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HALE AND DORR LLP
Draft of 3/27/98
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1997
COMMISSION FILE NO. 0-27352
HYBRIDON, INC.
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(Exact name of registrant as specified in its charter)
Delaware 3072298
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
620 Memorial Drive, Cambridge, Massachusetts 02139
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 528-7000
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
2
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 13, 1998, the aggregate market value of voting Common Stock
held by nonaffiliates of the registrant was $9,066,247, based on the last
reported sale price of the registrant's Common Stock on the Nasdaq OTC Bulletin
Board on March 13, 1998. There were 5,061,650 shares of Common Stock outstanding
as of March 13, 1998.
Documents Incorporated by Reference
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Part of Form 10-K
Document into which incorporated
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Portions of the Registrant's Proxy Statement Items 10, 11, 12 and 13
with respect to the Annual Meeting of of Part III
Stockholders to be held on June 15, 1998
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PART I
ITEM 1. BUSINESS.
OVERVIEW
General
Hybridon, Inc. (the "Company"), established in 1989, is a leader in the
discovery and development of novel genetic medicines based on antisense
technology. Antisense technology involves the use of synthetic segments of DNA
(oligonucleotides) to interact at the genetic level with target messenger RNA,
which codes for the production of proteins. In contrast to traditional drugs,
which are designed to interact with protein molecules associated with diseases,
antisense drugs work at the genetic level to interrupt the process by which
disease-causing proteins are produced. The Company believes that drugs based on
antisense technology may have broader applicability, greater efficacy and fewer
side effects than conventional drugs because antisense compounds are designed to
intervene early in the disease process at the genetic level and in highly
specific fashion.
The Company's efforts in the antisense field are based on an integrated
antisense technology platform combining patented and proprietary medicinal
chemistries, synthetic DNA manufacturing technology and analytical processes.
The Company's strategy is to leverage this technology platform by applying its
oligonucleotides against a range of genetic targets associated with major
diseases, by manufacturing oligonucleotides for its own internal use and on a
custom contract basis for sale to third parties and by entering into
collaborations with large pharmaceutical company partners for the development
and commercialization of oligonucleotide drugs directed against these genetic
targets.
The Company is focusing its efforts on drug development programs
involving second-generation antisense compounds based on the Company's
proprietary second-generation mixed backbone chemistries. The Company believes
that antisense compounds based on second-generation chemistries will demonstrate
a range of favorable pharmaceutical attributes and provide flexibility in
addressing many biological targets. In particular, the Company believes that
these advanced chemistries provide the potential for enhanced metabolic
stability, which may result in less frequent dosing and therefore lower costs
per treatment, as well as the potential for oral administration. The Company has
three compounds in clinical development (one with two formulations via different
routes of administration) and several other compounds in advanced preclinical
development. The compounds in the clinical phase of drug development are:
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- - GEM 132 for the treatment of systemic cytomegalovirus ("CMV")
infections and retinitis, which is now in Phase I/II clinical trials in
the U.S. and Canada. The Company believes these clinical trials are the
first clinical trials involving administration of a second-generation
chemistry oligonucleotide into humans;
- - GEM 92 for the treatment of HIV infection and AIDS, which has completed
a pilot Phase I clinical study in Europe;
- - GEM 231 for the treatment of a variety of cancers (gene target is
protein kinase A), which is currently in Phase I clinical trials in
patients with solid tumors who are no longer benefited by other
treatments.
The Company's compounds in advanced preclinical development include a
series of antisense oligonucleotides with potential to down regulate the
production of vascular endothelial growth factor ("VEGF"), which has been
implicated in diseases of the retina (e.g., diabetic retinopathy; age related
macular degeneration) related to the abnormal formation of new blood vessels in
the eye. The Company is evaluating other antisense compounds targeting VEGF as
potential therapies for solid tumors, rheumatoid arthritis and psoriasis.
An important part of the Company's business strategy is to enter into
research and development collaborations, licensing agreements and other
strategic alliances with third parties, primarily biotechnology and
pharmaceutical corporations, for the development and commercialization of its
products and to engage in spin-outs of certain technology of the Company to
minority-owned subsidiaries in order to obtain alternative financing for such
technology. The Company is a party to a corporate collaboration with G.D. Searle
& Co. ("Searle"), a subsidiary of Monsanto Company, in the field of
inflammation/immunomodulation. In addition, the Company has spun-out certain
advanced chemistry compounds based on proprietary genetic targets with respect
to DNA methyltransferase to a Quebec company, MethylGene Inc. ("MethylGene") in
exchange for a minority equity interest in MethylGene.
