Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For annual and transitional reports pursuant to sections
13 or 15(d) of the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27352
-------
HYBRIDON, INC.
(Exact name of Registrant as specified
in its certificate of incorporation)
Delaware 04-3072298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Fortune Blvd.
Milford, Massachusetts 01757
(Address of principal executive offices) (Zip Code)
(508) 482-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $12,146,631 million as of April 13, 1999.
For purposes of determining this number, 5,078,083 shares of common stock held
by affiliates are excluded.
As of April 13, 1999, the registrant had 15,306,825 shares of Common Stock
outstanding.
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13 of
with respect to the Annual Meeting of Part III.
Stockholders to be held on June 8, 1999.
HYBRIDON, INC.
FORM 10-K
INDEX
PART I
Item 1. BUSINESS...........................................................2
HYBRIDON..................................................................2
TECHNOLOGY OVERVIEW.......................................................2
Introduction.......................................................2
Conventional Drugs.................................................3
Antisense Drugs....................................................4
HYBRIDON ANTISENSE TECHNOLOGY.............................................4
Medicinal Chemistries..............................................4
Manufacturing Technology...........................................5
Proprietary Analytical Tools.......................................5
Regulatory Know-How................................................5
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS..........................6
The Drug Development and Approval Process..........................6
Hybridon Drug Development and Discovery Programs...................7
CLINICAL PROGRAMS.........................................................8
Protein Kinase A...................................................8
HIV-1 and AIDS.....................................................8
Cytomegalovirus....................................................9
PRECLINICAL PROGRAMS......................................................10
HYBRIDON SPINOUTS.........................................................10
MethylGene, Inc....................................................10
OriGenix Technologies, Inc.........................................11
CORPORATE COLLABORATIONS..................................................11
G.D. Searle & Co...................................................11
Medtronic, Inc.....................................................13
THE HYBRIDON SPECIALTY PRODUCTS (HSP) DIVISION............................13
MARKETING STRATEGY........................................................15
ACADEMIC AND RESEARCH COLLABORATIONS......................................15
DRUG DEVELOPMENT SERVICES.................................................16
PATENTS, TRADE SECRETS AND LICENSES.......................................16
GOVERNMENT REGULATION.....................................................19
FDA Approvals......................................................19
Other Regulation...................................................20
COMPETITION...............................................................20
EMPLOYEES.................................................................21
Item 2. PROPERTIES.........................................................21
Item 3. LEGAL PROCEEDINGS..................................................22
Item 4. SUBMISSION OF MATTERS TO A VOTE....................................22
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY...............22
i
PART II.......................................................................26
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................26
Item 6. SELECTED FINANCIAL DATA............................................28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................29
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........45
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................45
PART III......................................................................46
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................46
Item 11. EXECUTIVE COMPENSATION.............................................46
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....46
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................46
PART IV.......................................................................47
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORMS 8-K.......................................................47
ii
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such risks and uncertainties include, but are not limited to: the
obtaining of sufficient financing to maintain Hybridon's planned operations; the
timely development, receipt of necessary regulatory approvals and acceptance of
new products; the successful application of Hybridon's technology to produce new
products; the obtaining of proprietary protection for any such technology and
products; the impact of competitive products and pricing and reimbursement
policies; the changing of market conditions and the other risks detailed in the
Risk Factors section of this Annual Report on Form 10-K and elsewhere herein.
The Company does not undertake to update any forward-looking statements.
See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors" for a discussion of certain risks and
uncertainties applicable to the Hybridon and its stockholders, including
Hybridon's need for additional funds to sustain its operations in 1999 and
thereafter.
1
PART I
ITEM 1. BUSINESS
HYBRIDON
Hybridon, established in 1989, is a leader in the discovery and development of
genetic drugs. These drugs are based on "antisense" technology which uses
synthetic RNA and DNA that are designed to treat the underlying cause of disease
by stopping or reducing the body's production of proteins that directly or
indirectly cause disease. Hybridon also manufactures and sells synthetic RNA and
DNA, also called oligonucleotides, to third parties on a contract basis.
Hybridon's leadership in the antisense field is based on oligonucleotide
technology it owns or exclusively licenses, including (a) new advanced
chemistries, (b) sequence selection know-how, (c) drug development know-how, (d)
innovations in the manufacturing process, (e) its fully integrated, large scale
manufacturing facility and (f) its experience in manufacturing over 300
different compounds with various chemical modifications.
TECHNOLOGY OVERVIEW
Introduction
The human body contains many organs, such as the heart, liver, brain,
etc., that function together to support life. Each organ in turn is made up of
many microscopic units called cells. Each cell produces proteins which determine
how that cell functions within its organ, and ultimately how well each organ
functions within the body. Almost all human diseases result from abnormal
protein production or altered performance within individual cells. In some
instances, the proteins act directly to cause or support a disease. In other
instances, the proteins interfere with other proteins that prevent or combat
disease. Traditional drugs are designed to interact with protein molecules that
support or cause diseases. Antisense drugs are designed to work at an earlier
state to stop the production of disease-causing or disease-supporting proteins.
The information that controls production of a specific protein is
contained in its gene. Each gene is made up of two strands of DNA that pair
together to form a structure called a "double helix." Each strand of DNA is a
string of individual DNA building blocks, called nucleotides, that are arranged
in a specific sequence. One of the strands contains the information that directs
the composition of the specific protein, and is called the "coding" strand. The
other strand, the "non-coding" strand, contains a sequence of nucleotides that
are complementary with nucleotides on the coding strand.
The complete human genome consists of over 100,000 genes and contains
the information required to produce all human proteins. A copy of the complete
human genome
2
is present in each cell, and the proteins made by each cell are read from its
copy of the genome. Proteins are made from genes in two steps. First, the
information contained in the gene is read from the coding strand of DNA into a
molecule of messenger RNA. The messenger RNA also consists of a string of
nucleotides in a specific sequence. This is called the "sense" sequence. A
sequence that is complementary to the sense sequence is called the "antisense"
sequence. Second, the cell then produces proteins based on the information that
is now recorded in the messenger RNA. The information contained in a single gene
is often read into multiple copies of messenger RNA, which in turn causes the
cells to produce more copies of the protein.
A normal cell produces a particular set of normal proteins in the right
amount for the body to function properly. In a diseased cell, the wrong or
mutant proteins are made, or normal proteins are made in the wrong amount.
Mutant proteins occur because the DNA has changed, either through mutation, or
by infection with a virus. Infection with a virus can also cause the cell to
make proteins that are not coded by the human genome. This misinformation causes
the cell to produce proteins that are harmful to the body.
Antisense technology involves the use of a strand of nucleotides, called
an oligonucleotide, which has a specific sequence exactly complementary to that
of the messenger RNA read from a specific gene. Because of the complementary
nature of its sequence, it binds to and inactivates the messenger RNA, thereby
decreasing or eliminating the production of disease associated proteins.
Hybridon believes that drugs based on antisense technology may have broader
applicability, greater efficacy and fewer side effects than conventional drugs
because antisense drugs are designed to intervene in the production of proteins,
rather than intervening after the proteins are made, and in a highly specific
and more selective fashion.
Conventional Drugs
Most drugs are chemicals that stimulate or stop the function of a
particular molecule, usually a protein, with tolerable side effects. A drug will
cause side effects when it interacts with other proteins in addition to the
target protein. Therefore, a drug that interacts with as few other proteins as
possible causes fewer side effects.
Conventional drugs are not well tolerated for the treatment of many
diseases because of their relatively low level of selectivity, thus producing
more side effects. Conventional drugs bind only a few, generally two or three,
points of the target molecule. Frequently, sites on other non-target molecules
resemble the target binding site enough to permit the conventional drug to bind
to some degree to the non-target molecules. This lack of selectivity may result
in decreased effectiveness of the drug because of unwanted side effects.
In addition, the development of conventional drugs is generally time
consuming and expensive, as thousands of compounds must be made to find the most
effective drug with the fewest side effects.
3
Antisense Drugs
In contrast to conventional drugs, antisense drugs regulate the actual
production of proteins. Advances in the human genome project, including work
conducted by academic institutions, biotechnology companies and pharmaceutical
companies, have identified many targets for antisense drugs. Once a gene
associated with a disease-associated protein is identified, an antisense
oligonucleotide can be designed and its pharmaceutical effects can be improved
by chemical modification. Chemically-modified oligonucleotides may be composed
of DNA, RNA or a combination of the two.
Because the sequence of nucleic acid bases of a chemically-modified
antisense oligonucleotide is complementary to its target sequence on a messenger
RNA, the antisense oligonucleotide forms a large number of bonds at the target
site, typically between 40 and 60. Thus, the oligonucleotide will form a strong
bond with the messenger RNA read from the selected gene. A few identical
messenger RNA molecules may cause the cell to produce many copies of a protein;
nonetheless, a few identical chemically-modified antisense oligonucleotides may
stop this process. Moreover, an enzyme called RNaseH has been found that can
destroy the messenger RNA that binds the oligonucleotide. This occurs without
destroying the oligonucleotide itself, thus freeing the oligonucleotide to bind
with other identical messenger RNA molecules and cause destruction of these
molecules as well. This is called catalytic activity. All of Hybridon's drugs
are designed to take advantage of this catalytic activity so that a relatively
small number of antisense molecules can effectively inhibit production of
disease-associated proteins.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed and owns antisense technology that includes
important new medicinal chemistries, analytical chemistry and manufacturing
technology. The development of Hybridon's antisense chemistry has been directed
by Dr. Sudhir Agrawal, Hybridon's Chief Scientific Officer. Hybridon's antisense
chemistry builds on the pioneering work in the antisense field begun in the
1970s by Dr. Paul C. Zamecnik, a founder, consultant and director of Hybridon.
Currently, Dr. Zamecnik is a Professor Emeritus at Harvard Medical School and
has a research affiliation with the Massachusetts General Hospital in Boston.
