1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1997 Commission File Number 0-27352
Hybridon, Inc.
--------------
(Exact name of registrant as specified in its charter)
Delaware 04-3072298
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
620 Memorial Drive
Cambridge, MA 02139
-------------------
(Address of principal executive offices, including zip code)
(617) 528-7000
-------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.001 per share 25,260,252
- --------------------------------------- ----------
Class Outstanding as of July 31, 1997
2
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF JUNE 30, 1997 AND
DECEMBER 31, 1996
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND
CUMULATIVE FROM MAY 25, 1989 (INCEPTION) TO JUNE 30,
1997
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1996, AND CUMULATIVE
FROM MAY 25, 1989 (INCEPTION) TO JUNE 30, 1997
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
3
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 8,594,921 $ 12,633,742
Short-term investments 20,052,761 3,785,146
Accounts receivable 644,505 573,896
Prepaid expenses and other current assets 1,660,867 1,545,324
------------- -------------
Total current assets 30,953,054 18,538,108
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 13,606,246 9,257,516
Laboratory equipment 6,051,548 5,884,861
Equipment under capital leases 5,353,458 2,904,688
Office equipment 1,760,020 1,496,639
Furniture and fixtures 515,012 499,958
Construction-in-progress 2,086,000 2,193,400
------------- -------------
29,372,284 22,237,062
Less--Accumulated depreciation and amortization 8,837,668 6,596,294
------------- -------------
20,534,616 15,640,768
------------- -------------
OTHER ASSETS:
Restricted cash 350,000 437,714
Notes receivable from officers 322,641 317,978
Deferred financing costs and other assets 3,698,501 1,152,034
Investment in real estate partnership 5,450,000 5,450,000
------------- -------------
9,821,142 7,357,726
------------- -------------
$ 61,308,812 $ 41,536,602
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ 1,887,863 $ 1,308,511
Accounts payable 3,895,988 4,064,419
Accrued expenses 3,786,842 4,190,766
Deferred revenue -- 86,250
------------- -------------
Total current liabilities 9,570,693 9,649,946
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 10,019,593 9,031,852
------------- -------------
CONVERTIBLE SUBORDINATED NOTES 50,000,000 --
------------- -------------
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Issued and outstanding--None -- --
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--25,250,252 shares
at June 30, 1997, and 25,146,577 shares
at December 31, 1996 respectively
25,250 25,147
Additional paid-in capital 173,636,989 173,227,358
Deficit accumulated during the development stage (180,736,741) (149,193,775)
Deferred Compensation (1,206,972) (1,203,926)
------------- -------------
Total stockholders' equity(deficit) (8,281,474) 22,854,804
------------- -------------
$ 61,308,812 $ 41,536,602
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE FROM
MAY 25,1989
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30, 1997
1997 1996 1997 1996
REVENUES:
Research and development $ 186,250 $ 458,150 $ 780,150 $ 717,500 $ 5,334,413
Product Revenue 727,704 -- 1,075,858 -- 2,156,033
Interest income 486,502 340,622 603,914 635,495 2,745,531
Royalty and other income 14,971 62,321 14,971 62,321 77,292
------------ ------------ ------------ ------------- -------------
1,415,427 861,093 2,474,893 1,415,316 10,313,269
------------ ------------ ------------ ------------- -------------
OPERATING EXPENSES:
Research and development 14,969,366 9,700,841 26,445,805 17,084,138 145,077,705
General and administrative 2,524,046 2,804,907 5,954,499 5,223,293 42,744,367
Interest 1,447,348 29,978 1,617,555 69,581 3,227,938
------------ ------------ ------------ ------------- -------------
18,940,760 12,535,726 34,017,859 22,377,012 191,050,010
------------ ------------ ------------ ------------- -------------
Net loss $(17,525,333) $(11,674,633) $(31,542,966) $ (20,961,696) $(180,736,741)
------------ ------------ ------------ ------------- -------------
NET LOSS PER COMMON SHARE
(Note 2) $ (.69) $ (.48) $ (1.25) $ (.89)
============ ============ ============ =============
SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE (Note 2) 25,241,956 24,518,126 25,211,845 23,613,260
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED CUMULATIVE FROM
JUNE 30, MAY 25, 1989
(INCEPTION) TO
JUNE 30,
1997 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(31,542,966) $(20,961,696) $(180,736,741)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 2,241,374 985,840 8,939,109
Issuance of common stock for services rendered 146,875 -- 146,875
Compensation on grant of stock options, warrants and restricted stock 188,412 -- 7,996,143
Amortization of discount on convertible promissary notes payable -- -- 690,157
Amortization of deferred financing costs 250,395 -- 467,127
Noncash interest on convertible promissory notes payable -- -- 260,799
Changes in operating assets and liabilities-
Accounts Receivable (70,609) -- (644,505)
Prepaid and other current assets (108,610) (931,251) (1,653,933)
Notes receivable from officers (4,663) (4,953) (322,641)
Amounts payable to related parties -- (12,500) (200,000)
Accounts payable and accrued expenses (572,356) (269,454) 7,682,830
Deferred revenue (86,250) -- --
------------ ------------ -------------
Net cash used in operating activities (29,558,398) (21,194,014) (157,374,780)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (16,267,615) (19,282,850) (20,052,761)
Purchases of property and equipment, net (5,838,183) (3,991,072) (27,640,893)
Decrease (increase) in restricted cash and other assets 133,878 184,588 (1,530,305)
Investment in real estate partnership -- (4,230,539) (5,450,000
------------ ------------ -------------
Net cash used in investing activities (21,971,920) (27,319,873) (54,673,959)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock -- -- 96,584,154
Proceeds from issuance of common stock related to
stock options and restricted stock grants 62,327 260,426 1,236,929
Proceeds from issuance of common stock related to stock warrants 9,075 3,185,816
Net proceeds from issuance of common stock -- 52,231,244 52,355,324
Repurchase of common stock -- -- (263)
Proceeds from notes payable -- -- 9,450,000
Proceeds from issuance of convertible promissory notes payable 50,000,000 59,191,744
Proceeds from long-term debt -- -- 662,107
Payments on long-term debt and capital leases (895,183) (206,913) (2,696,796)
Proceeds from sale/leaseback 1,165,236 2,042,811 3,960,752
(Increase) decrease in deferred financing costs (2,849,958) 526,721 (3,286,107)
------------ ------------ -------------
Net cash provided by financing activities 47,491,497 54,854,289 220,643,660
------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,038,821) 6,340,042 8,594,921
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,633,742 5,284,262 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,594,921 $ 11,624,664 $ 8,594,921
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 492,555 $ 69,581 $ 2,102,938
============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware on
May 25, 1989. The Company is engaged in the discovery and development of
novel genetic medicines based primarily on antisense technology.
The Company is in the development stage. Since inception, the Company has
been engaged primarily in research and development efforts, development
of its manufacturing capabilities and organizational efforts, including
recruitment of scientific and management personnel and raising capital. To
date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it based on antisense technology.
In order to commercialize its own products, the Company will need to
address a number of technological challenges and comply with comprehensive
regulatory requirements. Accordingly, it is not possible to predict the
amount of funds that will be required or the length of time that will pass
before the Company receives revenues from sales of any of these products.
All revenues received by the Company to date have been derived from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by the
Company's Hybridon Specialty Products Division. As a result, although the
Company has begun to generate revenues from its contract manufacturing
business, the Company is dependent on the proceeds from possible future
sales of equity securities, debt financings and research and development
collaborations in order to fund future operations.