The Company's plan is to seek corporate collaborations with respect to
each of its compounds in development. The Company generally does not anticipate
proceeding with any of its current clinical programs beyond such time as data
from Phase II trials becomes available, or with any other drug development
programs beyond their current stages of development, without a commitment from a
corporate collaborator. The Company is also currently considering the
possibility of a spin-out of its hepatitis B and human papilloma virus ("HPV")
programs to a minority-owned subsidiary.
In 1996, the Company formed its Hybridon Specialty Products Division
(the "HSP Division") to manufacture highly purified oligonucleotide compounds
both for the Company's internal use and on a custom contract basis for sale to
third parties,
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including the Company's collaborative partners. The Company is manufacturing
oligonucleotides in compliance with current good manufacturing practices ("GMP")
at its 36,000 square foot leased manufacturing facility in Milford,
Massachusetts. The HSP Division first began production of oligonucleotide
compounds for sale to third parties in June 1996 and had revenues of
approximately $1.1 million in 1996 and approximately $1.9 million in 1997. The
Company is in discussions regarding a possible joint venture with respect to the
HSP Division, which the Company believes would enable it to maximize the
potential for third party manufacturing by the HSP Division, while ensuring for
the Company and its collaborators a source of oligonucleotides. However, there
can be no assurance that the Company will enter into any joint venture with
respect to the HSP Division or that the terms of any joint venture will be as
anticipated by the Company.
1997 Restructuring and Certain Other Developments
On April 2, 1997, the Company issued $50.0 million of 9% Convertible
Subordinated Notes (the 1997 "9% Notes") with a maturity date of April 1, 2004.
Under the terms of the 1997 9% Notes, the Company is required to make semiannual
interest payments on the outstanding principal balance of the 1997 9% Notes on
April 1 and October 1 of each year during which the 1997 9% Notes are
outstanding. The Company made the first interest payment of $2.3 million at the
beginning of October 1997. In connection with its ongoing financing effort
(described below), holders of the 1997 9% Notes in the aggregate original
principal amount of approximately $42.0 million have consented to the deferral
by the Company of the interest payment due April 1, 1998 until October 1, 1998.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 1997 9% Notes."
In July 1997, the Company terminated 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 this 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 decided to stop the
development of GEM 91 and refocus its efforts on its other most advanced drug
development programs described above.
During the second half of 1997, the Company implemented a restructuring
plan to reduce expenditures on a phased basis over the balance of 1997 and into
the first half of 1998 in an effort to conserve its cash resources. As part of
this restructuring plan, in addition to terminating the clinical development of
GEM 91, the Company reduced or suspended selected programs unrelated to its core
advanced chemistry antisense drug development programs, including its ribozyme
program. In
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addition, the Company terminated the employment of 84 employees at its Cambridge
and Milford, Massachusetts facilities in the second half of 1997 and
substantially reduced operations at its Paris, France office and terminated ten
employees at that location in August 1997. As part of this restructuring, the
Company reviewed all outside testing, public relations, travel and entertainment
and consulting arrangements and terminated or renegotiated various of these
arrangements.
As part of this restructuring, the Company has subleased one facility
in Cambridge, Massachusetts and a substantial portion of its corporate
headquarters located at 620 Memorial Drive, Cambridge, Massachusetts. Effective
March 31, 1998, the Company has also terminated the lease for its office in
Paris, France.
This restructuring of the Company, together with employee attrition,
resulted in a reduction in the number of the Company's employees from 213 at
June 30, 1997 to 102 at December 31, 1997 and 78 at March 30, 1998 and the
subleasing of an aggregate of approximately 61,000 square feet of space. As a
result, the Company has significantly scaled back the level and scope of its
operations since mid-1997. However, because of the significant costs involved in
terminating employees, subleasing its facilities, terminating research
contracts, suspending or cancelling research programs and substantially reducing
operations, the Company did not begin to experience a material decrease in its
expenditure rate until the fourth quarter of 1997. The Company is continuing to
explore opportunities to reduce operating expenses in an effort to conserve its
cash resources.
In September 1997, the Company received notification from F.
Hoffmann-La Roche Ltd. ("Roche") that Roche had decided not to pursue further
its antisense collaboration with the Company and was terminating the
collaboration effective February 28, 1998. As part of this termination, Roche
has agreed to assign its patent rights to the HPV and hepatitis C programs
covered by such collaboration to the Company, subject to the execution of
definitive documentation.