Medicinal Chemistries. Hybridon's first antisense drug, GEM 91, which
was based on its first-generation phosporothioate chemistry and differed only
slightly from native DNA, was more stable than native DNA, but was still able to
trigger the action of RNaseH for catalytic activity. However, there were side
effects caused by the administration of this modified DNA into the body. In
particular, in the last clinical trial of GEM 91 three of the nine patients
treated experienced unacceptable decreases in platelet counts thus increasing
the possibility of uncontrolled bleeding. As a result, Hybridon discontinued the
GEM 91
4
program. Hybridon has, however, used the information gained from the human
clinical trials of GEM 91 to design its more advanced oligonucleotide
chemistries.
Hybridon's scientists have designed and made over twenty families of
advanced oligonucleotide chemistries including DNA/RNA combinations, also called
hybrid or mixed backbone chemistries. Hybridon believes that antisense compounds
based on these advanced chemistries will show favorable pharmaceutical
characteristics; thus significantly increasing their potential therapeutic
value. These compounds are likely to have the following properties:
o catalytic activity;
o fewer side effects;
o more stable in the body enabling a patient to take
doses less frequently;
o more potent, enabling a patient to be given lower
doses and therefore be less expensive than
first-generation drug candidates; and
o ability to be given to patients different ways
(such as by injection, orally, or topically).
Manufacturing Technology. Hybridon's expertise in the synthesis of
chemically modified oligonucleotides has served as the foundation of its
manufacturing technology and know-how. Hybridon has developed proprietary
technology, including equipment, to increase the purity of its oligonucleotides,
improve the efficiency of the production process, increase the scale of
production and reduce the cost of drug compounds significantly.
Proprietary Analytical Tools. Hybridon has established analytical tools
and processes that enable it to test the purity of oligonucleotides more quickly
and accurately than traditional methods. Hybridon uses the information that it
obtains with its tools and processes to improve quality control, to comply with
regulatory requirements and to monitor absorption and stability of its drugs in
preclinical and clinical trials. Hybridon has the capability to provide or
support all required quality control functions.
Regulatory Know-How. Hybridon personnel also have extensive experience
in navigating the regulatory process in a cost-effective manner. Hybridon often
assists HSP customers in creating drug/devise master files and writing chemistry
and manufacturing control sections for their submissions to the FDA.
5
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The Drug Development and Approval Process
The process of taking a compound from the laboratory to human patients
is likely to take a number of years. This process is extremely expensive and is
rigorously regulated by governmental agencies. In the United States, this
process is regulated by the Food and Drug Administration (the "FDA"). The FDA
requires that each drug undergo a series of trials and studies (preclinical and
clinical) prior to considering its approval for commercial sale. The FDA or the
company conducting the trials can discontinue clinical trials at any time if it
is felt that the patients are being exposed to an unacceptable health risk or if
there is not enough evidence that the drug is effective. The FDA may also
require a company to provide additional information or conduct additional tests
before a drug proceeds from one phase to the next. If the FDA's concerns are not
addressed by additional information or tests, the drug will not be allowed to
proceed to the next phase. The regulatory process in other countries is
generally similar to the process required by the FDA. The sequential phases of
the preclinical and clinical trials and studies are described below.
o Preclinical Studies. Preclinical studies are designed to provide data on
the effectiveness and safety of the compound before the compound is
administered to humans.
o Investigational New Drug Application ("IND"). If the data from the
research and preclinical studies are promising, the company will file an
IND with the FDA. The IND contains the results of the preclinical
studies and the protocol for the first clinical trial. The IND becomes
active in 30 days unless the FDA disapproves it or requires additional
information. Once the IND becomes active, the company can begin clinical
trials in humans.
o Phase I Clinical Trials. In Phase I trials, the drug is given to a small
group of healthy individuals or patients with the disease. These trials
are designed to produce data on the drug's safety, the maximum safe
dose, how the drug is absorbed, distributed, metabolized and excreted,
as a function of time. In some cases, early indications suggesting
effectiveness can be found. A very small Phase I study is sometimes
called a Pilot Phase I study.
o Phase II Clinical Trials. In Phase II studies, the drug is given to a
larger group of patients with the disease to evaluate the drug's
effectiveness and side effects at doses that are considered to be
appropriate for the larger Phase III trials that follow.
o Phase III Clinical Trials. These studies generally have a large number
of patients. The primary purpose of a Phase III study is to confirm the
drug's effectiveness and produce additional information on side effects.
A Phase III study that provides data
6
critical to support the registration of the drug with the FDA is often
called a Pivotal Trial.
o New Drug Application ("NDA"). Once Phase III studies are complete, a
company will file a New Drug Application (NDA) with the FDA. The NDA
contains all of the information gathered from the Phase I, II and III
trials. Based on the NDA, the FDA may approve the drug for commercial
sale. Before approving an NDA, the FDA may require additional tests and,
in any event, may deny an NDA if the applicable regulatory requirements
are not met. Even after approval by the FDA, the company must file
additional reports about the drug with the FDA from time to time.
Product approvals may be withdrawn by the FDA if compliance with
regulatory standards is not maintained or if problems occur following
initial marketing.
o Accelerated Approval. Drugs meeting certain criteria are candidates for
special consideration during the review and approval process after
submission of an NDA. Accelerated review and marketing approval of an
NDA is possible for drugs that are intended to treat persons with
debilitating and life-threatened illnesses, especially where no
satisfactory alternatives are available. The more severe the disease,
the more likely the drug will qualify for accelerated approval. If the
new drug receives accelerated approval, the company may be required to
conduct specific post-marketing studies to obtain additional information
about its safety, benefits and optimal use.
Hybridon Drug Development and Discovery Programs
Hybridon is focusing its drug development and discovery efforts on
antisense compounds which incorporate its advanced chemistries for the treatment
of diseases in three major therapeutic areas: cancer, disease caused by viruses
and diseases of the eye.
Hybridon believes there are significant additional opportunities for the
use of antisense, particularly for the treatment of cancer. Compared to
conventional drugs, antisense may provide:
o more specific therapy for cancer;
o more rapid development of drugs targeting newly-discovered
cancer-related proteins;
o fewer toxic side effects, thereby allowing long-term therapy,
either alone or in combination with other cancer therapies (such
as radiation or chemotherapy); and
o in the case of combination therapy, additive or synergistic
therapeutic effects.
For these reasons, Hybridon is exploring new antisense targets relevant to the
treatment of cancer.
7
Hybridon plans to seek corporate collaborations for each of its
compounds in development. Hybridon intends to proceed with its GEM 231 clinical
program for the treatment of cancer through Phase II clinical trials, at which
time it may seek a corporate collaborator. Hybridon generally does not
anticipate proceeding with any of its other programs described below beyond
their current stages of development without a collaborative arrangement with a
corporate partner.
CLINICAL PROGRAMS
Hybridon has conducted clinical studies in the following areas, with
those in more advanced stages of development described first.
Protein Kinase A
Unlike the growth of normal human cells, cancer cells grow in an
uncontrolled and harmful manner. The protein molecule protein kinase A (PKA) has
been implicated in the formation and growth of various solid tumors, including
colon, ovarian, breast and lung. There are two kinds of PKA. Type I is normal in
developing fetuses, but its production is abnormal in adults. PKA type II is
found in, and is necessary to the health of, normal adults. Certain cancer
cells, however, produce PKA type I in adults. Hybridon's cancer drug that
targets PKA, GEM 231, is designed to stop the production of the harmful PKA type
I without interfering with the production of PKA type II. Current cancer drugs
based on conventional mechanisms can only stop production of both types, leading
to unacceptable side effects.
Hybridon has conducted a Phase I clinical study that has evaluated the
safety of GEM 231 at multiple doses and found it to be well tolerated. The
maximum tolerated dose of GEM 231 was established for both single doses and
multiple doses. Even high doses of GEM 231 did not show the side effects
normally seen with current cancer treatments. Evaluation of efficacy was not an
objective of this trial. In December 1998, Hybridon received approval to start a
Phase II Clinical trial of GEM 231 in patients with solid tumors which had not
responded to prior therapy. In addition to continuing to evaluate GEM 231 as a
single-agent therapy, Hybridon plans to conduct small Phase II studies in at
least two types of solid tumors using GEM 231 in combination with radiation or
other anti-tumor agents, such as Taxol.
HIV-1 and AIDS
AIDS is caused by infection with the HIV-1 virus and leads to severe,
life-threatening impairment of the immune system. AIDS therapy using a
combination of drugs has resulted in decreased rates of death and improvements
in the quality of life for patients with AIDS.
8
However, there are increasing reports that this therapy may be failing to give
sustained clinical benefit. Hybridon believes this underscores the need for new
AIDS therapies.
Hybridon has completed a pilot Phase I clinical study in Europe of GEM
92, Hybridon's advanced chemistry compound for the treatment of HIV-1 infection
and AIDS. This study was designed to explore the safety and to provide
information on the absorption of GEM 92 after oral dosing and injection. All
doses given in the pilot study were well tolerated. Further, GEM92 was detected
in the blood after both oral dosing and injection, suggesting that it may be
possible to develop GEM 92 as an oral drug. Hybridon believes this was the first
oral administration of an antisense molecule to humans. In vitro studies have
indicated that GEM 92 is additive with a number of marketed compounds.
Importantly, both its medicinal approach and genetic target are unique.
Cytomegalovirus
Cytomegalovirus ("CMV") is present, although inactive, in approximately
60% of the general population in the United States and in up to 90% of the
HIV/AIDS population. Because AIDS patients have such severely damaged immune
systems, advanced AIDS patients often suffer from active CMV infection. The most
frequent active form of CMV infection in AIDS patients is CMV retinitis, which
can result in blindness if left untreated. Active CMV infection in AIDS patients
has declined in recent years because of the success of the current combination
AIDS therapy. CMV infection is also a medical problem in other patients with
weak immune systems, such as those who have undergone organ transplants and
those undergoing chemotherapy.
