SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2004, or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For transition period from                    .
		Commission File Number 001-31918

HYBRIDON, INC.

345 Vassar Street
Cambridge, Massachusetts 02139
(Address of principal executive offices)

(617) 679-5500
(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]                                       No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

HYBRIDON, INC.

FORM 10-Q

INDEX

Hybridon® and GEM® are our registered trademarks. IMO ™, Amplivax™ and IMOxine™ are also our trademarks. Other trademarks appearing in this quarterly report are the property of their respective owners.

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PART I — FINANCIAL STATEMENTS

ITEM 1 – FINANCIAL STATEMENTS

HYBRIDON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated condensed financial statements.

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HYBRIDON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated condensed financial statements

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HYBRIDON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated condensed financial statements.

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HYBRIDON, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2004

(1)		Organization
		Hybridon, Inc. (the Company) was incorporated in the State of Delaware on May 25, 1989. The Company is engaged in the discovery and development of novel therapeutics and diagnostics using synthetic DNA. The Company’s activities are primarily based on two technologies: immunomodulatory oligonucleotide (IMO) technology, which modulates responses of the immune system using synthetic DNA containing specific sequences that mimic bacterial DNA, and antisense technology, which uses synthetic DNA to block the production of disease causing proteins at the cellular level.
(2)		Unaudited Interim Financial Statements
		The accompanying consolidated condensed financial statements included herein have been prepared by the Company, without audit, in accordance with generally accepted accounting principals for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of interim period results have been included. The Company believes that its disclosures are adequate to make the information presented not misleading. Interim results for the three and six month periods ended June 30, 2004 are not necessarily indicative of results that may be expected for the year ended December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which was filed with the Securities and Exchange Commission on March 23, 2004.
(3)		Net Loss per Common Share
		The following table sets forth the computation of basic and diluted loss per share:

Basic net loss per common share is computed using the weighted average number of shares of common stock outstanding during the period. For the three and six months ended June 30, 2004 and 2003, diluted net loss per share of common stock is the same as basic net loss per share of common stock, as the effects of the Company’s potential common stock equivalents are antidilutive. Total antidilutive securities were 27,972,186 for the three

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and six months ended June 30, 2004 and 31,514,035 for the three months and six months ended June 30, 2003. These antidilutive securities include stock options, warrants, convertible preferred stock and convertible debt instruments (on an as-converted basis) and are not included in the Company’s calculation of diluted net loss per common share.

(4)		Cash Equivalents and Investments
		The Company considers all highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents at June 30, 2004 and December 31, 2003 consisted of cash and money market funds.
		The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the appropriate classification of marketable securities at the time of purchase. In accordance with SFAS No. 115, investments that the Company does not have the positive intent to hold to maturity are classified as “available-for-sale” and reported at fair market value. Unrealized gains and losses associated with “available-for-sale” investments are recorded in “Accumulated other comprehensive loss” on the accompanying consolidated condensed balance sheet. The amortization of premiums and accretion of discounts, and any realized gains and losses and declines in value judged to be other than temporary, and interest and dividends are included in “Investment income, net” on the accompanying consolidated condensed statement of operations for all available-for-sale securities. The cost of securities sold is based on the specific identification method. The Company had no realized gains or losses for the six month period ended June 30, 2004. For the six month period ended June 30, 2003, the Company had approximately $104,000 of realized gains included in “Investment income, net” on the accompanying consolidated condensed statement of operations from available-for-sale securities sold in February 2003. There were no losses or permanent declines in value included in “investment income” for any securities in the three and six months ended June 30, 2004 and 2003.
		Available-for-sale securities are classified as short-term regardless of their maturity date if the Company has them available to fund operations within one year of the balance sheet date. Auction securities are highly liquid securities that have floating interest or dividend rates that reset periodically through an auctioning process that sets rates based on bids. Issuers include municipalities, closed-end bond funds and corporations. These securities can either be debt or preferred shares. The Company’s investments consisted of the following at June 30, 2004 and December 31, 2003:

(5)		Stock-Based Compensation Related to Repriced Options
		In September 1999, the Company’s Board of Directors authorized the repricing of options to purchase 5,251,827 shares of common stock to $0.50 per share, which represented the market value of the common stock on the date of the repricing. These options are subject to variable plan accounting which requires the Company to remeasure the intrinsic value of the repriced options, through the earlier of the date of exercise, cancellation or expiration, at each reporting date. For the three and six months ended June 30, 2004, the Company recognized a credit of approximately $257,000 and $574,000, respectively, as stock compensation from these repriced options as a result of a decrease in the intrinsic value of these options between December 31, 2003 and June 30, 2004. For the three months ended June 30, 2003, the Company recorded approximately $129,000 as stock compensation expense from these repriced options as a result of an increase in the intrinsic value of these options between March 31, 2003 and June 30, 2003. For the six months ended June 30, 2003, the Company recorded

