6 million loan and has completed a $7.7
million 8% note offering, both of which are secured by substantially all of
Hybridon's assets. The loan and the 8% notes are owned in part by Hybridon
affiliates. The loan agreement for the $6 million loan requires us to maintain
liquidity of $2,000,000 and a net worth of $6,000,000. The 8% notes require
Hybridon to maintain liquidity of $1,500,000. Hybridon believes that it
currently meets the liquidity requirements, but Hybridon does not meet the net
worth requirement. Hybridon does not expect to be able to comply with these
requirements in the future unless it is able to obtain significant additional
financing. Hybridon's lenders have in the past waived Hybridon's compliance with
these requirements, but they may not be willing to do so in the future. If
Hybridon's lenders and noteholders decline to give Hybridon waivers, Hybridon
will be in default and they will have the right to accelerate the repayment date
on the loan and the 8% notes and foreclose on Hybridon's assets. Foreclosure
will likely force Hybridon to cease doing business or file for bankruptcy. If
this happens, and Hybridon is liquidated, there will be few or no assets
available for distribution to Hybridon's shareholders. Since the debt is owned
in part by Hybridon's affiliates, the court may treat the loan as a capital
contribution or as a junior debt, in which case there may be assets available
for distribution to Hybridon's shareholders, along with the lenders.
Hybridon expects operating losses to continue into the future.
As of December 31, 1999, Hybridon has incurred an accumulated deficit
of approximately $253 million. Hybridon expects to continue incurring operating
losses until revenues from the sale of any drugs that Hybridon succeeds in
developing exceed Hybridon's research and development and administrative costs.
Assuming Hybridon is able to obtain adequate funding to continue operations,
Hybridon will need to spend substantial additional amounts on research and
development, including preclinical studies and clinical trials, in order to
obtain the necessary regulatory approvals. If Hybridon obtains regulatory
approval, Hybridon will also need to spend substantial amounts on sales and
marketing efforts. See "Business--Anticipated and Potential Costs."
Hybridon's Operations
Hybridon may not succeed in developing a commercially viable drug.
Hybridon does not currently have any drugs on the market and the drug
candidates Hybridon is working on are still in development. These drugs have not
yet been proven to be effective in humans. For example, Hybridon's drug closest
to commercialization, GEM(R) 231, is still in Phase II clinical trials. All of
Hybridon's other drug candidates have not yet begun human testing. Historically,
drug candidates have a low overall probability of being commercialized, but that
probability increases as the drug progresses through the various development
stages. A drug may, for instance, be ineffective, have undesirable side effects,
or demonstrate other therapeutic characteristics that prevent or limit its
commercial use, or may prove too costly to produce in commercial quantities. If
Hybridon determines that its drug candidates cannot be successfully developed,
or if Hybridon is unable to obtain the necessary regulatory approval, it will
not be able to generate the revenues from the sale of drugs that it would need
in order to be profitable.
Hybridon has many competitors, and may not be able to compete successfully
against them.
Several companies, in particular Isis Pharmaceuticals, Inc. and Genta
Incorporated, are also in the business of developing antisense drugs. Isis has
received the approval of the U.S. Food and Drug Administration, or "FDA," for
Vitravene. ISIS is currently marketing this drug for the treatment of CMV
retinitis, and has several other drugs in clinical testing for the possible
treatment of cancer, including ISIS 3521 and 2503. Genta is testing G3139 in
humans, also for the treatment of cancer. These drugs candidates are further
along in clinical testing than Hybridon's cancer drug GEM(R) 231. Other
companies have antisense drugs in preclinical and clinical development,
including Inex and AVI Biopharma.
In general, the human health care products industry is extremely
competitive. Many drugs are currently marketed for the treatment of cancer, such
as Taxol, Carboplatin, Taxotere and Camptosar. While it is unlikely that GEM(R)
231 will compete against these drugs, it may be used in combination with them.
GEM(R) 231 and other Hybridon antisense drugs may not, however, be able to
capture sufficient market share to be profitable.
Furthermore, biotechnology and related pharmaceutical technologies have
undergone rapid and significant change and Hybridon expects that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Hybridon's prospects depend in large part on
Hybridon's ability to compete with these
30
technologies. Any compounds, drugs or processes that Hybridon develops may
become obsolete before it recovers the expenses incurred in developing them.
Hybridon's ability to compete will suffer if it is unable to protect its patent
rights and trade secrets or if Hybridon infringes the proprietary rights of
third parties.
Hybridon's success will depend to a large extent on its ability to
obtain U.S. and foreign patent protection for drug candidates and processes,
preserve trade secrets and operate without infringing the proprietary rights of
third parties.
To obtain a patent on an invention, one must be the first to invent it
or the first to file a patent application for it. Hybridon cannot be sure that
the inventors of subject matter covered by patents and patent applications that
it owns or licenses were the first to invent, or the first to file patent
applications for, those inventions. Furthermore, patents Hybridon owns or
licenses may be challenged, infringed upon, invalidated, found to be
unenforceable, or circumvented by others, and its rights under any issued
patents may not provide sufficient protection against competing drugs or
otherwise cover commercially valuable drugs or processes. See
"Business--Patents, Trade Secrets, and Licenses."
Hybridon seeks to protect trade secrets and other unpatented
proprietary information, in part by means of confidentiality agreements with its
collaborators, employees, and consultants. If any of these agreements are
breached, Hybridon may be without adequate remedies. Also, Hybridon's trade
secrets may become known or be independently developed by competitors.
Hybridon's Securities
Because "penny stock" rules apply to trading in Hybridon's common stock,
shareholders may find it difficult to sell their shares of Hybridon stock.
Hybridon's common stock is a "penny stock," as it is not listed on an
exchange and trades at less than $5.00 a share. Broker-dealers who sell penny
stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. It provides information about
penny stocks and the nature and level of risks involved in investing in the
penny-stock market. A broker must also give a purchaser, orally or in writing,
bid and offer quotations and information regarding broker and salesperson
compensation, make a written determination that the penny stock is a suitable
investment for the purchaser, and obtain the purchaser's written agreement to
the purchase. The penny stock rules may make it difficult for shareholders to
sell their shares of Hybridon stock. Because of the rules, there is less trading
in penny stocks. Also, many brokers choose not to participate in penny stock
transactions.
Certain existing stockholders hold a substantial portion of our stock, and
consequently could control most matters requiring approval by stockholders.
Hybridon's officers, directors and principal stockholders own or
control more than 60% of Hybridon's common stock on a fully-diluted basis. As a
result, these stockholders, acting together, have the ability to control most
matters requiring approval by the stockholders. This concentration of ownership
may have the effect of delaying or preventing a change in control of Hybridon.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, Hybridon's primary exposures have been related to
nondollar-denominated operating expenses in Europe. As of December 31, 1999,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as
APPENDIX A hereto, are listed under Item 14(a), and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
F