Hybridon has conducted Phase I and early Phase II clinical trials of GEM
132, Hybridon's advanced chemistry antisense oligonucleotide for the treatment
of CMV infection. No clinical studies with GEM 132 are currently ongoing and
none are currently planned. Hybridon will reevaluate the status of GEM 132
development should the current poor market conditions improve. A competitor of
Hybridon has recently received FDA approval to market an antisense therapeutic
for the treatment of CMV retinitis. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations -- Risk Factors --Hybridon Faces
Intense Competition, And Hybridon's Products Could Be Rendered Obsolete; Many Of
Hybridon's Competitor's Have Greater Resources And Experience Than Hybridon."
9
PRECLINICAL PROGRAMS
Hybridon has also conducted preclinical studies in the following areas.
- -----------------------------------------------------------------------------------------------------------------------
Target Primary Therapeutic Status
Indication(s)
-------------
- -----------------------------------------------------------------------------------------------------------------------
MDM2 Cancer Research
Compounds/Searle
Collaboration
Vascular Endothelial Growth
Factor Cancer Angiogenesis Preclinical/Seeking Partner
Retinopathies (e.g. Preclinical/Seeking Partner
macular degeneration
and diabetic
retinopathy)
Psoriasis Preclinical/Seeking Partner
Hepatitis C Virus Hepatitis; Liver Lead Compounds/Seeking
Cancer Partner
- -----------------------------------------------------------------------------------------------------------------------
HYBRIDON SPINOUTS
Hybridon has used multiple strategies to fund uses of its antisense
technology that it cannot develop at present without external funding. Hybridon
has used one such strategy with MethylGene, Inc. and Origenix Technologies Inc.
MethylGene, Inc.
In 1996, Hybridon and three Canadian institutional investors formed
MethylGene, Inc. Hybridon currently owns approximately 30% of MethylGene.
Hybridon has granted exclusive worldwide licenses and sublicenses to MethylGene
to develop and market (i) antisense compounds to inhibit the protein DNA
methyltransferase for the treatment of any disease, (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any disease and (iii)
antisense compounds to inhibit up to two additional targets for the treatment of
cancers. DNA methyltransferase is a protein that has been shown to be
overproduced in some tumors, such as small cell lung cancer, colon cancer and
breast cancer. MethylGene is obligated to purchase from Hybridon all formulated
oligonucleotides that MethylGene requires at specified prices. Hybridon is also
performing drug development and other services for MethylGene.
10
The Canadian investors who initially invested in MethylGene have the
right to exchange all (but not less than all) of the shares of stock in
MethylGene that they initially purchased for shares of Common Stock of Hybridon
on the basis of 37.5 MethylGene shares (for which they paid approximately U.S.
$56.25) for one share of Hybridon Common Stock (subject to adjustment for stock
splits, stock dividends and the like). This option expires no later than 2001.
MethylGene submitted an IND in the United States and Canada in December
1998 and commenced Phase I clinical trials of its first compound, MG98, for the
treatment of cancer in March 1999.
OriGenix Technologies Inc.
In January 1999, Hybridon and three Canadian institutional investors
formed OriGenix to develop and market drugs for the treatment of infectious
diseases, with an initial focus on viral diseases. Hybridon owns approximately
49% of OriGenix. If certain conditions are satisfied by OriGenix, the Canadian
investors are committed to make an additional investment, at which time
Hybridon's ownership interest in OriGenix will be reduced to 40%.
Hybridon has granted to OriGenix worldwide exclusive licenses and
sublicenses to antisense technology developed by Hybridon for the treatment of
human papilloma virus and hepatitis B virus infections. Human papilloma viruses
("HPV") cause a variety of warts, including benign genital warts which, if
untreated, can lead to cervical cancer. Hepatitis B infections can lead to liver
cirrhosis and cancer of the liver. In the future, OriGenix may negotiate with
Hybridon for additional targets. In addition, OriGenix is obligated to purchase
from Hybridon all bulk oligonucleotides it requires at specified prices.
Hybridon anticipates that it will perform drug development and other services
for OriGenix.
CORPORATE COLLABORATIONS
An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements or other strategic
alliances with third parties, primarily biotechnology and pharmaceutical
corporations, to develop certain products. Hybridon is a party to corporate
collaborations with Searle and Medtronic. Hybridon expects to retain the rights
to manufacture many of the products it may license pursuant to these
collaborations.
G.D. Searle & Co.
In January 1996, Hybridon and Searle entered into a collaboration for
research and development of therapeutic antisense compounds. According to the
collaboration agreement
11
as modified in April 1998, targets can be selected from those in the fields of
cancer, cardiovascular disease and inflammation/immunomodulation (the "Searle
Field").
Hybridon and Searle are currently conducting research and development
relating to compounds targeting MDM2. In this project, Searle is funding certain
research and development efforts at Hybridon, and Searle and Hybridon have
committed personnel to the collaboration. The initial phase of research and
development activities will be conducted through the earlier of (i) the
achievement of certain milestones and (ii) January 31, 2000, subject to early
termination by Searle. The parties may extend the collaboration by mutual
agreement, including agreement on additional research funding to be made by
Searle.
In addition, Searle has the right to designate up to six additional
molecular targets in the Searle Field (the "Additional Targets") on terms
substantially consistent with the terms applicable to the initial molecular
target. Searle may exercise this right for each of the Additional Targets by
paying specified cash amounts (beyond specific research payments relating to the
particular Additional Target) and purchasing additional Common Stock from
Hybridon (at the then fair market value), totaling $10,000,000 per Additional
Target. If Searle designates all of the Additional Targets, Searle will pay
$24,000,000 in cash and purchase $36,000,000 of equity. If Searle has not
designated all of the Additional Targets by the time the initial molecular
target reaches a certain stage of preclinical development, Searle will be
required to purchase up to an additional $10,000,000 of Common Stock (at the
then fair market value) in order to keep its right to designate any of the
Additional Targets. This payment will be credited against the equity investment
payments made by Searle for any of the Additional Targets designated in the
future.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle elects to commercialize a product, Searle will fund
and perform preclinical tests and clinical trials of the product candidate and
will be responsible for regulatory approvals for, and marketing of, the product.
Hybridon has agreed to perform certain research and development work exclusively
with Searle. In addition, for each product candidate, Searle is required to make
milestone payments to Hybridon of up to $10,000,000 upon the achievement of
development milestones. Hybridon also will be entitled to royalties from net
sales of products resulting from the collaboration. As long as Hybridon
satisfies stated manufacturing capacities and capabilities, Hybridon will retain
manufacturing rights, and Searle will be required to purchase its requirements
of products from Hybridon on an exclusive basis at specified prices. Upon a
change in control of Hybridon, Searle would have the right to terminate
Hybridon's manufacturing rights, although the royalty payable to Hybridon from
net sales would be increased in such event.
If Searle designates all of the Additional Targets or if Hybridon fails
to satisfy certain requirements relating to its manufacturing capacities and
capabilities, Searle will have the right to require Hybridon to form a joint
venture with Searle for the development of products in the Searle Field (other
than products relating to molecular targets that have already been
12
designated by Searle) to which Searle will contribute $50,000,000 in cash and
certain intellectual property rights. Hybridon will also contribute certain
intellectual property and technology and, if the fair market value of such
technology is less that $50,000,000, Hybridon will, at its discretion, either
contribute the difference in cash or have its share of the first profits of the
joint venture reduced by the amount of such difference. Hybridon and Searle
would each own 50% of the joint venture, although Searle's ownership interest
could increase to 75% if the joint venture is established because of Hybridon's
failure to satisfy the requirements relating to its manufacturing capacities and
capabilities.
Under the collaboration Searle also purchased 200,000 shares of Common
Stock in Hybridon's initial public offering.
Medtronic, Inc.
In May 1994, Hybridon and Medtronic entered into a collaboration to test
a drug delivery device for the potential use of delivering Hybridon's antisense
oligonucleotides for the treatment of Alzheimer's disease. The agreement
provides that Hybridon is responsible for the development of, and will hold all
rights to, any drug developed in this collaboration, and Medtronic is
responsible for the development of, and will hold all rights to, any delivery
system developed in this collaboration. By mutual agreement, the parties may
extend this collaboration to other neurodegenerative disease targets. Hybridon
is not currently conducting any activities under this collaboration.
As part of the collaboration, Medtronic purchased a total of 131,667
shares of Hybridon's Common Stock.
HYBRIDON SPECIALTY PRODUCTS (HSP)
In 1996, Hybridon formed HSP to manufacture oligonucleotide compounds
both for Hybridon's internal use and for sale to third parties. Hybridon
believes the interest in investigating the potential of gene expression
modulation technologies will continue, and even increase, as the use of these
technologies for the development of new classes of drugs becomes more widely
understood. The Company's strategy is to position HSP to take advantage of this
potential growth. There can be no assurance that such strategy will be
successful or that industry growth will be as anticipated. See "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -- Risk
Factors -- HSP's Results May Be Lower Than Currently Anticipated" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." However, HSP is attempting to minimize
this risk by manufacturing oligonucleotides for many applications at different
stages of development. HSP currently is manufacturing oligonucleotides for both
13
diagnostic and therapeutic applications. HSP's customers are developing over 20
oligonucleotide drugs.
HSP manufactures oligonucleotides at its 36,000 square foot leased
facility, which Hybridon believes is the only facility capable of manufacturing
large commercial-scale oligonucleotides. HSP first began production of
oligonucleotide compounds for sale in June 1996 and had revenues of
approximately $1.1 million in 1996, $1.9 million in 1997 and $2.8 million in
1998. HSP's principal customers include Genta/JBL Scientific, LaJolla
Pharmaceuticals, Inc. and MethylGene, Inc.