7
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(1) ORGANIZATION (Continued)
The unaudited consolidated condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission and include, in
the opinion of management, all adjustments, consisting of normal,
recurring adjustments, necessary for a fair presentation of interim period
results. 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. The Company believes, however, that its disclosures
are adequate to make the information presented not misleading. The results
for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year. It is suggested that
these financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as filed with the Securities and Exchange Commission.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
Net loss per common share is computed using the weighted average number of
shares of common stock outstanding during the period. Pursuant to the
requirements of the Securities and Exchange Commission, common stock
issued by the Company during the 12 months immediately preceding its
initial public offering, plus shares of common stock that became issuable
during the same period pursuant to the grant of common stock options and
preferred and common stock warrants, has been included in the calculation
of weighted average number of shares outstanding for the period from
January 1, 1996 through February 2, 1996 (using the treasury-stock method
and the initial public offering price of $10 per share). In addition, the
calculation of the weighted average number of shares outstanding includes
shares of common stock as if all shares of preferred stock were converted
into common stock on the respective original dates of issuance.
8
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(3) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Accordingly, the Company has classified its
cash equivalents and short-term investments as held-to-maturity, and has
recorded them at amortized cost, which approximates market value.
Short-term investments mature within one year of the balance sheet date.
Cash equivalents have original maturities of less than three months. Cash
and cash equivalents and short-term investments at June 30, 1997 and
December 31, 1996 consisted of the following:
June 30, December 31,
1997 1996
Cash and Cash Equivalents-
Cash and money market funds $ 3,621,326 $10,144,367
U.S. government securities 974,701 2,489,375
Commercial paper and certificates of deposit 3,998,894 --
----------- -----------
$ 8,594,921 $12,633,742
=========== ===========
Short-term Investments-
U.S. government securities $ - $ 3,785,146
Commercial paper and certificates of deposit 20,052,761 --
----------- -----------
$20,052,761 $ 3,785,146
=========== ===========
(4) CONVERTIBLE SUBORDINATED NOTES PAYABLE
On April 2, 1997, the Company issued $50,000,000 of 9% convertible
subordinated notes (the Notes). Under the terms of the Notes, the Company
must make semi-annual interest payments on the outstanding principal
balance through the maturity date of April 1, 2004. If the Notes are
converted prior to April 1, 2000, the Noteholders are entitled to receive
accrued interest from the date of the most recent interest payment through
the conversion date. The Notes are subordinate to substantially all of the
Company's existing indebtedness. The Notes are convertible at any time
prior to the maturity date at a conversion price equal to $7.0125, subject
to adjustment under certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the Notes at its option
for a 4.5% premium over the original issuance price, provided that from
April 1, 2000 to March 31, 2001, the Notes may not be redeemed unless the
closing price of the common stock equals or
9
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(4) CONVERTIBLE SUBORDINATED NOTES PAYABLE (continued)
exceeds 150% of the conversion price for a period of at least 20 out of 30
consecutive trading days and the Notes redeemed within 60 days after such
trading period. The premium decreases by 1.5% each year through March 31,
2003. Upon a change of control of the Company, as defined, the Company
will be required to offer to repurchase the Notes at 150% of the original
issuance price.
(5) NEW ACCOUNTING STANDARD
On March 31, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997 and early
adoption is not permitted. When adopted by the Company, SFAS No. 128 will
require restatement of prior years' earnings per share. The Company will
adopt SFAS No. 128 for its fiscal year ended December 31, 1997. The
Company believes that the adoption of SFAS No. 128 will not have a
material effect on its financial statements.
(6) SUBSEQUENT EVENTS
In July 1997, the Company stopped the development of GEM 91, its first
generation antisense drug for the treateent of AIDS and HIV infection,
based on a review of new data from an open label Phase II clinical trial
of patients with advanced HIV infection. In the Phase II trial, three of
the nine subjects tested experienced decreases in platelet counts that
required dose interruption. In addition, a review of the data showed
inconsistent responses to the treatment and failed to confirm the
decrease in cellular viremia observed in an earlier clinical trial. As a
result, the Company now plans to focus its resources on core drug
development programs involving four second generation antisense compounds
based on the Company's proprietary mixed backbone chemistries.
The Company is implementing a restructuring plan to reduce expenditures
on a phased basis over the balance of 1997 in an effort to conserve its
cash resources. As part of this restructuring plan, in addition to
stopping the clinical development of GEM 91, the Company is reducing or
suspending selected programs unrelated to the four core programs. To
begin the implementation of these changes the Company terminated the
employment of 28 employees at its Cambridge and Milford, Massachusetts
facilities in July 1997 and plans to substantially reduce operations at
its Paris, France office and terminate 11 employees at that location in
August 1997. The Company is continuing to review its expenditure rate and
implement additional measures to conserve its cash resources.
Because of the significant costs involved in terminating employees and
substantially reducing operations at its Paris, France office, the Company
does not expect its expenditure rate to materially decrease until at least
October 1997. The Company estimates that restructuring charges from the
actions taken to date and the substantial reduction of operations at its
Paris, France office will total between approximately $2.0 million and
$3.0 million, and expects that it will recognize such charges in the third
quarter of 1997 and that it will make the associated cash payments over
the third and fourth quarters of 1997.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is engaged in the discovery and development of genetic medicines
based primarily on antisense technology. The Company commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruitment of scientific and management
personnel and raising capital. To date, the Company has not received revenue
from the sale of biopharmaceutical products developed by it based on antisense
technology. In order to commercialize its own products, the Company will need to
address a number of technological challenges and comply with comprehensive
regulatory requirements. Accordingly, it is not possible to predict the amount
of funds that will be required or the length of time that will pass before the
Company receives revenues from sales of any of these products. All revenues
received by the Company to date have been derived from collaborative agreements,
interest on invested funds and revenues from the custom contract manufacturing
of synthetic DNA and reagent products by the Company's Hybridon Specialty
Products Division.
In July 1997, the Company stopped the development of GEM 91, its first
generation antisense drug for the treatment of AIDS and HIV infection, based on
a review of new data from an open label Phase II clinical trial of patients
with advanced HIV infection. In the Phase II trial, three of the nine subjects
tested experienced decreases in platelet counts that required dose
interruption. In addition, a review of the data showed inconsistent responses
to the treatment and failed to confirm the decrease in cellular viremia
observed in an earlier clinical trial. As a result, the Company now plans to
focus its resources on core drug development programs involving four second
generation antisense compounds based on the Company's proprietary mixed
backbone chemistries.
The Company is implementing a restructuring plan to reduce expenditures on a
phased basis over the balance of 1997 in an effort to conserve its cash
resources. As part of this restructuring plan, in addition to stopping the
clinical development of GEM 91, the Company is reducing or suspending selected
programs unrelated to the four core programs. To begin the implementation of
these changes the Company terminated the employment of 28 employees at its
Cambridge and Milford, Massachusetts facilities in July 1997 and plans to
substantially reduce operations at its Paris, France office and terminate 11
employees at that location in August 1997. The Company is continuing to review
its expenditure rate and implement additional measures to conserve its cash
resources.
Because of the significant costs involved in terminating employees and
substantially reducing operations at its Paris, France office, the Company does
not expect its expenditure rate to materially decrease until at least October
1997. The Company estimates that restructuring charges from the actions taken to
date and the substantial reduction of operations at its Paris France office will
total between approximately $2.0 million and $3.0 million, and expects that it
will recognize such charges in the third quarter of 1997 and that it will make
the associated cash payments over the third and fourth quarters of 1997.
The Company has incurred losses since its inception and, despite its
restructuring plan, expects to incur significant operating losses in the future.
The Company expects that its research and development expenses will continue to
be significant during the balance of 1997 and in future years as it pursues its
four core development programs. The Company has incurred cumulative losses from
inception through June 30, 1997 of approximately $180.7 million.
This Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans,"
11
"intends," "may," and other similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those indicated by
such forward-looking statements. These factors include the matters set forth
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors that May Affect Future Results" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
which is hereby incorporated herein by this reference. Any statement contained
in such matters shall be deemed to be modified or superseded for purposes of
this Quarterly Report on Form 10-Q to the extent that a statement contained
herein modifies or supersedes such statement. Moreover, there can be no
assurance that the Company will be able to successfully implement its
restructuring plan or as to the timing thereof.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1997 and 1996
Revenues
The Company had total revenues of $1,415,000 and $861,000 in the three months
ended June 30, 1997 and 1996, respectively, and $2,475,000 and $1,415,000 in the
six months ended June 30, 1997 and 1996, respectively.
Revenues from research and development collaborations were $186,000 and $458,000
for the three months ended June 30, 1997 and 1996, respectively, and $780,000
and $718,000 for the six months ended June 30, 1997 and 1996, respectively.
Revenues for the three months ended June 30, 1997 decreased because the research
funding, which the Company received under the Company's collaboration with F.
Hoffmann-La Roche Ltd. ("Roche") during the three months ended June 30, 1996,
was terminated by Roche as of March 31, 1997 in connection with Roche's
termination of the research phase of the collaboration. Despite the decrease in
revenues for the three months ended June 30, 1997 as a result of the termination
of research funding by Roche, revenues for the six months ended June 30, 1997
were comparable to revenues for the six months ended June 30, 1996 because of
the inclusion of revenues earned under the Company's collaboration with G.D.
Searle & Co. ("Searle") during the full six months ended June 30, 1997. During
the six months ended June 30, 1996, the Company did not receive revenues under
the Searle collaboration until the second quarter of 1996.
Revenues from the custom contract manufacturing of synthetic DNA and reagent
products by the Hybridon Specialty Products Division were $727,000 and
$1,075,000, respectively, for the three and six months ended June 30, 1997.
The Hybridon Specialty Products Division commenced operations in June
1996. Accordingly, the Company did not receive any revenues from the custom
contract manufacturing of synthetic DNA and reagent products during the six
months ended June 30, 1996.
Interest income was $487,000 and $341,000 for the three months ended June 30,
1997 and 1996, respectively, and $604,000 and $635,000 for the six months ended
June 30, 1997 and 1996, respectively. The increase in interest income in the
three months ended June 30, 1997 was the result of more favorable interest
rates during such period then during the three months ended June 30, 1996.
12
Research and Development Expenses
The Company had research and development expenses of $14,969,000 and $9,701,000
in the three months ended June 30, 1997 and 1996, respectively, and $26,446,000
and $17,084,000 in the six months ended June 30, 1997 and 1996, respectively.
The increase in research and development expenses for the three and six months
ended June 30, 1997 primarily reflected increased expenses related to ongoing
clinical trials of the Company's product candidates, including trials of GEM 91
(which were terminated in July of 1997) and trials of two different formulations
of GEM 132 (an antisense compound for the treatment of systemic CMV and CMV
retinitis), which were first initiated with respect to GEM 132 intravenous in
Europe during the third quarter of 1996 and with respect to GEM 132 intravitreal
for the treatment of CMV retinitis in the United States during the first quarter
of 1997. The increase also reflected increased salaries and related costs,
facilities equipment costs related to additional laboratories, consulting and
professional expenses and expenses related to the production of GEM 91, GEM 132
and preclinical compounds. Research and development staffing and related costs
increased significantly as the number of employees engaged in research and
development activities increased from 157 employees as of March 31, 1997 to 161
employees as of June 30, 1997.
General and Administrative Expenses
The Company had general and administrative expenses of $2,524,000 and $2,805,000
in the three months ended June 30, 1997 and 1996, respectively, and $5,954,000
and $5,223,000 in the six months ended June 30, 1997 and 1996, respectively. The
decrease in general and administrative expenses for the three months ended June
30, 1997 was attributable primarily to a reduction in travel and consulting
expenses in such period. The increase in general and administrative expenses for
the six months ended June 30, 1997 was attributable primarily to increased
expenses in the three months ended March 31, 1997 related to certain financing
activities which were terminated during such period and a one-time charge
related to the Company's investment in MethylGene, Inc., a Canadian company in
which the Company owns a minority interest.
Interest Expense
The Company had interest expense of $1,447,000 and $30,000 in the three months
ended June 30, 1997 and 1996, respectively, and $1,618,000 and $70,000 in the
six months ended June 30, 1997 and 1996, respectively. The increase in interest
expense for the three and six months ended June 30, 1997 reflected an increase
in the debt outstanding during the three months ended June 30, 1997 associated
with the Company's issuance of $50,000,000 of 9% Convertible Subordinated Notes
(the "Notes") on April 2, 1997 and interest incurred on borrowing to finance the
purchase of property and equipment, and leasehold improvements.
Net Loss
As a result of the above factors, the Company incurred net losses of $17,525,000
and $11,675,000 for the three months ended June 30, 1997 and 1996, respectively,
and $31,543,000 and $20,962,000 for the six months ended June 30, 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30,1997, the Company used $29,558,000 of net
cash for operating activities, principally for ongoing research and development
programs, and $5,838,000 of net cash for investment in property and equipment,
consisting primarily of costs related to leasehold improvements, equipment and
furnishings of the Cambridge facility which the Company moved into on February
1, 1997.
On April 2, 1997, the Company sold $50.0 million of Notes to certain investors.
The Notes bear interest at a rate of 9% per annum and have a maturity date of
April 1, 2004. Under the Notes, the Company is required to make semi-annual
interest payments on the outstanding principal balance through the maturity date
of April 1, 2004. The Notes are unsecured and subordinate to substantially all
of the Company's existing indebtedness. The Notes are convertible at the option
of the holder into the Company's Common Stock at any time prior to maturity,
unless previously redeemed or repurchased by the Company under certain specified
circumstances, at a conversion price of $7.0125 per share (subject to
adjustment). Upon change of control of the Company (as defined), the Company is
required to offer to repurchase the Notes at 150% of the original issuance
price.
13
The Company had cash, cash equivalents and short term investments of $28,648,000
at June 30, 1997. Based on its current operating plan, including the expenditure
rate reduction initiatives being undertaken by the Company as part of its
restructuring plan, the Company believes that its existing capital resources,
together with the committed collaborative research and development payments from
Searle, and anticipated sales of the Hybridon Specialty Products Division and
margins on such sales, will be adequate to fund the Company's capital
requirements into the fourth quarter of 1997. The Company will require
substantial additional funds from external sources in the fourth quarter of 1997
to support the Company's operations through the end of the fourth quarter of
1997 and thereafter.
A significant factor affecting the Company's future capital requirements is the
level of sales of the Hybridon Specialty Products Division and the margins on
such sales. Revenues from the sale of custom contract manufacturing of synthetic
DNA and reagent products by the Hybridon Specialty Products Division were lower
than anticipated in the three months ended June 30, 1997. During such period,
the Company received repeat customer orders and expanded its customer base from
17 customers to 30 customers. The Company expects revenues from sale of custom
contract manufacturing of synthetic DNA and reagent products by the Hybridon
Specialty Products Division in the three months ending September 30, 1997 to
exceed revenues in the three months ended June 30, 1997. However, based on the
Hybridon Specialty Products Division's backlog of orders at June 30, 1997, the
Company believes that such revenues may be lower than initially anticipated for
the three months ending September 30, 1997 and for the balance of 1997.