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		approximately $135,000 as stock compensation expense from these repriced options, which included a charge for repriced options exercised between December 31, 2002 and June 30, 2003 when the market value per share of common stock was higher than its value at December 31, 2002.
(6)		Series A Convertible Preferred Stock Dividend
		On December 4, 2003, the Company’s stockholders approved amendments to the Company’s Restated Certificate of Incorporation that:

•

reduced the liquidation preference of the Company’s Series A convertible preferred stock from $100 per share to $1 per share;

•

reduced the annual dividend on the Company’s Series A convertible preferred stock from 6.5% to 1%; and

•

increased the number of shares of the Company’s common stock issuable upon conversion of the Company’s Series A convertible preferred stock by 25% over the number of shares that would otherwise be issuable for a 60-day conversion period between December 4, 2003 and February 2, 2004 inclusive.

		As a result of these amendments, during the 60-day conversion period, the conversion ratio was increased so that the Series A convertible preferred stockholders could receive approximately 29.41 shares of common stock for each share of Series A convertible preferred stock converted instead of the stated conversion rate of 23.53 shares. The value of the additional shares issued during the 60-day conversion period was recorded as an addition to dividends in the consolidated condensed statement of operations at the time of conversion. For the six months ended June 30, 2004, the Company recorded $3.2 million of preferred stock dividends related to the additional shares issued. During the 60-day conversion period, 99.9% of the Series A convertible preferred stock was converted to common stock.
		The combined effects of the amendments to the Company’s Restated Certificate of Incorporation and the Series A convertible preferred stock conversions are as follows:

(*) As described in Note 11, common stock outstanding at June 30, 2004 includes 16.9 million shares issued in the April 2004 financing.

Through June 30, 2004, the Company has always elected to pay the dividends due on the Series A convertible preferred stock in stock. In calculating the number of shares to be paid with respect to each dividend, the Series A convertible preferred stock is valued at $100.00 per share. Based on the Series A convertible preferred stock outstanding as of June 30, 2004, the annual dividend amount is $655. From January 1, 2004 through June 30, 2004, 488,570 shares of Series A convertible preferred stock were converted into 14,369,740 shares of the Company’s common stock at the adjusted conversion ratio. As a result of these conversions, $570,000 of dividends accreted during the year ended December 31, 2003 with respect to these shares were reversed during the six months ended June 30, 2004 because the former holders of these shares of Series A convertible preferred stock were no longer entitled to such dividends once their shares of Series A convertible preferred stock were converted into common stock.

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As a result of the amendments to the Company’s Restated Certificate of Incorporation and the Series A convertible preferred stock conversions, the Series A convertible preferred stock liquidation preference was reduced from $73,055,654 at December 3, 2003 to $494,912 at December 31, 2003 and $655 at June 30, 2004.

(7)		Related Party Transactions
		In the three and six months ended June 30, 2003, the Company paid Pillar S.A., which is controlled by a director of the Company, $60,000 and $205,000, respectively, for consulting services relating to investor relations and the repurchase of the Company’s common stock from certain stockholders. Pillar has not provided consulting or any other services to the Company in the three or six months ended June 30, 2004.
(8)		Stock Repurchase
		On February 14, 2003, the Company repurchased 4,643,034 shares of its common stock at a price of $1.15 per share from two Middle Eastern stockholders and their affiliates. The fair market value of the common stock was $0.75 per share on the date of the transaction resulting in a premium of approximately $1,857,000 in the aggregate. The Company charged this premium to general and administrative expense in the six months ended June 30, 2003. The repurchased stock was retired on March 13, 2003.
(9)		Stock-Based Compensation
		The Company applies the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company continues to account for employee stock compensation at intrinsic value, in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, with disclosure of the effects of fair value accounting on net income or net loss and related per share amounts on a pro forma basis.
		The pro forma effect of applying SFAS No. 123 for the three and six months ended June 30, 2004 and 2003 would be as follows:

The effects on the three and six months ended June 30, 2004 and 2003 pro forma net loss and net loss per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income (loss) for the years ended December 31, 2004 and 2003 and future years because of the vesting periods of stock options and the potential for issuance of additional stock options in future periods.

(10)

Note Payable

On April 1, 2004, the Company’s 9% convertible subordinated notes matured. As a result, the Company paid $1,306,000 to the note holders in payment of the principal amount outstanding under the notes plus accrued interest through the maturity date of $58,770. The Company currently has no debt outstanding.