HSP has developed a manufacturing technology platform which combines
multiple methods to improve the production process and increase the amount of
compounds produced in a single batch. HSP has developed two separate commercial
scale synthesizers. One of these machines was developed by Hybridon alone and
the other in collaboration with Pharmacia Biotech. Pharmacia has the right to
make and sell synthesizers based on the design developed in the collaboration
but must also pay Hybridon royalties on sales. Hybridon believes that its
synthesizers are the first commercial-scale oligonucleotide synthesizers
designed for advanced oligonucleotide chemistries. In addition, HSP has
developed purification processes which use water in place of chemical solvents,
decreasing environmental impact and permitting purification of large amounts
(kilograms) of oligonucleotides. HSP has also developed processes and unique
chemicals used in the process, which HSP believes may further lower its
production costs.
In 1996, Hybridon entered into a four-year sales and supply agreement
with the Applied Biosystems Division of Perkin-Elmer. Under the agreement,
Perkin-Elmer agreed to refer potential customers to HSP, and Hybridon agreed to
purchase amidites from Perkin-Elmer for the manufacture of oligonucleotides sold
to such customers. Hybridon is also required to pay Perkin-Elmer a percentage of
the sales price paid by such customers. In addition, Perkin-Elmer licensed to
Hybridon its oligonucleotide synthesis patents.
HSP is targeting three market areas for oligonucleotides: antisense and
non-antisense therapeutics, diagnostics and genetic research. Within each area
there is a large number of potential products. HSP is currently manufacturing
oligonucleotides for diagnostics, therapeutics and genetic research.
The production of oligonucleotides is similar in many respects to the
chemical synthesis used to produce conventional drugs. However, unlike many
conventional drugs, antisense compounds used for different diseases can be made
with the same chemical building blocks using the same manufacturing processes
and equipment with minimal changes. As a result, the knowledge and experience
that HSP obtains manufacturing one oligonucleotide compound can be applied to
the manufacture of other oligonucleotide compounds for the treatment of other
diseases. This also allows several different compounds to be manufactured
14
in one facility, potentially reducing capital expenditures required in the
future and reducing the risks associated with building a plant for a single
designated drug compound.
HSP may need to increase its manufacturing capacity by adding more
oligonucleotide synthesizers in order to satisfy future internal and third-party
requirements. In addition, in order to successfully commercialize its drugs or
achieve satisfactory profit on sales, HSP may be required to reduce its
production costs. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Risk Factors -- HSP's Results May Be
Lower Than Currently Anticipated."
Hybridon believes that it is currently manufacturing oligonucleotides
according to FDA-required Good Manufacturing Practices (GMP). The FDA has not
formally inspected Hybridon's facility and procedures and Hybridon may need to
improve its procedures in the future as production increases. In 1997, HSP was
one of two biotechnology companies chosen to participate in the FDA's
Biotechnology PAI Pilot Initiative. This is a pilot program that allows FDA
regulatory officials to provide advice on compliance with FDA standards before
companies submit drug approval filings.
MARKETING STRATEGY
Hybridon plans to market the drugs it is developing either directly with
its own sales group or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. To market products
that will serve a large, geographically diverse patient population, Hybridon
expects to enter into licensing, distribution or partnering agreements with
pharmaceutical and biotechnology companies that have large, established sales
organizations. While Hybridon has developed general marketing strategies, it has
not begun to implement any of these strategies. See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Risk Factors
- --Hybridon's Lack Of Marketing Experience Could Adversely Affect Its Ability To
Commercialize Its Drugs."
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon enters into collaborative research agreements for specific
disease targets and other research activities in order to supplement its
internal research capabilities and to obtain access to the specialized knowledge
or expertise. In some cases Hybridon relies primarily upon outside
collaborators. Accordingly, termination of a collaborative research agreement
could result in the termination of the related research program.
In general, Hybridon's collaborative research agreements require
Hybridon to pay various amounts to support the research. Hybridon usually
provides the oligonucleotides,
15
which the collaborator then tests. If the collaborator creates any invention
during the course of his or her efforts, solely or jointly with Hybridon,
Hybridon generally has an option to negotiate an exclusive, worldwide,
royalty-bearing license to the invention. Inventions developed solely by
Hybridon's scientists as part of the collaboration generally are owned
exclusively by Hybridon. Most of these collaborative agreements are nonexclusive
and can be cancelled on short notice.
Since July 1997, as part of its restructuring, Hybridon has allowed a
number of its collaborative research agreements to expire and has terminated
certain others, but has maintained those which it believes are appropriate to
support its current drug development programs.
DRUG DEVELOPMENT SERVICES
Hybridon's Drug Development Department has experience in the design and
conduct of preclinical studies and has prepared and submitted the reports and
other regulatory documents for Hybridon's three advanced chemistry antisense
compounds which have entered Phase I studies. This development expertise is also
being used through a contract with MethylGene under which Hybridon's Drug
Development Department has helped design and monitor the preclinical studies for
MethylGene's antisense compound, MG98, leading to MethylGene's submission of an
Investigational New Drug ("IND") application in Canada and the United States.
MethylGene compensated Hybridon for these services. Hybridon expects to perform
similar services for OriGenix.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for Hybridon's products, processes and know-how
is important to Hybridon's business. For that reason, Hybridon prosecutes and
aggressively enforces its patents and proprietary technology. Hybridon's policy
is to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
Hybridon also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
As of March 1, 1998, Hybridon owned or exclusively licensed 62 issued
U.S. patents, 9 issued foreign patents, 7 allowed U.S. patent applications, 2
allowed foreign applications and 63 other U.S. and 99 other non-U.S. patent
applications. The patents and applications cover various chemically advanced
oligonucleotides, target sequences, specific oligonucleotide products, methods
for making and purifying oligonucleotides, analytical methods and methods for
antisense treatment of various diseases. The patents expire at various dates
ranging from 2006 to 2015.
16
Hybridon is the worldwide, exclusive licensee under several U.S. issued
or allowed patents and various patent applications owned by University of
Massachusetts Medical Center (formerly the Worcester Foundation) ("U. Mass")
relating to oligonucleotides and hybrid or mixed backbone chemistries. Many of
these patents and patent applications have corresponding applications on file or
corresponding patents in other major industrial countries.
One of the issued U.S. patents (the "HIV Patent") and one of the issued
European patents licensed from the U. Mass cover antisense oligonucleotides as
new compositions of matter for stopping the replication of HIV. The other issued
U.S. patents include claims covering composition and uses of oligonucleotides
based on advanced chemistries, methods of oligonucleotide production,
compositions of certain modified oligonucleotides that are useful for diagnostic
tests or assays and methods of purifying oligonucleotides. The earliest
expiration of the patents licensed to Hybridon by U. Mass is 2006, when the HIV
Patent expires.
Hybridon also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including two U.S. patent applications
owned by McGill University relating to oligonucleotides and DNA
methyltransferase. Hybridon and Massachusetts General Hospital ("MGH") jointly
own one issued U.S. patent applicable to Alzheimer's disease. Hybridon holds an
exclusive license to MGH's interests under such patent.
Hybridon is a nonexclusive licensee of certain patents held by the
National Institutes of Health ("NIH") relating to oligonucleotide
phosphorothioates and a nonexclusive licensee of an NIH patent covering the
phosphorothiolation of oligonucleotides. The field of each of these licenses
extends to a wide variety of genetic targets.
The U.S. Patent and Trademark Office (the "PTO") has informed Hybridon
that certain patent applications exclusively licensed by Hybridon from U. Mass
have been submitted to the Board of Patent Appeals and Interferences to
determine whether an interference should be declared with issued U.S. patents
held by the NIH relating to oligonucleotide phosphoro-thioates. An interference
proceeding is a proceeding in the PTO to determine who is the first to invent a
claimed invention, and thus who is entitled to a patent for the invention.
McDonnell Boehnen Hulbert & Berghoff, Hybridon's U.S. patent counsel, is of the
opinion that the U. Mass patent application has a prima-facie case for priority
against the NIH for an invention that includes phosphorothioate-modified
oligonucleotides. However, there can be no assurance an interference will be
declared, or if declared, as to the outcome thereof. If Hybridon were to lose
the interference, its nonexclusive license from the NIH of the NIH
phosphorothioate patents would not be affected.
The PTO has also declared a four-way interference involving two
additional U.S. patents relating to Hybridon's chimeric oligonucleotides which
Hybridon exclusively licenses from U. Mass. This interference also involves
patents owned by or exclusively licensed to Integrated DNA Technologies ("IDT"),
Isis Pharmaceuticals, Inc. and Gilead Sciences, Inc.
17
All parties have agreed to settle the interference, and the settlement agreement
has been filed with the PTO for approval. In connection with the settlement,
Hybridon has obtained a license to certain patents and patent applications owned
by IDT which broadly claim chemical modifications to oligonucleotides. Hybridon
has also granted a license to IDT to make, use and sell limited quantities of
oligonucleotides which incorporate certain of Hybridon's advanced chemistries.
Under its licenses, Hybridon is obligated to pay royalties on its net
sales of products or processes covered by the licensed technology and in some
cases to pay a percentage of any sublicense income that Hybridon may receive.
These licenses impose various commercialization, sublicensing, insurance and
other obligations on Hybridon. Failure of Hybridon to comply with these
requirements could result in termination of the license.
The patent positions of pharmaceutical and biotechnology firms,
including Hybridon, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Hybridon and its licensors
prosecute their patent applications, Hybridon does not know whether any of the
applications will issue as patents or, if any patents are issued, whether they
will provide adequate proprietary protection. Since patent applications in the
United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, Hybridon cannot be certain that it,
or any licensor of patents to it, was the first creator of inventions claimed by
pending patent applications or that Hybridon or any licensor, was the first to
file patent applications for such inventions. See "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations -- Risk Factors --
Hybridon May Be Unable To Obtain Or Enforce Patents; Its Patents May Not Provide
Adequate Protection."