The Company intends to seek additional equity, debt and lease financing to fund
future operations. The Company also intends to seek additional collaborative
development and commercialization relationships with potential corporate
partners in order to fund certain of its programs. Except for research and
development funding from Searle under Hybridon's collaborative agreement with
Searle (which is subject to early termination in certain circumstances),
Hybridon has no committed external sources of capital, and, as discussed above,
expects no product revenues for several years from sales of the products that
it is developing (as opposed to sales of DNA products and reagents
manufactured on a custom contract basis by the Hybridon Specialty Products
Division). If the Company is unable to obtain necessary additional funds, it
may be required to further scale back or eliminate certain of its core
development programs, license to third parties certain technologies which the
Company would otherwise pursue on its own, sell certain assets or business
units to third parties, conduct a financing which could be dilutive to holders
of the Company's existing securities and contain certain terms that would
adversely affect the rights of holders of the Company's existing securities or
cease operations.
14
HYBRIDON, INC.,
PART II
OTHER INFORMATION
Item 2 Changes in Securities
During the three months ended June 30, 1997, the Company issued and sold
the following securities that were not registered under the Securities
Act of 1933, as amended (the "Securities Act"):
1. On April 2, 1997, the Company issued $50,000,000 of its 9%
Convertible Subordinated Notes Due 2004 to an investment bank (the
"Bank") pursuant to Rule 506 under the Securities Act.
2. On April 2, 1997, the Company issued to the Bank warrants to
purchase 356,506 shares of Common Stock at an exercise price of
$7.0125 per share pursuant to Section 4(2) of the Securities Act.
Item 4 Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 19, 1997, the
following proposals were adopted by the vote specified below:
1. Election of Class II Directors
For Withheld Authority
--- ------------------
Mohamed A. El-Khereiji 15,046,792 14,666
Jerry A. Weisbach 15,027,192 34,266
James B. Wyngaarden 15,046,892 14,566
Paul C. Zamecnik 15,047,092 14,366
2. Adoption of the 1997 Stock Incentive Plan
For Against Abstain Broker Nonvotes
10,704,147 244,725 12,641 4,099,945
3. Ratification of the Selection of Independent Auditors
For Against Abstain Broker Nonvotes
15,003,091 9,801 48,566 --
15
Item 5. Other Information
1. Effective July 28, 1997, Jerry A. Weisbach, a Class II director of
the Company resigned from the Board of Directors of the Company.
2. Effective August 11, 1997, J. Robert Buchanan, a Class I director
of the Company, resigned from the Board of Directors of the
Company.
3. On August 8, 1997, the Company withdrew Post-effective Amendment
No. 1 to its Registration Statement on Form S-3 ( Registration No.
333-28409) ( the "Registration Statement"). The Company filed
Post-effective Amendment No. 1 to the Registration Statement on
July 25, 1997 to remove from registration the 5,000,000 shares of
Common Stock registered under the Registration Statement. Although
the Company is not offering shares of Common Stock pursuant to the
Registration Statement at this time, the Company may do so in the
future at such time as it considers, in its sole discretion, to
be appropriate.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
On April 14, 1997, the Company filed a Current Report on Form 8-K
dated April 2, 1997 announcing the completion of the sale of
$50,000,000 of the Company's 9% Convertible Subordinated Notes Due
2004.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYBRIDON, INC.
August 13, 1997 /s/ E. Andrews Grinstead III
- --------------- ----------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
August 13, 1997 /s/ Anthony J. Payne
- --------------- --------------------
Date Anthony J. Payne
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
HYBRIDON, INC.
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
*10.1 Amendment No. 1 to License Agreement, dated as February 21, 1990 and
restated as of September 8, 1993, by and between the Worcester
Foundation for Biomedical Research, Inc. and the Company, dated as
of November 26, 1996.
10.2 Letter Agreement dated May 12, 1997 between the Company and Pillar
S.A. amending the Consulting Agreement dated as of March 1, 1994
between the Company and Pillar S.A..
10.3 Amendment dated July 15, 1997 to the Series G Convertible Preferred
Stock and Warrant Purchase Agreement dated as of September 9, 1994
among the Company and certain purchasers, as amended.
10.4 Sixth Amendment to the lease dated April 1997 between the Company and
Charles River Building Limited Partnership for space located at 620
Memorial Drive, Cambridge, Massachusetts.
11 Computation of Net Loss Per Common Share.
27 Financial Data Schedule (EDGAR)
99 Pages 39-48 of the Company's Annual Report on Form 10-K for the
period ended December 31, 1996 (which is not deemed to be filed
except to the extent that portions thereof are expressly incorporated
by reference herein).
* Confidential treatment requested as to certain portions of exhibit,
which portions have been omitted and filed separately with the
commission
1
EXHIBIT 10.1
Confidential materials omitted and filed separately with the
Securites and Exchange Commission.
Asterisks denote omissions.
AMENDMENT NO. 1 TO LICENSE AGREEMENT,
DATED AS OF FEBRUARY 21, 1990 AND
RESTATED AS OF SEPTEMBER 8, 1993,
BY AND BETWEEN THE WORCESTER FOUNDATION
FOR BIOMEDICAL RESEARCH, INC. AND HYBRIDON, INC.
This Agreement, dated as of November 26, 1996, is entered into by and
between the Worcester Foundation for Biomedical Research, Inc. (formerly the
Worcester Foundation for Experimental Biology, Inc.), having offices at 222
Maple Avenue, Shrewsbury, Massachusetts 01545, ("Foundation") and Hybridon,
Inc., a Delaware Corporation having offices at One Innovation Drive, Worcester,
Massachusetts 01605, ("Hybridon").
WITNESSETH:
WHEREAS, Foundation and Hybridon entered into a license agreement, dated
as of February 21, 1990 and restated as of September 8, 1993 (the "License
Agreement"); and
WHEREAS, Foundation and Hybridon wish to amend the License Agreement on
the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below, the parties agree as follows:
1. Capitalized terms used herein and not defined herein shall have
the respective meanings ascribed to such terms in the License Agreement.
2. Section 1.7 of the License Agreement shall be amended to read in
its entirety as follows:
1.7. SUBLICENSE INCOME. The term "Sublicense Income" shall mean all
consideration received from Sublicensees of Licensee pursuant to
Section 2.2(c), excluding (a) payments made by a Sublicensee in
consideration for the issuance of equity or debt securities of
Licensee, (b) payments made by a Sublicensee to support or fund
research activities to be undertaken by Licensee, (c) up-front
payments made in consideration or recognition of prior research
and development efforts undertaken by Licensee, (d) payments made
upon the achievement by Licensee or Sublicensee of specified
milestones or benchmarks relating to the
2
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
development of the Licensed Products sublicensed to Sublicensee,
except to the extent that such payments are in consideration for
the grant or exercise of a sublicense under the Patent Rights, and
(e) payments made by a Sublicensee for the manufacture and supply
of Licensed Products to such Sublicensee. If non-monetary
consideration is so received, then a commercially reasonable
monetary value will be assigned for purposes of calculating
Foundation's share of Sublicense Income.
3. Section 5.2 of the License Agreement shall be amended to read in
its entirety as follows:
5.2. Royalties.
---------
(a) Except as provided in Section 5.2(b) below, on all sales of
Licensed Products covered by any pending or Valid Claim of Patent
Rights in any country where the Licensed Product is made, used or
sold by Licensee or its Affiliates, Licensee shall pay Foundation
royalties in accordance with the following schedule, such
undertaking and schedule having been agreed to for the purpose of
reflecting and advancing the mutual convenience of the parties:
(*) ***** *********** *** ************ ******** *** **
*** **** ****;
(*) ***** ********** ********* ** ** *** ***** *****;
(*) ********** *********** *** ************ *********
** ** *** ***** *****;
(*) ********** ********** ********* ** ** *** *****
*****;
(*) ************ ********* ** ** *** ***** ****** ***
(*) ******** ******** *** *** ********** **** ** ***
***** *****.
For purposes of this Section 5.2, a "Valid Claim" shall mean a
claim of an unexpired patent which shall not have been withdrawn,
cancelled, or disclaimed, nor held invalid by a court of competent
jurisdiction in any
2
3
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote omissions.
unappealed or unappealable decision in the country where the
Licensed Product is made, used or sold by Licensee or its
Affiliates.
