SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

  For the quarterly period ended September 30, 2004, or

  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           Noo

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

Yes o           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

SEPTEMBER 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 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 nine month periods ended September 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 nine months ended September 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 30,201,511 for the three and nine months ended September 30, 2004 and 41,326,860 for the three months and nine months ended September 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

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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 September 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 sheets. 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 nine month period ended September 30, 2004. For the nine month period ended September 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 nine months ended September 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 September 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 nine months ended September 30, 2004, the Company recognized a credit of approximately $19,000 and $592,000, 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 September 30, 2004. For the three months ended September 30, 2003, the Company recorded approximately $506,000 as stock compensation expense from these repriced options as a result of an increase in the intrinsic value of these options between June 30, 2003 and September 30, 2003. For the nine months ended September 30, 2003, the Company recorded approximately $641,000 as stock compensation expense from these repriced options, which included a charge for repriced options exercised between December 31, 2002 and September 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;

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•		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 nine months ended September 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 September 30, 2004 includes 16.9 million shares issued in the April 2004 financing and 8.8 million shares issued in the August 2004 financing.

Through September 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 September 30, 2004, the annual dividend amount is $655. From January 1, 2004 through September 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 nine months ended September 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.

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 September 30, 2004.

(7)

Related Party Transactions

In the nine months ended September 30, 2004, the Company paid Pillar Investment Ltd., which is controlled by a director of the Company, a total of $281,000 for commissions relating to the Company’s August 2004 financing. In conjunction with the financing, the Company also issued Pillar Investment Ltd., as additional commissions, warrants to purchase 432,520 shares of common stock at an exercise price of $0.67 per share. These warrants have a Black-Scholes value of approximately $155,000. Optima Life Sciences Limited, which is controlled by Pillar Investment Ltd., purchased 2,768,100 shares of common stock and warrants to purchase 553,620 additional shares of common stock at an exercise price of $0.67 per share in the financing.

In the nine months ended September 30, 2003, the Company paid Pillar S.A. and Pillar Investment Ltd. a total of $505,000 for (i)

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consulting services relating to international investor relations (ii) consulting services related to the repurchase of the Company’s common stock from certain stockholders and (iii) commissions relating to the Company’s August 2003 private placement. In conjunction with the August 2003 private placement, the Company also issued Pillar Investment Limited, as additional compensation for services provided as a placement agent in the private placement, warrants to purchase 587,709 shares of common stock at an exercise price of $1.00 per share. The amounts paid to Pillar in cash and warrants for the August 2003 private placement were less on a percentage basis than the comparable fees paid to the other placement agent involved in the private placement. Optima Life Sciences Limited purchased 5,500,381 shares of common stock and warrants to purchase 1,650,114 additional shares of common stock in the private placement.

Drs. James Wyngaarden and Paul Zamecnik, Chairman of the Board of Directors and a director of the Company, respectively, participated in the August 2003 private placement offering under the same terms as other investors. Dr. Wyngaarden purchased 34,246 shares of common stock and warrants to purchase 10,274 shares of common stock at an exercise price of $1.00 per share; Dr. Zamecnik purchased 68,493 shares of common stock and warrants to purchase 20,548 shares of common stock at an exercise price of $1.00 per share.

In addition to the fees described above, the Company paid a director approximately $15,000 for consulting services rendered in 2004. In 2003, the Company paid two directors approximately $41,000 and $13,000, respectively, for consulting services provided to the Company in 2003. One of these directors was also paid $20,000 in 2003 for consulting services rendered during 2002.

(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 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 nine months ended September 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, as amended by the disclosure requirements of FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. 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 nine months ended September 30, 2004 and 2003 would be as follows:

The effects on the three and nine months ended September 30, 2004 and 2003 pro forma net loss and net loss per share of

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expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net 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.

(11)

Financings

In August 2004, the Company raised approximately $5.1 million in gross proceeds from a private placement to institutional and overseas investors. In the private placement, the Company sold 8,823,400 shares of common stock and warrants to purchase 1,764,680 shares of common stock. The warrants to purchase common stock have an exercise price of $0.67 per share and will expire if not exercised on or prior to August 27, 2009. The warrants may be exercised by cash payment only. On or after February 27, 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 is greater than or equal to $1.34 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 $4.7 million.

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 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.

In August 2003, the Company raised approximately $14.6 million in gross proceeds from a private placement to institutional and accredited investors. In the private placement, the Company sold 20,053,022 shares of common stock and warrants to purchase 6,015,934 shares of common stock. The warrants to purchase common stock have an exercise price of $1.00 per share and will expire if not exercised by August 28, 2008. The warrants may be exercised by paying cash or by invoking a cashless exercise feature. The Company may redeem the warrants at a price of $0.05 per share of common stock issuable upon exercise of the warrants if the average closing sales price of the common stock for a 10 consecutive trading day period is greater than or equal to $2.00 per share. The net proceeds to the Company from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $13.1 million.

(12)

Research Collaborations

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. The Company may be entitled to royalties on sales and milestone payments triggered by specified sales levels under this collaboration.

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. The upfront payment, license fees and milestone payments payable to the Company under the agreement could total approximately $4.4 million, if all the milestones are achieved. Milestone payments are triggered by the achievement of specific events in the development process.

(13)

New Chief Executive Officer

In August 2004, Dr. Sudhir Agrawal, the Company’s President and Chief Scientific Officer, was appointed to the additional position of Chief Executive Officer, replacing Stephen R. Seiler who resigned as CEO of the Company. The Company has accrued approximately $0.7 million for amounts to be paid to Mr. Seiler through September 1, 2006 under his employment agreement. Mr. Seiler also resigned as a director of the Company.

(14)

Phase 2 Clinical Trial

In July 2004, the Company signed an agreement with Parexel International to manage the phase 2 clinical trial of IMOxine in patients with renal cell carcinoma. Under the agreement, the Company may pay Parexel up to $4.4 million in connection with this trial. As of September 30, 2004, the Company had paid approximately $0.7 million to Parexel under the agreement.

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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 $296.5 million through September 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 will increase in the fourth quarter of 2004 and 2005 as a result of the commencement of phase 2 clinical trials of HYB2055, the lead drug candidate in our IMO program. 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. Developments in 2004 under our collaborative relationships include:

•

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.

•

Immune Response Corporation (IRC) announced pre-clinical research results which demonstrated that their HIV product candidate IR103 generated robust HIV-1 specific immune responses in models with mice and human blood cells in vitro. IR103 combines IRC’s HIV-1 immunogen (Remune®) with the IMO adjuvant Amplivax developed by us. IRC has initiated a phase 1 clinical trial of IR103 in Canada and in the United Kingdom. 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 entered into the following collaborative relationships:

•

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. We may be entitled to royalties on sales and milestone payments triggered by specified sales levels under this collaboration.

•

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. The upfront payment, license fees and milestone payments payable to us under the agreement could total approximately $4.4 million, if all the milestones are achieved. Milestone payments are triggered by the achievement of specific events in the development process.

     We continue to broaden and strengthen our Board of Directors. In September 2004, Alison Taunton-Rigby, Ph.D., O.B.E. was elected to our Board of Directors. Our Board of Directors now incl