In December 1997, because of the Company's failure to satisfy the
minimum net tangible assets criteria of the Nasdaq National Market, the
Company's Common Stock was delisted from the Nasdaq National Market and began
being quoted on the Nasdaq OTC Bulletin Board. In addition, in December 1997,
the Company effected a one-for-five reverse stock split of its Common Stock.
All per share Common Stock information contained herein (other than in the
Exhibit Index) has been adjusted to reflect this reverse split.
Ongoing Financing Effort
In January 1998, the Company commenced a private offering of up to 400
units, each unit consisting of a Note Due 2007 in the original principal
amount of $100,000 and warrants to purchase Common Stock. The Company is
offering the units at a price of $100,000 per unit. As of March 30, 1998, the
Company had received approximately $4.8 million in gross proceeds from the sale
of units. The Company has very limited cash resources and substantial
obligations to lenders,
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equipment lessors, real estate landlords and trade creditors. The Company's
ability to continue operations in 1998 depends on its success in raising new
funds in this financing or otherwise. If the Company is unable to obtain
substantial additional new funding in April 1998, it will be required to
terminate its operations or seek relief under applicable bankruptcy laws by the
end of April 1998. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- 1998 Financing Activities."
TECHNOLOGY OVERVIEW
Introduction
Proteins play a central role in virtually every aspect of human
metabolism. Almost all human diseases are the result of inappropriate protein
production or performance. Traditional drugs are designed to interact with
protein molecules that support or create diseases. Antisense drugs work at the
genetic level to interrupt the process by which disease-causing proteins are
produced.
The information necessary to produce a specific protein is encoded in a
specific gene. The information required to produce all human proteins is
contained in the human genome and its collection of more than 100,000 genes.
Each gene is made up of DNA, which is a duplex of entwined strands -- a "double
helix." In each duplex, the building blocks of DNA, called nucleotides, are
bound or "paired" with complementary nucleotides on the other strand. The
precise sequence of a nucleotide chain that is the blueprint for the information
that is used during protein production is called the "sense" sequence. The
sequence of a nucleotide chain that is precisely complementary to a given sense
sequence is called its "antisense" sequence.
Protein synthesis or expression typically involves a two-phase process.
First, the information contained in the gene is transcribed from the sense
strand of DNA into one or more molecules of messenger RNA. Second, the
information encoded in the messenger RNA is translated into the sequence of
amino acids that comprise the protein. The information contained in a single
gene is often repeatedly transcribed into multiple copies of messenger RNA,
which in turn are repeatedly translated, giving rise to multiple copies of the
same protein.
Conventional Drugs
Most drugs are chemicals designed to induce or inhibit the function of
a target molecule, typically a protein, with as few unwanted side effects as
possible. However, conventional drugs are not available for the treatment of
many diseases because of their relatively low level of selectivity. The
selectivity of conventional drugs is usually determined by only a few, generally
two or three, points of interaction at the binding site of the target molecule.
Frequently, sites on other non-
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target molecules resemble the target binding site sufficiently to permit the
conventional drug to bind to some degree. This lack of selectivity may result in
decreased efficacy, unwanted side effects or a need to administer the drug in
less than optimal dosages due to toxicity concerns. In addition, the development
of conventional drugs is generally time consuming and expensive, as thousands of
compounds must be synthesized to find one with the right efficacy and side
effect profile.
Gene Expression Modulation
In contrast to conventional drugs, which usually interact with disease-
associated proteins after they have been produced, gene expression modulation
technology is intended to regulate the production of disease-associated
proteins, thus targeting an earlier biochemical process. Advances in genomic
science have identified many targets for gene expression modulation products.
Once a gene that codes for a disease-associated protein is identified, an
oligonucleotide based on the complementary sequence for the selected site can be
synthesized and its pharmaceutical properties optimized by chemical
modification. These chemically-modified oligonucleotides may be composed of
DNA, RNA or a combination of the two.
Chemically-modified oligonucleotides can be designed to attack a
disease at the genetic level by binding to messenger RNA or DNA to prevent
production of disease-associated proteins. Binding to messenger RNA generally is
used in the "antisense" approach to gene expression modulation, while binding to
the DNA generally is used in the "triplex" approach to gene expression
modulation.