Hybridon's competitors and other third parties hold issued patents and
pending patent applications relating to antisense and/or particular genetic
targets which could require Hybridon to change its products or processes, pay
substantial licensing fees or cease certain activities, including an issued
patent in Europe covering MDM2 (the "MDM2 Patent"). Hybridon is currently in
license negotiations with the holder of the MDM2 Patent. There can be no
assurance that Hybridon will be able successfully to obtain any such licenses at
a reasonable cost or that licenses to such intellectual property will not be
made available to competitors of Hybridon on an exclusive or nonexclusive basis.
Failure to obtain such licenses could have a material adverse effect on
Hybridon. See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations -- Risk Factors -- Hybridon May Be Unable To Obtain Or
Enforce Patents; Its Patents May Not Provide Adequate Protection." Previously,
another European patent had been granted to a third party relating to certain
types of stabilized synthetic oligonucleotides for use as therapeutic agents for
selectively blocking the translation of a messenger RNA into a targeted protein
by binding with a portion of the messenger RNA to which the stabilized synthetic
oligonucleotide is substantially complementary. This European patent was revoked
in entirety in an opposition
18
proceeding before the European Patent Office in September 1995. The holder of
this patent appealed such decision. This appeal was dismissed on February 18,
1999.
Hybridon requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known by Hybridon to the individual is to be kept
confidential, subject to specific exceptions. In the case of employees, the
agreements provide that all inventions conceived by the individual are the
exclusive property of Hybridon. There is no assurance, however, that these
agreements will provide meaningful protection for Hybridon's trade secrets or
adequate remedies in the event of breach of agreement.
Hybridon engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as the NIH, to take
advantage of their technical expertise and to gain access to certain technology.
Consistent with pharmaceutical industry and academic standards, these agreements
may provide that developments and results will be freely published, that
information or materials supplied by Hybridon will not be treated as
confidential and that Hybridon may be required to negotiate a license to
developments and results in order to commercialize products incorporating them.
There can be no assurance that Hybridon will be able successfully to obtain any
such license at a reasonable cost or that such developments and results will not
be made available to competitors of Hybridon on an exclusive or nonexclusive
basis. See "Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
Hybridon's research, clinical development and production are regulated
for safety, effectiveness and quality by numerous governmental authorities in
the United States and other countries. Hybridon believes that it is in material
compliance with all applicable federal, state and foreign legal and regulatory
requirements. However, it is possible that legal or regulatory requirements may
change, which could have a material adverse effect on Hybridon's business or
results of operations.
FDA Approvals
In addition to product approvals by the FDA as described above, Hybridon
may be required to obtain a satisfactory inspection by the FDA covering
Hybridon's manufacturing facilities before a product manufactured by Hybridon
can be marketed in the United States. The FDA will review Hybridon's
manufacturing procedures and inspect its facilities and equipment for compliance
with GMP and other applicable rules and regulations. Any material
19
change by Hybridon in its manufacturing process, equipment or location would
necessitate additional FDA review and approval.
Other Regulation
In addition to regulations enforced by the FDA, Hybridon also is subject
to regulation under the Occupational Safety and Health Act and other present and
potential future federal, state or local regulations. In addition, because
Hybridon uses hazardous materials, chemicals, viruses and various radioactive
compounds, Hybridon's must comply with U.S. Department of Transportation and
Environmental Protection Agency requirements and other federal, state and
foreign laws and regulations regarding hazardous waste disposal, air emissions
and waste-water discharge. Although Hybridon believes that it complies with the
standards prescribed by applicable regulations, it cannot completely eliminate
the risk of accidental contamination or injury from these materials. In the
event of such an accident, Hybridon could be held liable for any damages that
result. Any such liability could have a material adverse effect on Hybridon.
COMPETITION
Hybridon's proposed products will be competing with products developed
by third parties for the same diseases. Competition among these products will be
affected by, among other things, product efficacy, safety, reliability,
availability, price and patent protection. In addition, the speed at which
Hybridon can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market will be
an important competitive factor. Hybridon's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient funds to sustain it until commercial sales of its drugs occur.
There are a number of companies, both privately and publicly held, that
are conducting research and development activities on technologies and products
aimed at therapeutic regulation of gene expression, including antisense drugs.
Hybridon believes that the industry-wide interest in these technologies and
products will continue and will accelerate. It is possible that Hybridon's
competitors will succeed in developing products that are more effective than
Hybridon's or which would render Hybridon's technology and products obsolete or
noncompetitive. One competitor of Hybridon has recently received FDA approval to
market an antisense therapeutic product for the treatment of CMV retinitis. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon." Furthermore, because of the fundamental
differences between
20
antisense and other technologies, there may be diseases for which such other
technologies are superior to antisense.
Hybridon has many competitors, including, among others, major
pharmaceutical and chemical companies, biotechnology firms, universities and
other research institutions. Many of these competitors have substantially
greater financial, technical and human resources than Hybridon. In addition,
many of these competitors have significantly greater experience than Hybridon in
undertaking preclinical studies and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. Accordingly, Hybridon's competitors may succeed in obtaining
regulatory approvals for products more rapidly than Hybridon. Furthermore, if
Hybridon receives approval to commence commercial sales of products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited experience.
HSP also competes against a number of third parties. There is the
possibility that Hybridon's customers could begin to produce their drugs
internally or could find other sources for their manufacturing needs. Many of
these third parties and customers have greater financial, technical and human
resources than Hybridon. Key competitive factors will include the price and
quality of the products as well as manufacturing capacity and ability to comply
with specifications and to fulfill orders on a timely basis. Hybridon may be
required to reduce the cost of its product offerings to meet competition. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations -- Risk Factors -- Hybridon Faces Intense Competition, And Hybridon's
Products Could Be Rendered Obsolete; Many Of Hybridon's Competitors Have Greater
Resources And Experience Than Hybridon."
EMPLOYEES
As of March 31, 1999, Hybridon employed 51 individuals full-time, of
whom 20 held advanced degrees. Nineteen of these employees are engaged in
research and development activities and eight are employed in finance, corporate
development and legal and general administrative activities. In addition,
twenty-four of these employees are employees of HSP, of whom five are employed
in quality control. Many of Hybridon's management and professional employees
have had prior experience with pharmaceutical, biotechnology or medical products
companies. None of Hybridon's employees is covered by a collective bargaining
agreement, and management considers relations with its employees to be good.
ITEM 2. PROPERTIES
Hybridon leases its 36,000 square foot facility in Milford,
Massachusetts under a lease which expires in 2004. The term of the lease may be
extended at Hybridon's option for two additional five-year terms.
21
In addition, Hybridon leases supplemental laboratory space in Cambridge,
Massachusetts comprising approximately 26,000 square feet for a term expiring
April 30, 2007 at an annual rent of approximately $23 per square foot. Hybridon
is currently subleasing approximately 20,000 square feet of this facility to a
third party under a sublease expiring September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
Hybridon is not a party to any litigation that it believes could
have a material adverse effect on Hybridon or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the
quarter ended December 31, 1998.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
The executive officers and significant employees of the Company as of
March 31, 1999 are as follows:
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
E. Andrews Grinstead, III............. 53 Chairman of Board of Directors, President and
Chief Executive Officer
Sudhir Agrawal, D. Phil............... 45 Senior Vice President of Discovery, Chief
Scientific Officer and Director
22
SIGNIFICANT EMPLOYEES
NAME AGE POSITION
- ---- --- --------
Robert G. Andersen.................... 48 Vice President of Operations and Planning and
Treasurer
Judith Marquis, Ph.D, D.A, B.T........ 52 Vice President of Pre-Clinical Development
R. Russell Martin, M.D. .............. 63 Vice President of Drug Development
Jin-Yan Tang, Ph.D. .................. 55 Vice President of Production
Cheryl M. Northrup.................... 42 Vice President and General Counsel
Mr. Grinstead joined the Company in June 1991 and was appointed Chairman
of the Board and Chief Executive Officer in August 1991 and President in January
1993. He has served on the Board of Directors since June 1991. Prior to joining
the Company, Mr. Grinstead served as Managing Director and Group Head of the
life sciences group at Paine Webber, Incorporated, an investment banking firm,
from 1987 to October 1990; Managing Director and Group Head of the life sciences
group at Drexel Burnham Lambert, Inc., an investment banking firm, from 1986 to
1987; and Vice President at Kidder, Peabody & Co. Incorporated, an investment
banking firm, from 1984 to 1986, where he developed the life sciences corporate
finance specialty group. Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly and Company ("Eli Lilly"), an international
pharmaceutical company, from 1976 to 1984, most recently as General Manager of
Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical Operations
and at Lilly Corporate Staff as Administrator, Strategic Planning and
Acquisitions. From 1991 until its merger with another company in 1998, Mr.
Grinstead served as a director of EcoScience Corporation, a development stage
company engaged in the development of biopesticides, and has served since 1991
as a director of Pharmos Corporation, a development stage company engaged in the
development of novel pharmaceutical compounds and drug delivery systems. Mr.
Grinstead also serves as a director of Meridian Medical Technologies, Inc., a
pharmaceutical and medical device company. Mr. Grinstead was appointed to The
President's Council of the National Academy of Sciences and the Institute of
Medicine in January 1992 and the Board of the Massachusetts Biotech Council in
1997. Since 1994, Mr. Grinstead has served as a member of the Board of Trustees
of the Albert B. Sabin Vaccine Foundation, a charitable foundation dedicated to
disease prevention. Mr. Grinstead received an A.B. from Harvard College in 1967,
a J.D. from the University of Virginia School of Law in 1974 and an M.B.A. from
the Harvard Graduate School of Business Administration in 1976.