(b) Foundation shall *** ** ******** ** * ******* ** ***
******** **** ** ******** ** ** ********** for the ********** ***
****** ** ******** ******** ** **** *********** *** **********
***** ** **** ******** ******** if, and only if, *** *********
received by ******** **** **** *********** ** *** **** of such
******** ******** ** **** *********** **** ********** ** ***
************ ** ***** ******* ***** ******* ***** **********
********** ******* *** at rates equal to or greater than those set
forth in Section 5.2(a) (subject to any reduction pursuant to
Section 5.8). **** ******* ** ******** ******* ************* **
******** *** * *********** **** *** *** *** ********** **** ***
with respect to which Foundation shall ** ******** ** * ********
pursuant to the first sentence of this Section 5.2(b), or **** ***
*** ** ** ******** ** ******* ********* ***** *** *** ** ** ****
*** ********* *********** ** ******** ********* ********** *****
** ******** ** * ******* ** *** ***** ** **** ******** ******** **
**** *********** ** the applicable royalty rates set forth in
Section 5.2(a) (subject to any reduction pursuant to Section
5.8)***** ********** ******* ****** *** **** ** **** ***********
*** ****** ** ********* ******** *** *** ******* ** *** ********
***** ******* ** *********** PROVIDED, HOWEVER, **** *** ********
***** *** ********** ******* ** ****** the agreement of such
*********** ** ********* ******** *** *** ******* ** *** ********
***** ******** *** *** ** *** ***** **** ******** ***** ** ******
such agreement **** **** ************ **** ******** ***** *** **
********** *** ******* ******** ** ******** *** ***** ***********
*** *** *********** *** ****** ** ******** ******** ** ****
*********** **** *** ** ****** ** ********** ***** ********* *****
** ************* *** ********* **** ******** ********* ** ** **
********* ****** **** ** ***** ** *** ******* ***** *******.
4. In all other respects the License Agreement shall remain in full
force and effect.
3
4
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names by their properly and duly authorized officers or
representatives as of the date first written above.
WORCESTER FOUNDATION FOR HYBRIDON, INC.
BIOMEDICAL RESEARCH, INC.
By: /s/ Thoru Pederson By: /s/ E. Andrews Grinstead III
---------------------------- --------------------------------
Name: Thoru Pederson Name: E. Andrews Grinstead III
Title: President & Director Title: Chairman, President & CEO
Date: 11/26/96 Date: 11-13-96
4
1
EXHIBIT 10.2
------------
HYBRIDON, INC.
620 Memorial Drive
Cambridge, MA 02139
May 12, 1997
Pillar S.A.
28, Avenue de Messine
75008 Paris, France
Attn: Mr. Youssef El-Zein
Re: Consulting Agreement dated as of March 1, 1994 as amended
---------------------------------------------------------
Dear Youssef:
Hybridon, Inc. ("Hybridon") hereby confirms its agreement that the term
of the Consulting Agreement dated as of March 1, 1994, as amended, between
Hybridon and Pillar S.A., as set forth in Section 2(a) of such Consulting
Agreement, has been extended to February 28, 1998.
If you are in agreement with the foregoing, please so indicate by signing
below.
HYBRIDON, INC.
/s/ E. Andrews Grinstead, III
---------------------------------------
E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer
Agreed and Acknowledged this
14 day of May, 1997
PILLAR S.A.
By: /s/ Youssef El-Zein
---------------------------
Title: President Directeur General
---------------------------
1
EXHIBIT 10.3
------------
Amendment to Definition of Registrable Shares
in Section 8.1 of the Series G Convertible
Preferred Stock and Warrant Purchase Agreement
----------------------------------------------
Section 8.1 of the Series G Convertible Preferred Stock and Warrant
Purchase Agreement dated as of September 9, 1994, as amended, between the
Company and certain holders of securities of the Company (the "Purchase
Agreement") is amended by deleting the proviso to the definition of
"Registrable Shares" under Section 8.1 of the Purchase Agreement in its
entirety and inserting in lieu thereof the following:
"PROVIDED, HOWEVER, that shares of Common Stock which are Registrable Shares
shall cease to be Registrable Shares (i) upon any sale pursuant to a
Registration Statement, Section 4(1) of the Securities Act or Rule 144 under
the Securities Act ("Rule 144"), (ii) with respect to a holder of Registrable
Shares, if all of the Registrable Shares held by such holder (A) may be sold by
the holder within a 90-day period pursuant to Rule 144, (B) may be sold by the
holder pursuant to Rule 144(k) or (C) do not constitute "restricted securities"
under Rule 144 because such Registrable Shares were acquired by such holder
pursuant to Regulation S under the Securities Act, or (iii) upon any sale in
any manner to a person or entity which, by virtue of Section 9(b) of this
Agreement is not entitled to the rights provided by this Section 8."
1
EXHIBIT 10.4
------------
SIXTH AMENDMENT TO LEASE
This Sixth Amendment to Lease is entered into by and between Charles River
Building Limited Partnership, a Delaware limited partnership (the "Landlord")
and Hybridon, Inc., a Delaware corporation (the "Tenant") as of April __, 1997.
Reference is hereby made to that certain Lease between Landlord and Tenant
dated February 4, 1994, as amended by a First Amendment to Lease dated as of
November 30, 1995, a Second Amendment to Lease dated as of February 23, 1996, a
Third Amendment to Lease dated as of February 28, 1996, a Fourth Amendment to
Lease dated July 25, 1996 and a Fifth Amendment to Lease dated March 14, 1997
(as affected by this Fifth Amendment to Lease, the "Lease").
WHEREAS, the Tenant has elected to exercise the Equity Investment Option (as
defined in the Lease); and
WHEREAS, Landlord and Tenant have agreed that the Building (as defined in
the Lease) contains 91,500 rentable square feet; and
WHEREAS, Landlord and Tenant have agreed to extend the initial Term (as
defined in the Lease) for an additional five years; and
WHEREAS, Landlord and Tenant have agreed that the Commencement Date (as
defined in the Lease) was February 1, 1997;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as of the date hereof that the Lease is amended as follows:
1. The recitals set forth above are hereby incorporated herein.
2. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed thereto in the Lease.
3. The definitions set forth in Section 1.1 of the Lease for the term set
forth below are hereby deleted and replaced with the following:
Term: Fifteen (15) years, commencing on the
Commencement Date, with three (3) five (5) year
options to extend, as set forth in Section 2.3
Annual Fixed Rent Rate: During the original Term, for the five years
commencing on the Commencement Date,
Thirty-Seven and 79/100 Dollars ($37.79) per
1
EXHIBIT 11
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS PER COMMON SHARE (1)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
NET LOSS $(17,525,333) $(11,674,633) $(31,542,966) $(20,961,696)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
Weighted average common stock outstanding during the period 25,241,956 24,518,126 25,211,845 20,747,427
Conversion of preferred stock -- -- -- 2,778,569
Dilutive effect of common equivalent shares
issued subsequent to October 31, 1994 (2) -- -- -- 87,264
------------ ------------ ------------ ------------
25,241,956 24,518,126 25,211,845 23,613,260
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (.69) $ (.48) $ (1.25) $ (.89)
============ ============ ============ ============
(1) Primary and fully diluted net loss per share has not been separately
presented, as the amounts would not be meaningful.