In the antisense approach to gene expression modulation,
chemically-modified oligonucleotides, which consist of the antisense sequence to
a selected region on a target messenger RNA, are used to inhibit the synthesis
of a particular protein. Because the sequence of nucleic acid bases of a
chemically-modified antisense oligonucleotide is complementary to its target
sequence on a messenger RNA, the antisense oligonucleotide forms a large number
of bonds at the target site, typically between 15 and 30, practically assuring
that the oligonucleotide will hybridize (bind) tightly to the selected type of
messenger RNA. Since a single messenger RNA may be translated repeatedly into a
protein, a single chemically-modified antisense oligonucleotide may inhibit the
synthesis of many copies of a protein. Moreover, in vitro tests have shown that
certain chemically-modified antisense oligonucleotides form complexes with their
target messenger RNAs. These complexes activate RNaseH, a cellular enzyme, in a
manner that destroys the messenger RNA to which the oligonucleotide is bound,
without destroying the oligonucleotide itself, thus freeing the oligonucleotide
to bind with another identical messenger RNA.
The triplex approach involves the interaction of oligonucleotides
directly with the appropriate region of the double-stranded DNA comprising the
target gene, thus
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resulting in a triplex structure and physically interfering with the
transcription of DNA into messenger RNA. The triplex approach typically does not
involve the destruction of the region of DNA to which the oligonucleotides are
bound, in contrast with the effects of antisense oligonucleotides on messenger
RNA. Constraining factors to the triplex approach to date have been the
difficulty of obtaining access for oligonucleotides to the DNA, the relative
weakness of the bonding of the oligonucleotides with the DNA and concerns over
compounds that interact directly with the DNA genetic information.
HYBRIDON ANTISENSE TECHNOLOGY
Hybridon has developed an integrated antisense technology platform
based on proprietary medicinal chemistries, analytical chemistry and
manufacturing technology. The development of Hybridon's antisense chemistry has
been directed by Dr. Sudhir Agrawal, the Company's Chief Scientific Officer, and
builds on the pioneering work in the antisense field begun in the 1970s by Dr.
Paul C. Zamecnik, a founder and director of the Company and Chairman of its
Scientific Advisory Board, at the Massachusetts General Hospital ("MGH") and
continued by Dr. Zamecnik at the Worcester Foundation for Biomedical Research,
Inc., which has since merged into the University of Massachusetts (the
"Worcester Foundation").
Medicinal Chemistries. Hybridon's scientists have designed and
synthesized over 20 proprietary families of synthetic antisense oligonucleotide
chemistries. The Company believes that antisense compounds based on these
chemistries may demonstrate a range of favorable pharmaceutical attributes,
including: reduced side effects, increased duration of action, increased potency
and susceptibility to lower dosing, less frequent dosing, controlled release
formulation and alternative routes of administration, including oral
administration. Hybridon designed its first generation phosphorothioate
oligonucleotides to increase their resistance to enzymatic degradation and their
biological activity and to act catalytically by triggering RNase H. GEM 91 was
such a phosphorothioate-modified oligonucleotide. Hybridon has used the insights
gained by it in the human clinical trials of GEM 91 in the design of its more
advanced oligonucleotide chemistries.
Manufacturing Technology. The Company's expertise in the structure,
design and analysis of chemically-modified oligonucleotides has served as the
foundation of its manufacturing technology and know-how. The Company has
developed proprietary technology to increase the purity of oligonucleotide
products, enhance the efficiency of the production process and increase the
scale of production. In 1996, the Company completed development of two separate
commercial scale oligonucleotide synthesizers, one in an internal program and
one in a collaboration with Pharmacia Biotech, Inc. The synthesizer developed by
Hybridon is capable of producing advanced chemistry antisense oligonucleotides.
In addition, the Company has implemented proprietary purification processes,
which use water in place of chemical solvents, simplifying environmental
compliance and permitting purification of kilogram batches of
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oligonucleotides. The Company has also developed proprietary chemical synthesis
processes and novel reagents used in the synthesis process, which the Company
believes may further decrease the cost of production of its modified
oligonucleotides.
Proprietary Analytical Tools and Processes. The Company has established
proprietary analytical tools and processes that enable it to analyze
oligonucleotide compounds with greater speed and accuracy when compared to
traditional methods. Hybridon has developed a novel method of determining
antisense purity that is sensitive to a single DNA base difference; this method
is significantly more accurate than traditional chromatography methods. The
Company uses the information that it obtains with its proprietary analytical
tools and processes to improve production quality control, to comply with
regulatory requirements and to monitor the pharmacokinetic behavior of its
oligonucleotide compounds in preclinical studies and clinical trials.