Dr. Agrawal joined the Company in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993 and Senior Vice President of Discovery in
March 1994. He has served on the Board of
23
Directors since March 1993. Prior to joining the Company, Dr. Agrawal served as
a Foundation Scholar at the Worcester Foundation from 1987 through 1991. Dr.
Agrawal served as a Research Associate at Research Council Laboratory of
Molecular Biology in Cambridge, England, from 1985 to 1986, studying synthetic
oligonucleotides. Dr. Agrawal received a B.Sc. in chemistry, botany and zoology
in 1973, an M.Sc. in organic chemistry in 1975 and a D. Phil. in chemistry in
1980 from Allahabad University in India.
Mr. Andersen joined the Company and was appointed Vice President of
Systems Engineering and Management Information Systems in November 1996 prior to
being appointed Vice President of Operations and Planning in 1997 and Treasurer
of the Company in January 1998. Prior to joining the Company, Mr. Andersen
served in a variety of positions at Digital Equipment Corporation, a computer
company, from 1986 to 1996, most recently as Group Manager of the Applied
Objects Group. From 1978 to 1986, Mr. Andersen served in a variety of positions
at United Technologies Corporation, an aviation technology company, most
recently as Director of Quality. Mr. Andersen received his B.E.E. in Electrical
Engineering from The City College of New York in 1972 and a M.S. from
Northeastern University in 1978.
Dr. Martin joined the Company and served as Vice President of Clinical
Research from April 1994 to February 1997 prior to being appointed Vice
President of Drug Development in February 1997. Prior to joining the Company,
Dr. Martin served in a variety of positions at Bristol Myers Squibb from 1983 to
1994, most recently as Vice President of Clinical Research (Infectious
Diseases). During such period, he served as an Adjunct Associate Professor of
Medicine and Associate Clinical Professor at Yale University School of medicine
from 1987 to 1994, Clinical Professor at University of Connecticut School of
Medicine from 1986 to 1993 and Adjunct Professor of Medicine at Baylor College
of Medicine from 1993 to 1994. Prior to joining Bristol Myers Squibb, Dr. Martin
served as Professor of Medicine, Microbiology and Immunology at Baylor College
from 1975 to 1983. Dr. Martin received an A.B. in American studies from Yale
University in 1956 and an M.D. from the Medical College of Georgia in 1960.
Dr. Marquis joined the Company in April, 1995, and served as Director of
Drug Safety Evaluation until January, 1998 when she was appointed Vice President
of Preclinical Development. Prior to joining the Company, Dr. Marquis served as
Director of Preclinical Development at Procept, Inc., from 1993 to 1995, and
Director of Life Sciences Research at Arthur D. Little, Inc., from 1989 to 1993.
Prior to joining the pharmaceutical industry, Dr. Marquis spent 16 years in
medical research and education at Tufts University School of Medicine. Dr.
Marquis received a B.S. in Biology from Trinity College of Vermont in 1973 and a
Ph.D. in physiology and biophysics from the University of Vermont School of
Medicine. She is board certified in toxicology and a former president of the
American Board of Toxicology.
24
Ms. Northrup joined the Company in 1997 and was appointed Vice
President and General Counsel in June 1998. Ms. Northrup served as Corporate
Counsel to ImmuLogic Pharmaceutical Corporation from 1996 to 1997 and as a
Director of the Wallace Law Registry from 1994 to 1996. Ms. Northrup also served
as Director of Legal Services of the Boston Five Cents Savings Bank from 1992
until 1994 and as Associate General Counsel to American Finance Group in 1990.
Prior to joining American Finance Group, Ms. Northrup was an Associate from 1981
to 1990 and a Partner from 1990 to 1991 of Peabody & Brown, a law firm in
Boston, Massachusetts. Ms. Northrup received her A.B. degree from Smith College
in 1978 and a J.D. degree from Boston College Law School in 1981.
Dr. Tang joined the Company in 1991 and served as Senior Research
Scientist from 1991 to 1993, Director of Oligonucleotide Chemistry from 1993 to
1994 and Executive Director of Process Chemistry from 1994 to April 1995 prior
to being appointed Vice President of Process Development in April 1995. In
November of 1997, Dr. Tang was appointed Vice President of Production. Prior to
joining the Company, Dr. Tang served as a Visiting Fellow at the Worcester
Foundation from 1988 to 1991. He also served as a Visiting Professor at the
University of Colorado in 1988. Dr. Tang received a B.S. in biochemistry from
Shanghai University of Sciences and Technology in 1965 and a Ph.D. from the
Shanghai Institute of Biochemistry in 1978.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
------------------
From January 24, 1996 until December 2, 1997, Hybridon's Common Stock
was traded on the Nasdaq National Market under the symbol "HYBN." Prior to
January 24, 1996, there was no established public trading market for Hybridon's
Common Stock.
On December 2, 1997, Hybridon's Common Stock was delisted from the
Nasdaq National Market and began being quoted on the NASD OTC Bulletin Board.
Prices reflected on the NASD OTC Bulletin Board may reflect inter-dealer prices,
without retail mark-up, mark-downs or commissions and may not necessarily
represent actual transactions.
On December 10, 1997 Hybridon effected a one-for-five reverse stock
split of its Common Stock. As a result of the reverse stock split, each five
shares of Common Stock was automatically converted into one share of Common
Stock, with cash paid in lieu of any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the NASD OTC Bulletin
Board since January 24, 1996 and as adjusted to reflect the December 1997
reverse stock split.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996)........ $71.250 $43.750
Second Quarter............................... 59.375 25.625
Third Quarter................................ 59.375 33.125
Fourth Quarter............................... 43.125 26.250
1997
- ----
First Quarter................................ $43.125 $28.125
Second Quarter............................... 35.625 25.000
Third Quarter................................ 28.125 7.500
Fourth Quarter............................... 4.859 2.609
26
1998
- ----
First Quarter................................ 3.359 1.000
Second Quarter............................... 2.75 1.609
Third Quarter................................ 2.516 1.125
Fourth Quarter............................... 3.25 1.125
1999
- ----
First Quarter................................ 1.953 1.000
The reported closing bid price of the Common Stock on the NASD OTC
Bulletin Board on April 13, 1999 was $1.1875 per share.
(b) Holders
-------
The number of Common Stockholders of record on April 13, 1999 was 351.
(c) Dividends
---------
The dividend rate of Hybridon's Series A convertible preferred stock
(the "Series A Preferred Stock") is 6.5% per annum, payable semi-annually in
arrears. These dividends may be paid either in cash or in additional shares of
Series A Preferred Stock, at the discretion of Hybridon.
Hybridon has never declared or paid cash dividends on its capital stock
and does not expect to pay any dividends on its Common Stock or any cash
dividends on the Series A Preferred Stock in the foreseeable future. The
Indenture under which Hybridon issued its 9% Convertible Subordinated Notes (the
"9% Notes") on April 2, 1997 limits Hybridon's ability to pay dividends or make
other distributions on its Common Stock or to pay cash dividends on the Series A
Preferred Stock. As of December 31,1998, $1.3 million in aggregate principal
amount of the 9% Notes remained outstanding.
In addition, Hybridon is currently prohibited from paying cash dividends
under a $6,000,000 secured loan, which is owned by affiliates of two members of
Hybridon's Board of Directors. See Note 7(b) to the Consolidated Financial
Statements.
(d) Recent Sales of Unregistered Securities
---------------------------------------
During the quarterly period ended December 31, 1998, the Company did not
sell any securities that were not registered under the Securities Act of 1933,
as amended.
27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from the Company's
Consolidated Financial Statements that have been audited by Arthur Andersen LLP,
independent public accountants. This financial data should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Consolidated Financial Statements and the Notes
thereto and the other financial information appearing elsewhere in this Annual
Report on Form 10-K.
Years Ended December 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Research and development................... $ 1,032 $ 1,186 $ 1,419 $ 945 $ 1,100
Product and service revenue................ -- -- 1,080 1,877 3,254
Royalty income............................. -- -- 62 48 --
Interest income............................ 135 219 1,447 1,079 148
------- ------- ------- ------- -------
1,167 1,405 4,008 3,949 4,502
Operating Expenses
Research and development................... 20,024 29,685 39,390 46,828 20,977
General and administrative................. 6,678 6,094 11,347 11,027 6,573
Interest................................... 69 173 124 4,536 2,932
Restructuring.............................. -- -- -- 11,020 --
------- ------- ------- ------- -------
Total operating expenses.............. 26,771 35,952 50,861 73,410 30,482
------- ------- ------- ------- -------
Loss from operations............................ (25,604) (34,547) (46,853) (69,461) (25,980)
Extraordinary item:
Gain on exchange of 9% convertible -- -- -- -- 8,877
subordinated notes payable................. ------- ------- ------- ------- -------
Net Loss........................................ (25,604) (34,547) (46,853) (69,461) (17,104)
Accretion of preferred stock dividends.......... -- -- -- -- 2,689
------- ------- ------- ------- -------
Net loss to common stockholders................. $(25,604) $(34,547) $(46,853) $(69,461) $(19,793)
======== ======== ======== ======== ========
Basic and Diluted net loss per common share:
Loss per share before extraordinary item... $(70.77) $(94.70) $ (10.24) $ (13.76) $ (2.19)
Extraordinary Item......................... - - - - 0.75
------- ------- ------- ------- -------
Net loss per share......................... (70.77) (94.70) (10.24) (13.76) (1.44)
Accretion of preferred stock dividends..... - - - - (.23)
------- ------- ------- ------- -------
Net loss per share applicable to common
shareholders............................... $ (70.77) $ (94.70) $ (10.24) $ (13.76) $ (1.67)
======== ======== ========== ========= =========
Shares Used in Computing Basic and Diluted Net
Loss per Common Share........................... 362 365 4,576 5,050 11,859
======== ======== ========== ========= =========
Balance Sheet Data:
Cash, cash equivalents and short-term
investments..................................... $3,396 $5,284 $ 16,419 2,202 5,608
Working capital (deficit)....................... (1,713) 210 8,891 (24,100) (5,614)
Total assets.................................... 11,989 19,618 41,537 35,072 16,536
Long-term debt, net of current portion.......... 1,522 1,145 9,032 3,282 6,473
9% Convertible Subordinated
Notes Payable................................... -- -- -- 50,000 1,306
Accumulated Deficit (67,794) (102,341) (149,194) (218,655) (238,448)
Total stockholders' equity (deficit)............ 4,774 12,447 22,855 (46,048) 2,249
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Hybridon is engaged in the discovery and development of genetic
medicines based on antisense technology. Hybridon commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, developing its manufacturing capabilities, and raising
capital. In order to commercialize its therapeutic products, Hybridon will need
to address a number of technological challenges and comply with comprehensive
regulatory requirements. All revenues received by Hybridon to date have been
derived from collaborative agreements, interest on invested funds and revenues
from the custom contract manufacturing of synthetic DNA and reagent products by
HSP.