(2) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, stock options issued at prices below the initial
public offering price per share (cheap stock) during the 12-month
period immediately preceding the initial filing date of the
Company's Registration Statement of its initial public offering have
been included as outstanding for all periods presented. The dilutive
effect of the common and common stock equivalents was computed in
accordance with the treasury stock method.
5
U.S. DOLLARS
6-MOS
DEC-31-1997
JAN-01-1996
JUN-30-1997
1
8,594,921
20,052,761
644,505
0
0
30,953,054
29,372,284
8,837,668
61,308,812
9,821,142
60,019,593
25,251
0
0
(8,306,724)
61,308,812
1,075,858
2,474,893
0
0
32,400,304
0
1,617,555
(31,542,966)
0
(31,542,966)
0
0
0
(31,542,966)
(1.25)
(1.25)
1
EXHIBIT 99
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
-39-
2
Early Stage of Development; Technological Uncertainty
Hybridon's potential pharmaceutical products are at various stages of
research, preclinical testing or clinical development. There are a number of
technological challenges that the Company must successfully address to complete
any of its development efforts. To date, most of the Company's resources have
been dedicated to applying oligonucleotide chemistry and cell biology to the
research and development of potential pharmaceutical products based upon
antisense technology. As in most drug discovery programs, the results of in
vitro, tissue culture and preclinical studies by the Company may be inconclusive
and may not be indicative of results that will be obtained in human clinical
trials. In addition, results attained in early human clinical trials by the
Company may not be indicative of results that will be obtained in later clinical
trials. Neither the Company, nor to its knowledge, any other company has
successfully completed human clinical trials of a product based on antisense
technology, and there can be no assurance that any of the Company's products
will be successfully developed.
The success of any of the Company's potential pharmaceutical products
depends in part on the molecular target on the genetic material chosen as the
site of action of the oligonucleotide. There can be no assurance that the
Company's choice will be appropriate for the treatment of the targeted disease
indication in humans or that mutations in the genetic material will not result
in a reduction in or loss of the efficacy or utility of the Company product.
Uncertainty Associated with Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of
its pharmaceutical products under development, the Company must undertake
extensive and costly preclinical studies and clinical trials to demonstrate that
such products are safe and efficacious. The results from preclinical studies and
early clinical trials are not necessarily predictive of results that will be
obtained in later stages of testing or development, and there can be no
assurance that the Company's clinical trials will demonstrate the safety and
efficacy of any pharmaceutical products or will result in pharmaceutical
products capable of being produced in commercial quantities at reasonable cost
or in a marketable form.
Although the Company is conducting clinical trials of certain
oligonucleotide compounds and is developing several oligonucleotide compounds on
which it plans to file IND applications with the FDA and equivalent filings
outside of the U.S., there can be no assurance that necessary preclinical
studies on these compounds will be completed satisfactorily or that the Company
otherwise will be able to make its intended filings. Further, there can be no
assurance that the Company will be permitted to undertake and complete human
clinical trials of any of the Company's potential products, either in the U.S.
or elsewhere, or, if permitted, that such products will not have undesirable
side effects or other characteristics that may prevent or limit their commercial
use.
The rate of completion of the Company's human clinical trials, if
permitted, will be dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the protocol, the availability of
alternative treatments, the proximity to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment might result in
increased costs and delays, which could have a material adverse effect on the
Company. The Company or the FDA or other regulatory agencies may suspend
clinical trials at any time if the subjects or patients participating in such
trials are being exposed to unacceptable health risks.
-40-
3
Future Capital Needs; Uncertainty of Additional Funding
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research, drug discovery and
development programs, the magnitude of these programs, progress with preclinical
and clinical trials, sales of DNA products and reagents to these parties
manufactured on a custom contract basis by the Hybridon Specialty Products
Division and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the ability of
the Company to establish and maintain collaborative academic and commercial
research, development and marketing relationships, the ability of the Company to
obtain third-party financing for leasehold improvements and other capital
expenditures and the costs of manufacturing scale-up and commercialization
activities and arrangements.
Based upon its current operating plan, the Company believes that its
existing capital resources, together with the committed collaborative research
and development payments from Searle, anticipated sales of the Hybridon
Specialty Products Division and margins on such sales, which are expected to
increase significantly over historic levels, and the net proceeds from the sale
of the Notes and the interest earned thereon, will be adequate to fund the
Company's capital requirements through at least the first quarter of 1998. The
Company anticipates that it will be required to raise substantial additional
funds, through external sources, including through collaborative relationships
and public or private financings, to support the Company's operations beyond
that time. No assurance can be given that additional financing will be
available, or, if available, that it will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders will result. Additionally, the terms of any such
additional financing may adversely affect the holdings or rights of then
existing stockholders. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research, drug discovery or
development programs, or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own. See "Item 1. Business -- Hybridon Drug Development
and Discovery Programs."
History of Operating Losses and Accumulated Deficit
Hybridon has incurred net losses since its inception. At December 31,
1996, the Company's accumulated deficit was approximately $149,194,000. Such
losses have resulted principally from costs incurred in the Company's research
and development programs and from general and administrative costs associated
with the Company's development. No revenues have been generated from sales of
pharmaceutical products developed by the Company and no revenues from the sale
of such products are anticipated for a number of years, if ever. The Company
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase significantly as the Company's research
and development and clinical trial efforts expand. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial. Although the Company's Hybridon Specialty Products Division has
begun to generate revenues from the sale of synthetic DNA products and reagents
manufactured by it on a custom contract basis, there can be no assurance that
demand for and margins on these products will not be lower than anticipated. The
Company's ability to achieve profitability is dependent in part on obtaining
regulatory approvals for its pharmaceutical products and entering into
agreements for drug discovery, development and commercialization. There can be
no assurance that the Company will obtain required regulatory approvals, enter
into any additional agreements for drug discovery, development and
commercialization or ever achieve sales or profitability.
-41-
4
Patents and Proprietary Rights
The Company's success will depend in part on its ability to develop
patentable products and obtain and enforce patent protection for its products
both in the U.S. and in other countries. The Company has filed and intends to
file applications as appropriate for patents covering both its products and
processes. However, the patent positions of pharmaceutical and biotechnology
firms, including Hybridon, are generally uncertain and involve complex legal and
factual questions. No assurance can be given that patents will issue from any
pending or future patent applications owned by or licensed to Hybridon. Since
patent applications in the U.S. are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions covered by pending patent
applications or that is was the first to file patent applications for such
inventions. Further, there can be no assurance that the claims allowed under any
issued patents will be sufficiently broad to protect the Company's technology.
In addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide competitive advantages to the
Company.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to competitors or others nor breaching the
technology licenses upon which the Company's products might be based. The
Company's licenses of patents and patent applications impose various
commercialization, sublicensing, insurance and other obligations on the Company.
Failure of the Company to comply with these requirements could result in
termination of the license. The Company is aware of patents and patent
applications belonging to competitors, and it is uncertain whether these patents
and patent applications will require the Company to alter its products or
processes, pay licensing fees or cease certain activities. In particular,
competitors of the Company and other third parties hold issued patents and
pending patent applications relating to antisense and other gene expression
modulation technologies which may result in claims of infringement against the
Company or other patent litigation. There can be no assurance that the Company
will be able successfully to obtain a license to any technology that it may
require or that, if obtainable, such technology can be licensed at a reasonable
cost or on an exclusive basis. See "Item 1. Business -- Patents, Trade Secrets
and Licenses."