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(11)		Financing
		In April 2004, the Company raised approximately $11.8 million in gross proceeds through a registered direct offering. In the offering, the Company sold 16,899,800 shares of common stock and warrants to purchase 3,041,964 shares of common stock to institutional and other investors. The warrants to purchase common stock have an exercise price of $1.14 per share and are exercisable at any time on or after October 21, 2004 and on or prior to April 20, 2009. The warrants may be exercised by cash payment only. On or after October 21, 2005, the Company may redeem the warrants if the closing sales price of the common stock for each day of any 20 consecutive trading day period ending within 30 days prior to providing notice of redemption is greater than or equal to $2.60 per share. The redemption price will be $0.01 per share of common stock underlying the warrants. The Company may exercise its right to redeem the warrants by providing 30 days prior written notice to the holders of the warrants. The net proceeds to the Company from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $10.7 million.
(12)		Research Collaboration
		On June 30, 2004, the Company entered into a research collaboration with Lexicon Genetics Incorporated covering the exploratory evaluation of certain antisense compounds against a target identified by Lexicon.
(13)		Subsequent Event
		On August 2, 2004, the Company and Alnylam Pharmaceuticals, Inc. entered into a Collaboration and License Agreement pursuant to which the Company granted to Alnylam an exclusive license to a series of patents and patent applications relating to the therapeutic use of oligonucleotides that inhibit the production of the protein Vascular Endothelial Growth Factor (VEGF). Under the license, Alnylam’s rights are limited to targeting VEGF for ocular indications with RNAi molecules. The Company is entitled to receive an up-front payment, annual license fees, milestone payments, royalties and sublicensing payments from Alnylam under the terms of the agreement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     We are engaged in the discovery and development of novel therapeutics using synthetic DNA. Our activities are primarily based on two technologies:

•

Our immunomodulatory oligonucleotide, or IMO, technology modulates responses of the immune system using synthetic DNA containing specific sequences that mimic bacterial DNA.

•

Our antisense technology uses synthetic DNA to block the production of disease causing proteins at the cellular level.

     Since we began operations in February 1990, we have been involved primarily in research and development and manufacturing. To date, almost all of our revenues have been from collaborative and license agreements. In addition, we manufactured synthetic DNA and reagent products within our Hybridon Specialty Products Division, or HSP, prior to our selling HSP in September 2000.

     We have incurred total losses of $292.5 million through June 30, 2004 and expect to incur substantial operating losses in the future. In order to commercialize our therapeutic products, we need to address a number of technological challenges and to comply with comprehensive regulatory requirements. We expect our research and development expenses may increase in the second half of 2004 if we move one or more of our drug candidates into Phase 2 clinical trials. We expect our general and administrative expenses for 2004 to remain at approximately the same level as in 2003, excluding for this purpose the $1.9 million charged to general and administrative expenses relating to the repurchase of shares of our common stock in February 2003.

     We continue to pursue a strategy of establishing alliances with other biotechnology and pharmaceutical companies for the development and commercialization of products based on our technologies. This strategy is intended to leverage our intellectual property portfolio and create the potential for additional revenue. Recent developments under our collaborative relationships include:

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Aegera Therapeutics, Inc. announced the start of phase 1 clinical trials in the first quarter of 2004 for AEG35156/GEM640, an antisense drug candidate targeted to the XIAP gene, a gene which has been implicated in the resistance of cancer cells to chemotherapy. This drug candidate is being developed by Aegera in collaboration with and under a license from us. Aegera has paid us an upfront license fee and milestones. In addition, we are entitled to receive additional milestone payments upon achievement of specified milestones and royalties on product sales and sublicensing from Aegera under the terms of the agreement.

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•

Immune Response Corporation (IRC) announced pre-clinical research results suggesting their HIV product candidate IR103 generated robust HIV-1 specific immune responses. IR103 combines IRC’s HIV-1 immunogen with the IMO adjuvant Amplivax developed by us. We are entitled to receive payments from IRC at specified times under the agreement and, if successful, royalty payments on net sales of the combination drug.

In addition, we recently entered into the following collaborative relationships:

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On June 30, 2004, we entered into a research collaboration with Lexicon Genetics Incorporated covering the exploratory evaluation of certain antisense compounds against a target identified by Lexicon.

•

On August 2, 2004, we entered into a Collaboration and License Agreement with Alnylam Pharmaceuticals, Inc. pursuant to which we granted to Alnylam an exclusive license to a series of patents and patent applications relating to the therapeutic use of oligonucleotides that inhibit the production of the protein VEGF. Under the license, Alnylam’s rights are limited to targeting VEGF for ocular indications with RNAi molecules. We are entitled to receive an up-front payment, annual license fees, milestone payments, royalties and sublicensing payments from Alnylam under the terms of the agreement.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

     This management’s discussion and analysis of financial condition and results of operations is based on our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Our significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2003. Not all of these significant accounting policies, however, require management to make difficult, complex or subjective judgments or estimates. We believe that our accounting policies relating to revenue recognition, as described under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2003, fit the definition of “critical accounting estimates and judgments.”

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2004 and 2003

  Alliance Revenues

     Total alliance revenue decreased by $32,000, or 26%, from $120,000 for the three months ended June 30, 2003 to $88,000 for the three months ended June 30, 2004 and increased by $278,000, or 61%, from $455,000 for the six

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months ended June 30, 2003 to $733,000 for the six months ended June 30, 2004. Alliance revenue consists of revenue we receive under our collaboration and licensing agreements and includes research and development payments, milestone payments, license fees, sublicens