Hybridon has very limited cash resources and substantial obligations to
lenders, its real estate landlords, trade creditors, and others. Hybridon's
ability to continue operations in 1999 depends on its success in obtaining new
funds. If Hybridon is unable to obtain substantial additional new funding by the
end of May 1999, it will be required to terminate its operations or seek relief
under applicable bankruptcy laws. Hybridon is currently seeking debt or equity
financing in an amount sufficient to support its operations through the end of
1999, and in connection therewith, is in negotiations with several parties to
obtain such financing.
In the Report of Independent Public Accountants set forth in Appendix A
attached to this Annual Report on Form 10-K, Arthur Andersen LLP, Hybridon's
independent public accountants, states that there is substantial doubt about
Hybridon's ability to continue as a going concern.
Hybridon has incurred cumulative losses from inception through December
31, 1998 of approximately $238.4 million. Hybridon implemented a restructuring
plan in the second half of 1997, which significantly reduced Hybridon's
operating expenses in 1998 from 1997 levels. However, Hybridon expects that its
research and development expenses will be significant in 1999 and future years
as it pursues its core drug development programs and expects to continue to
incur operating losses and have significant capital requirements that it will
not be able to satisfy with internally generated funds.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements herein that are not statements of historical fact
may be deemed to be forward-looking statements. For example, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
are based on management's current expectations and involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance or achievements of Hybridon to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. There are a number of important factors that could
cause Hybridon's actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth below under the caption "Risk Factors."
29
RESTRUCTURING PLAN
During the second half of 1997, Hybridon implemented a restructuring
plan to reduce expenditures on a phased basis in an effort to conserve its cash
resources. As part of this plan, in addition to terminating the development of
GEM 91, Hybridon reduced or suspended programs unrelated to its core advanced
chemistry antisense drug development programs. In addition, in 1997, Hybridon
terminated the employment of a substantial number of employees at its Cambridge
and Milford, Massachusetts and Paris, France facilities and substantially
reduced operations at its Paris, France office. In December 1999, Hybridon began
the final process of terminating all operations in Europe.
In 1997 Hybridon subleased a portion of each of its facilities in
Cambridge, Massachusetts (including a substantial portion of its former
headquarters). In June 1998, Hybridon relocated its headquarters from Cambridge,
Massachusetts to its facility in Milford, Massachusetts and subsequently sold
its interest in Charles River Building Limited Partnership, which owned the
former Cambridge headquarters. In connection with this transaction and the
termination of the Cambridge lease in 1998, the Company received $6,163,000 in
cash, which included the return of a portion of its security deposit for its
Cambridge headquarters and the reclassification on the Company's balance sheet
of $660,000 from restricted cash to cash and cash equivalents. The Cambridge
facility was re-leased in September 1998 to a third party, subject to a sublease
to a portion of the premises. As a result of these actions, Hybridon was
relieved of its substantial lease obligations for the Cambridge facility,
subject to a continuing liability for any defaults which may arise under the
sublease.
RESULTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
Revenues
Hybridon had total revenues of $4.0 million in 1996, $3.9 million in
1997, and $4.5 million in 1998. During 1996, 1997 and 1998, Hybridon received
revenues from research and development collaborations of $1.4 million, $0.9
million and $1.1 million, respectively. Research and development collaboration
revenues decreased in 1997 from 1996 because of the cancellation by Roche of its
collaboration with Hybridon and the resulting elimination of research funding by
Roche. Research and development collaboration revenues increased in 1998 from
1997, primarily due to Hybridon receiving certain payments under its license
agreement with MethylGene, Inc.
Product and service revenues were $1.1 million in 1996, $1.9 million in
1997 and $3.3 million in 1998. The increase in revenues in 1997 over those in
1996 resulted from a full year of operations for HSP, which commenced operations
in the third quarter of 1996. As of December 31, 1998, HSP had a backlog of $0.9
million. Hybridon anticipates filling this backlog in the first half of 1999.
The increase in revenues in 1998 was primarily the result of an expansion by HSP
in the customer base and increased sales to certain existing customers, and was
also due in part to Hybridon receiving $0.4 million in service revenue from
MethylGene.
30
Revenues from interest income were $1.4 million in 1996, $1.1 million in
1997 and $0.1 million in 1998. The decrease in interest income in 1997 from
1996, and in 1998 from 1997 was the result of lower cash balances available for
investment each year.
Research and Development Expenses
During 1996, 1997 and 1998, Hybridon expended $39.4 million, $46.8
million and $21.0 million, respectively, on research and development activities.
The increases in research and development expenses in 1997 from 1996
reflected increasing expenses related primarily to ongoing clinical trials of
Hybridon's product candidates, including (a) clinical trials of two different
formulations of GEM 132, which were first initiated during the third quarter of
1996 and the first quarter of 1997, (b) clinical trials of GEM 92, which were
initiated in the third quarter of 1997 and (c) clinical trials of GEM 91, which
were initiated in France in October 1993 and in the U.S. in May 1994, and were
terminated in July 1997. Clinical expenses related to GEM 91 decreased
significantly during the second half of 1997 after Hybridon terminated
development of this compound. Research and development expenses also increased
in 1997 over 1996 due to significant increases in preclinical expenses incurred
to meet the filing requirements to initiate clinical trials of Hybridon's
product candidates in the United States.
The decrease in research and development expenses in 1998 reflects
Hybridon's restructuring that commenced during the second half of 1997. The
restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, termination of the clinical development of GEM 91 and the
reduction or suspension of selected programs unrelated to Hybridon's core
advanced chemistry antisense drug development program. The restructuring
resulted in significant reductions in employee-related expenses, clinical and
outside testing, consulting, materials and lab expenses.
The facilities expense related to the research and development area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts and decreased significantly in 1998 as a
result of the relocation in July 1998 from Cambridge to Milford, Massachusetts.
Hybridon's facility costs in 1998 related to research and development were also
reduced by the income received from subleasing its underutilized Cambridge
facilities.
Research and development salaries and related costs remained at
approximately the same level in 1997 as 1996 because of the costs involved in
terminating employees in 1997. Research and development salaries and related
costs decreased in 1998 from 1997 due to the substantial reduction in the number
of employees engaged in research and development in 1998.
Patent expenses also remained at approximately the same level in 1998 as
1997 and 1996, as Hybridon continued to limit the scope of patent protection
that it sought as part of its effort to conserve its cash resources, while
prosecuting and maintaining key patents and patent applications.
31
General and Administrative Expenses
Hybridon incurred general and administrative expenses of $11.3 million
in 1996, $11.0 million in 1997 and $6.6 million in 1998.
The decrease in general and administrative expenses in 1998 resulted
primarily from Hybridon's restructuring program initiated during the second half
of 1997 and its effect on employee-related and consulting expenses and net
facilities costs.
The facilities expense related to the general and administrative area
increased significantly in 1997 over 1996 as a result of the relocation of the
corporate offices to Cambridge, Massachusetts. However, as a result of the
implementation of the restructuring plan in the second half of 1997, such
increase was offset by decreases in general and administrative salaries and
related costs and in consulting expenses in the second half of 1997, which
carried over into 1998. Hybridon's facilities expense related to the general and
administrative area decreased significantly in 1998 as a result of its
relocation to Milford, Massachusetts. Facility costs in 1998 were also reduced
by the income received from subleasing underutilized Cambridge facilities.
General and administrative expenses related to business development, public
relations and legal expenses decreased in 1998 from 1997, but remained at
approximately the same level in 1997 as 1996.
Interest Expense
Interest expense was $0.1 million in 1996, $4.5 million in 1997 and $2.9
million in 1998. The decrease in interest expense in 1998 is mainly attributable
to the exchange of approximately $48.7 million of the 9% Convertible
Subordinated Notes ("the 9% Notes"), issued in the second quarter of 1997, for
Series A Preferred Stock on May 5, 1998. In addition, the outstanding balance of
borrowings to finance the purchase of property and equipment was reduced in May
1998, resulting in a reduction in interest expense.
The increase in interest expense in 1997 from 1996 reflected an increase
in Hybridon's debt outstanding associated with the issuance of the 9% Notes and
interest incurred on borrowings to finance the purchase of property and
equipment.
Restructuring Charge
As a part of its restructuring plan, Hybridon recorded an $11.0 million
restructuring charge in 1997 to provide for (i) the termination costs of certain
research programs and other contracts, (ii) the loss of certain leased
facilities (net of sublease income and other contracts), (iii) severance,
benefits and related costs for 95 terminated employees and (iv) the write down
of assets to net realizable value.