The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of others' proprietary rights. The Company also
may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office, which could result in substantial cost to the Company, to
determine the priority of inventions. Furthermore, the Company may have to
participate at substantial cost in International Trade Commission proceedings to
abate importation of products which would compete unfairly with products of the
Company.
Hybridon engages in collaborations, sponsored research agreements and
other agreements with academic researchers and institutions and government
agencies. Under the terms of such agreements, third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
independently developed by competitors. See "Item 1. Business -- Patents, Trade
Secrets and Licenses."
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Risks Associated with Hybridon Specialty Products Division
Through its Hybridon Specialty Products Division, the Company manufactures
oligonucleotide compounds on a custom contract basis for third parties. The
results of operations of the Hybridon Specialty Products Division will be
dependent upon the Demand for and margins on these products, which may be lower
than anticipated by the Company. The results of operations of the Hybridon
Specialty Products Division also may be affected by the price and availability
of raw materials. It is possible that Hybridon's manufacturing capacity may not
be sufficient for production of oligonucleotides both for the Company's internal
needs and for sale to third parties. The Company's manufacturing facility must
comply with GMP and other FDA regulation. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - - Certain
Factors That May Affect Future Results - - Limited Manufacturing Capability."
The Company will be competing against a number of third parties, as well
as the possibility of internal production by the Company's customers, in
connection with the operations of the Hybridon Specialty Products Division. Many
of these third parties are likely to have greater financial, technical and human
resources than the Company. Key competitive factors will include the price and
quality of the products as well as manufacturing capacity and ability to comply
with specifications and to fulfill orders on a timely basis. The Company may be
required to reduce the cost of its product offerings to meet competition. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - - Certain Factors That May Affect Future Results - -
Competition." Failure to manufacture oligonucleotide compounds in accordance
with the purchaser's specifications could expose the Company to breach of
contract and/or product liability claims from the purchaser or the purchaser's
customers. The Company has limited experience in sales, marketing and
distribution and is relying in part upon the efforts of third party,
Perkin-Elmer, in connection with the marketing and sale of products by the
Hybridon Specialty Products Division. See "Item 7. Management's Discussion and
Analysis of Financial Conditions and Results of Operations - - Certain Factors
That May Affect Future Results - - Absence of Sales and Marketing Experience."
Need to Establish Collaborative Commercial Relationships; Dependence on Partners
Hybridon's business strategy includes entering into strategic alliances or
licensing arrangements with corporate partners, primarily pharmaceutical and
biotechnology companies, relating to the development and commercialization of
certain of its potential products. Although the Company is a party to corporate
collaborations with Searle, Roche and Medtronic, there can be no assurance that
these collaborations will be scientifically or commercially successful, that the
Company will be able to negotiate additional collaborations, that such
collaborations will be available to the Company on acceptable terms or that any
such relationships, if established, will be scientifically or commercially
successful. The Company expects that under certain of these arrangements, the
collaborative partner will have the responsibility for conducting human clinical
trials and the submission for regulatory approval of the product candidate with
the FDA and certain other regulatory agencies. Should the collaborative partner
fail to develop a marketable product, the Company's business may be materially
adversely affected. There can be no assurance that the Company's collaborative
partners will not be pursuing alternative technologies or developing alternative
compounds either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
targeted by these collaborative programs. The Company's business also will be
affected by the performance of its corporate partners in marketing any
successfully developed products within the geographic areas in which such
partners are granted marketing rights. The Company's plan is to retain
manufacturing rights for many of the products it may license pursuant to
arrangements with corporate partners. However, there can be no assurance that
the Company will be able to retain such rights on acceptable terms, if at all,
or that the Company will have the ability to produce the quantities of product
required under the terms of such
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arrangements. See "Item 1. Business -- Hybridon Drug Development and Discovery
Programs" and "-- Corporate Collaborations."
No Assurance of Regulatory Approval; Government Regulation
The Company's preclinical studies and clinical trials, as well as the
manufacturing and marketing of its potential products being developed by it and
the products sold by the Hybridon Specialty Products Division, are subject to
extensive regulation by numerous federal, state and local governmental
authorities in the U.S. Similar regulatory requirements exist in other countries
where the Company intends to test and market its drug candidates. Preclinical
studies of the Company's product development candidates are subject to GLP
requirements and the manufacture of any products by the Company, including
products developed by the Company and products manufactured for third parties on
a custom contract basis by Hybridon Specialty Products Division, will be subject
to GMP requirements prescribed by the FDA.
The regulatory process, which includes preclinical studies, clinical
trials and post-clinical testing of each compound to establish its safety and
effectiveness, takes many years and requires the expenditure of substantial
resources. Delays may also be encountered and substantial costs incurred in
foreign countries. There can be no assurance that, even after the passage of
such time and the expenditure of such resources, regulatory approval will be
obtained for any drugs developed by the Company. Data obtained from preclinical
and clinical activities are subject to varying interpretation which could delay,
limit or prevent regulatory approval by the FDA or other regulatory agencies.
The Company, an IRB, the FDA or other regulatory agencies may suspend clinical
trials at any time if the participants in such trials are being exposed to
unacceptable health risks. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitation on the indicated uses for which it
may be marketed. Failure to comply with applicable regulatory requirements can,
among other things, result in fines, suspension of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
FDA policy may change and additional government regulations may be established
that could prevent or delay regulatory approval of the Company's potential
products. In addition, a marketed drug and its manufacturer are subject to
continual review, and subsequent discovery of previously unknown problems with a
product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market and withdrawal
of the right to manufacture the product. All of the foregoing regulatory matters
also will be applicable to development, manufacturing and marketing undertaken
by any strategic partners or licensees of the Company. See "Item 1. Business --
Government Regulation."
Competition
There are many companies, both private and publicly traded, that are
conducting research and development activities on technologies and products
similar to or competitive with the Company's antisense technologies and proposed
products. For example, many other companies are actively seeking to develop
products, including antisense oligonucleotides, with disease targets similar to
those being pursued by the Company. Some of these competitive products are in
clinical trials. The Company believes that the industry-wide interest in
investigating the potential of gene expression modulation technologies will
continue and will accelerate as the techniques which permit the design and
development of drugs based on such technologies become more widely understood.
There can be no assurance that the Company's competitors will not succeed in
developing products based on oligonucleotide or other technologies, existing or
new, which are more effective than any that are being developed by the Company,
or which would render Hybridon's antisense technologies obsolete and
noncompetitive. Moreover, there currently are commercially available products
for the treatment of certain of the disease targets being pursued by the
Company.
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Competitors of the Company engaged in all areas of biotechnology and drug
discovery in the U.S. and other countries are numerous and include, among
others, pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions. Many of the Company's competitors have
substantially greater financial, technical and human resources than the Company.
In addition, many of these competitors have significantly greater experience
than the Company in undertaking preclinical studies and human clinical trials of
new pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience. Accordingly, the Company's competitors may succeed in
obtaining FDA or other regulatory approvals for products or in commercializing
such products more rapidly than the Company. See "Item 1. Business --
Competition."
Limited Manufacturing Capability
While the Company believes that its existing production capacity will be
sufficient to enable it to satisfy its current research needs and to support the
Company's preclinical and clinical requirements for oligonucleotide compounds,
the Company will need to purchase additional equipment to expand its
manufacturing capacity in order to satisfy its future requirements, subject to
obtaining regulatory approvals, for commercial production of its product
candidates. In addition, Hybridon Specialty Products Division is using the
Company's existing production capacity to custom contract manufacture synthetic
DNA products for commercial sale. As a result, depending on the level of sales
by the Hybridon Specialty Products Division, and the success of the Company's
product development programs, Hybridon's manufacturing capacity may not be
sufficient for production for both its internal needs and sales to third
parties. In addition, in order to successfully commercialize its product
candidates or achieve satisfactory margins on sales, the Company may be required
to reduce further the cost of production of its oligonucleotide compounds, and
there can be no assurance that the Company will be able to do so.