Net Loss
As a result of the above factors, Hybridon incurred net losses before
extraordinary items of $46.9 million in 1996, $69.5 million in 1997 and $26.0
million in 1998. Hybridon had extraordinary income of $8.9 million in 1998
resulting from the exchange of 9% Notes for Series A Preferred Stock in the
second quarter of 1998. In accordance with Statement of Financial Accounting
("SFAS") No.15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, the Company recorded an extraordinary gain of approximately $8.9
32
million related to the exchange. The extraordinary gain represents the
difference between the carrying value of the 9% Notes tendered for exchange and
the fair value of the Series A Preferred Stock issued upon the exchange, as
determined by the per share sales price of such stock sold in May 1998 in the
private offering described below. As a result of this transaction, Hybridon
reduced its net loss before preferred stock dividends to $17.1 million in 1998.
Hybridon had an accretion of preferred stock dividends of $2.7 million at
December 31, 1998 to reflect the 1998 portion of dividends payable to the
holders of Series A Preferred Convertible Stock, resulting in a net loss to
common stockholders of $19.8 million for 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Since inception, Hybridon has incurred significant losses which it has
funded through the issuance of equity securities, debt issuances, sales by HSP,
and through research and development collaborations and licensing arrangements.
During the year ended December 31, 1998, Hybridon utilized approximately
$21.5 million to fund operating activities and approximately $472,000 for
capital expenditures. The primary use of cash for operating activities was to
fund Hybridon's loss before extraordinary items of $26.0 million. Capital
expenditures during 1998 included amounts expended for the build-out and
equipping of Hybridon's corporate headquarters and primary research and
development laboratories in its leased manufacturing facility in Milford,
Massachusetts. Hybridon expects to purchase a minimal amount of capital
equipment in 1999 as part of its effort to conserve cash resources.
Cash Resources
Hybridon had cash and cash equivalents of $5.6 million at December 31,
1998. However, since that date, Hybridon has expended the majority of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On March 30, 1999, Hybridon's obligations
included $1.3 million principal amount of 9% Notes, a $6.0 million loan with
Forum Capital Markets, LLC and others, as described below, $0.5 million of notes
payable and approximately $2.4 million of accounts payable. Because of
Hybridon's financial condition, many trade creditors are only willing to provide
Hybridon with products and services on a cash on delivery basis.
Hybridon's ability to continue operations in 1999 depends on its success
in obtaining new funds in the immediate future. Hybridon is currently seeking
debt or equity financing in an amount sufficient to support its operations
through the end of 1999, and in connection therewith, is in negotiations with
several parties to obtain such financing. However, there can be no assurance
that Hybridon will obtain any funds or as to the timing thereof. If the Company
is unable to obtain substantial additional new funding by the end of May 1999,
Hybridon may be required to further curtail significantly one or more of its
core drug development programs, obtain funds through arrangements with
collaborative partners or others that may require it to relinquish rights to
certain of its technologies, product candidates or products which it would
otherwise pursue on its own or terminate operations or seek relief under
applicable bankruptcy laws. It is also possible that Hybridon's creditors may
seek to commence involuntary bankruptcy proceedings against the Company.
33
Even if Hybridon obtains sufficient cash to fund its operations in 1999,
it will be required to raise substantial additional funds through external
sources, including through collaborative relationships and public or private
financings, to support its operations beyond 1999. Except for research and
development funding from Searle under its collaborative agreement with Searle
(which is subject to early termination in certain circumstances), Hybridon has
no committed external sources of capital, and, as discussed above, expects no
product revenues for several years from sales of the therapeutic products that
it is developing (as opposed to sales of DNA products and reagents manufactured
and sold by HSP).
No assurance can be given that additional funds will be available to
fund operations for the balance of 1999 or in future years, or, if available,
that such funds will be available on acceptable terms. If additional funds are
raised by issuing equity securities, further dilution to then existing
stockholders will result. Additionally, the terms of any such additional
financing may adversely affect the holdings or rights of then existing
stockholders.
Hybridon's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to third parties by HSP
and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, Hybridon's
ability to establish and maintain collaborative academic and commercial
research, development and marketing relationships, its ability to obtain
third-party financing for leasehold improvements and other capital expenditures
and the costs of manufacturing scale-up and commercialization activities and
arrangements.
1998 FINANCING ACTIVITIES
On February 6, 1998, Hybridon commenced an offer to the holders of the
9% Notes to exchange the 9% Notes for Series A Preferred Stock and certain
warrants of Hybridon. On May 5, 1998, noteholders holding $48.7 million of
principal and $2.4 million of accrued interest tendered such principal and
accrued interest to Hybridon for 510,505 shares of Series A Preferred Stock and
warrants to purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share.
On May 5, 1998, Hybridon completed a private offering of equity
securities raising total gross proceeds of approximately $26.7 million from the
issuance of 9,597,476 shares of common stock, 114,285 shares of Series A
Preferred Stock and warrants to purchase 3,329,486 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of approximately $5.9
million of accounts payable, capital lease obligations and other obligations
into common stock. Hybridon incurred approximately $1.6 million of cash expenses
related to the private offering and issued 597,699 shares of common stock and
warrants to purchase 1,720,825 shares of common stock at $2.40 per share to the
placement agents. In addition, Hybridon is obligated to issue an additional
300,000 shares in connection with this transaction. For more information about
this transaction, see Note 15(c) of the Notes to Consolidated Statements.
34
Credit Facility
In December 1996, Hybridon entered into a five year $7,500,000 note
payable with a bank. The note contained certain financial covenants that
required Hybridon to maintain minimum tangible net worth and minimum liquidity
and prohibited the payment of dividends. The note was payable in 59 equal
installments of $62,500 commencing on February 1, 1997 with a balloon payment of
the then remaining outstanding principal balance due on January 1, 2002. Because
Hybridon was required to make certain prepayments of principal during 1998, the
outstanding principal balance of the loan at November 16, 1998 was approximately
$2.8 million. The lender has granted Hybridon a waiver of compliance with the
minimum tangible net worth requirement at December 31, 1998 and March 31, 1999
and the minimum liquidity requirement at April 15, 1999.
Effective November 20, 1998, Forum Capital Markets, LLC ("Forum") and
certain investors associated with Pecks Management Partners Ltd. ("Pecks"; Forum
and Pecks collectively, the "Lender") purchased the loan from the bank. Forum
and Pecks are affiliates of two members of Hybridon's Board of Directors. In
connection with this purchase, the Lender lent an additional $3.2 million to
Hybridon so as to increase the outstanding principal amount of the note to
$6,000,000. In addition, the terms of the note payable were amended as follows:
(i) the maturity was extended to November 30, 2003;
(ii) the interest rate was decreased to 8%;
(iii) interest is payable monthly in arrears, with the principal due in
full at maturity;
(iv) the note payable is convertible, at the Lender's option, in whole
or in part, into shares of common stock of Hybridon at a
conversion price equal to $2.40 a share;
(v) the threshold of the minimum liquidity covenant was reduced from
$4,000,000 to $2,000,000; and
(vi) the note payable may not be prepaid, in whole or in part, at any
time prior to December 1, 2000.
The other terms of the note payable were unchanged.
For further information about this loan, see Note 7 of the Notes to Consolidated
Financial Statements.
Facility Leases
As of December 31, 1998, Hybridon has future operating lease commitments
of approximately $7.7 million through 2007 for its existing leases.
Net Operating Loss Carryforwards
As of December 31, 1998, Hybridon had approximately $220.0 million and
$3.9 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may
limit Hybridon's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period.
Hybridon has completed several financings since the effective date of the Tax
Act,
35
which, as of December 31, 1998, have resulted in ownership changes in excess of
50%, as defined under the Tax Act and which will limit Hybridon's ability to
utilize its net operating loss carryforwards.
YEAR 2000
As has been widely publicized, many computer systems and microprocessors
are not programmed to accommodate dates beyond the year 1999. Hybridon's
exposure to this year 2000 ("Y2K") problem comes not only from its own internal
computer systems and microprocessors, but also from the systems and
microprocessors of its key suppliers, including utility companies and payroll
services.
Hybridon believes that all of its internal systems will be Y2K compliant
by the end of the third quarter of 1999. Hybridon is currently evaluating all of
its internal computer systems and microprocessors in light of the Y2K problem.
As part of this process, Hybridon has conducted an inventory of its automated
instruments and other computerized equipment and is contacting applicable
vendors for information regarding Y2K compliance. Hybridon will then upgrade or
otherwise modify its internal computer systems and microprocessors, to the
extent necessary. Testing of all its internal computer systems and
microprocessors was completed in the first quarter of 1999. Hybridon does not
expect the cost of bringing all Hybridon's systems and microprocessors into Y2K
compliance will be material. Approximately 50% of Hybridon's systems either have
been found compliant or have already been brought into compliance.
Hybridon's Y2K compliance efforts are in addition to other planned
information technology ("IT") projects. While these efforts have caused and may
continue to cause delays in other IT projects, Hybridon does not expect that any
of these delays will have a significant effect on Hybridon's business or that
any of Hybridon's other IT projects will be canceled or postponed to pay for the
Y2K upgrades.
With regard to potential supplier Y2K problems, Hybridon has compiled a
list of its critical suppliers, and has sent and received back a Y2K
questionnaire from each of them in order to permit Hybridon to ascertain the Y2K
compliance status of each. Hybridon has not yet uncovered any key supplier Y2K
problems that could have a material effect on its business. If through continued
monitoring of these suppliers Hybridon becomes aware of any such problems and is
not satisfied that those problems are being adequately addressed, it will take
appropriate steps to find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems
have the potential to disrupt global economies, that no business is immune from
the potentially far-reaching effects of Y2K problems, and that it is difficult
to predict with certainty what will happen after December 31, 1999.
Consequently, it is possible that Y2K problems will have a material effect on
Hybridon's business even if Hybridon takes all appropriate measures to ensure
that it and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its
analysis to date will change, which could cause Hybridon's Y2K cost estimates
and target completion dates to change.
36
RISK FACTORS
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-loo