The manufacture of the Company's products is subject to GMP requirements
prescribed by the FDA or other standards prescribed by the appropriate
regulatory agency in the country of use. To the Company's knowledge, therapeutic
products based on chemically-modified oligonucleotides have never been
manufactured on a commercial scale. There can be no assurance that the Company
will be able to manufacture or obtain products in a timely fashion and at
acceptable quality and price levels, that it or its suppliers can manufacture in
compliance with GMP or other regulatory requirements or that it or its suppliers
will be able to manufacture an adequate supply of product. The Company has in
the past relied in part and may in the future rely upon third party contractors
in connection with the manufacture of some compounds. Reliance on such third
parties entails a number of risks, including the possibility that such third
parties may fail to perform on an effective or timely basis or fail to abide by
regulatory or contractual restrictions applicable to the Company. See "Item 1.
Business -- Manufacturing. Technology and the Hybridon Specialty Products
Division."
There are three sources of supply for the nucleotide building blocks used
by the Company in its current oligonucleotide manufacturing process. This
process is covered by issued patents either held by or licensed to these three
companies. Therefore, these companies are likely the sole suppliers to Hybridon
of these nucleotide building blocks. The inability of Hybridon to obtain these
nucleotide building blocks from one of these suppliers could have a material
adverse effect on Hybridon.
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Absence of Sales and Marketing Experience
The Company expects to market and sell certain of its products directly
and certain of its products through co-marketing or other licensing arrangements
with third parties. The Company has limited experience in sales, marketing or
distribution, and does not expect to establish a sales and marketing plan or
direct sales capability with respect to the products being developed by it until
such time as one or more of such products approaches marketing approval. In
addition, although the Company does have a limited direct sales capability with
respect to the sales of custom contract manufactured DNA products to third
parties by the Hybridon Specialty Products Division, the Company has entered
into a sales and marketing arrangement with Perkin-Elmer with respect to such
products and its reliant in par on the efforts of Perkin-Elmer to promote these
products. In order to market the products being developed by it directly, the
Company will be required to develop a substantial marketing staff and sales
force with technical expertise and with supporting distribution capability.
There can be no assurance that the Company will be able to build such a
marketing staff or sales force, that the cost of establishing such a marketing
staff or sales force will be justifiable in light of any product revenues or
that the Company's direct sales and marketing efforts will be successful. In
addition, if the Company succeeds in bringing one or more products to market, it
may compete with other companies that currently have extensive and well-funded
marketing and sales operations. There can be no assurance that the Company's
marketing and sales efforts would enable it to compete successfully against such
other companies. To the extent the Company enters into co-marketing or other
licensing arrangements, any revenues received by the Company will be dependent
in part on the efforts of third parties and there can be no assurance that such
efforts will be successful. See "Item 1. Business -- Marketing Strategy."
No assurance of Market Acceptance
Pharmaceutical products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years. There can be no assurance that, if approved for marketing, such
products will achieve market acceptance. The degree of market acceptance will
depend upon a number of factors, including the receipt of regulatory approvals,
the establishment and demonstration in the medical community of the clinical
efficacy and safety of the Company's products and their potential advantages
over existing treatment methods and reimbursement policies of government and
third-party payors. There is no assurance that physicians, patients, payors or
the medical community in general will accept or utilize any products that may be
developed by the Company.
Product Liability Exposure and Insurance
The use of any of the Company's potential products in clinical trials and
the commercial sale of any products, including the products being developed by
it and the DNA products and reagents manufactured and sold on a custom contract
basis by the Hybridon Specialty Products Division, may expose the Company to
liability claims. These claims might be made directly by consumers, health care
providers or by pharmaceutical and biotechnology companies or others selling
such products. Hybridon has product liability insurance coverage, and such
coverage is subject to various deductibles. Such coverage is becoming
increasingly expensive, and no assurance can be given that the Company will be
able to maintain or obtain such insurance at reasonable cost or in sufficient
amounts to protect the Company against losses due to liability claims that could
have a material adverse effect on the Company.
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Hazardous Materials
The Company's research and development and manufacturing activities
involves the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could have a material adverse
effect on the Company.
Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement
The Company's ability to commercialize its pharmaceutical products
successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of such products and related treatment are
obtained from government authorities, private health insurers and other
organizations, such as health maintenance organization ("HMO's"). Third-party
payors are increasingly challenging the prices charged for medical products and
services. Also the trend towards managed health care in the U.S. and the
concurrent growth of organizations such as HMO's, which could control or
significantly influence purchase of health care services and products, as well
as legislative proposals to reduce government insurance programs, may all result
in lower prices for the Company's products. The cost containment measures that
health care providers are instituting could affect the Company's ability to sell
its products and may have a material adverse effect on the Company.
Uncertainty of Health Care Reform Measures
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) have proposed or are reportedly
considering proposing a variety of reforms to the health care systems in the
U.S. and abroad. The Company cannot predict what health care reform legislation,
if any, will be enacted in the U.S. or elsewhere. Significant changes in the
health care system in the U.S. or elsewhere are likely to have a substantial
impact over time on the manner in which the Company conducts its business. Such
changes could have a material adverse effect on the Company. The existence of
pending health care reform proposals could have a material adverse effect on the
Company's ability to raise capital. Furthermore, the Company's ability to
commercialize its potential products may be adversely affected to the extent
that such proposals have a material adverse effect on the business, financial
condition and profitability of other companies that are prospective corporate
partners with respect to certain of the Company's proposed products.
Attraction and Retention of Key Employees and Scientific Collaborators
The Company is highly dependent on the principal members of its management
and scientific staff, including E. Andrews Grinstead, III, the Company's
Chairman of the Board, President and Chief Executive Officer, and Sudhir
Agrawal, The Company's Senior Vice President of Discovery and Chief Scientific
Officer, the loss of whose services could have a material adverse effect on the
Company. Furthermore, recruiting and retaining qualified scientific personnel to
perform research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain scientific personnel on acceptable terms given the
competition for experienced scientists among numerous pharmaceutical,
biotechnology and health care companies, universities and non-profit research
institutions.
The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as clinical testing, governmental
approvals, production and marketing, are expected to require the addition of new
management personnel and the development of additional expertise by
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existing management personnel. The failure to acquire such services or to
develop such expertise could have a material adverse effect on the Company.
The Company's success will depend in part on its continued ability to
develop and maintain relationships with independent researchers and leading
academic and research institutions. The competition for such relationships is
intense, and there can be no assurance that the Company will be able to develop
and maintain such relationships on acceptable terms. The Company has entered
into a number of such collaborative relationships relating to specific disease
targets and other research activities in order to augment its internal research
capabilities and to obtain access to the specialized knowledge or expertise of
its collaborative partners. The loss of any such collaborative relationship
could have an adverse effect on the Company's ability to conduct research and
development in the area targeted by such collaboration. See "Item 1. Business -
- - Hybridon Drug Development and Discovery Programs" and "- - Academic and
Research Collaborations."
Concentration of Ownership by Directors and Executive Officer
The Company's directors and executive officers and their affiliates
beneficially own approximately 18.89% of the Company's outstanding Common Stock
(including 4,217,857 shares issuable upon exercise of outstanding warrants and
options held by the Company's directors and executive officers and their
affiliates which are exercisable within the 60-day period following February 28,
1997). As a result, these stockholders, if acting together, may have the ability
to influence the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
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