HYBRIDON DRUG DEVELOPMENT AND DISCOVERY PROGRAMS
The Company is focusing its efforts on drug development programs
involving second-generation antisense compounds based on the Company's
proprietary mixed backbone chemistries as shown below. The Company's plan is to
seek corporate collaborations with respect to each of its compounds in
development. The Company generally does not anticipate proceeding with any of
its current clinical programs beyond such time as data from Phase II trials
becomes available, or with any of its other drug development programs described
below beyond their current stages of development, without a commitment from a
corporate collaborator.
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TARGET PRIMARY THERAPEUTIC STATUS(1)
INDICATION(S)
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CLINICAL PROGRAMS
Cytomegalovirus CMV Retinitis GEM 132 for Intravitreal
Injection - Phase I/II Clinical
Trial/Seeking Partner
CMV (Systemic) GEM 132 for Systemic Injection
- Phase I/II Clinical
Trial/Seeking Partner
HIV-1 HIV-1 Infection and AIDS GEM 92 - (Intravenous and
Oral Formulations) - Pilot
Phase I Clinical Trial/Seeking
Partner
Protein Kinase A Cancer GEM 231 - (Intravenous
Formulation) - Phase I Clinical
Trial/Seeking Partner
PRECLINICAL PROGRAMS
Vascular Endothelial Growth Retinopathies (e.g. macular GEM 220 - Preclinical/Seeking
Factor degeneration and diabetic Partner
retinopathy)
Cancer Angiogenesis Preclinical/Seeking Partner
Psoriasis Preclinical/Seeking Partner
Hepatitis C Virus Hepatitis; Liver Cancer Lead Compounds/Seeking
Partner(2)
Murine Double Minute-2 Cancer Research Compounds/Seeking
Partner
Amyloid Proteins Alzheimer's Research Compounds/Seeking
Partner
Human Papilloma Viruses Genital Warts Preclinical 2)(3)
Hepatitis B Virus Hepatitis; Liver Cancer Research Compounds (2)(3)
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUT
DNA Methyltransferase Cancer Preclinical/MethylGene(4)
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(1) Phase II clinical trials. The product is administered to a limited
patient population to (i) evaluate the effectiveness for specific
indications and (ii) identify possible short-term adverse effects and
safety risks.
Phase I clinical trials. The product is administered to a limited
number of healthy human subjects or patients and tested for
pharmacokinetics (absorption, metabolism, distribution and excretion),
pharmacologic action, dose response, safety and, if possible, early
evidence of effectiveness.
Pilot Phase I Study. The product is administered to a small number of
patients to assess safety, pharmacokinetics and other data on a
preliminary basis.
Preclinical: Compounds are undergoing additional testing and
alternative chemistries are being evaluated in biological assays and/or
appropriate animal models in order to assess efficacy, toxicology and
pharmacokinetics and to select particular chemistries with optimal
pharmaceutical attributes. If these procedures are completed
satisfactorily and other scientific and financial criteria are met, the
Company may initiate IND-enabling Good Laboratory Practices ("GLP")
studies and begin preparation of an IND application.
Lead Compounds: One or more antisense compounds have demonstrated
biological activity for a particular gene target in a specific and
relevant biological assay.
Research Compounds: Appropriate target gene(s) and sequence(s) are
being determined; antisense compounds are being synthesized and
screened for biological activity.
(2) Developed as part of the Company's collaboration with Roche, which was
terminated by Roche as of February 28, 1998. Roche has agreed to assign
all rights to these programs to the Company in connection with such
termination, subject to the execution of definitive documentation.
(3) The Company is currently considering the possibility of a spin-out of
its hepatitis B and HPV programs to a minority-owned subsidiary.
(4) Technology relating to target has been licensed to and is being
developed by MethylGene, a Canadian company co-founded by the Company
and in which the Company owns a minority interest. See "Item 1.
Business -- Financial Collaborations -- MethylGene Inc."
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CLINICAL PROGRAMS
Cytomegalovirus
CMV is a member of the herpes virus family which exists latently in
approximately 60% of the general U.S. population, and in approximately 90% of
the HIV/AIDS population. Because of their immunocompromised state, AIDS patients
often suffer from CMV infection. In this patient population, CMV may be
manifested as retinal, gastrointestinal, hepatic, pulmonary and/or neurological
disease, although in 75% of patients with CMV, CMV usually manifests itself as
retinal disease. CMV retinitis lesions progress rapidly and can result in
blindness if left untreated.
Prior to the advent of combination therapy including protease
inhibitors (a highly active anti-retroviral therapy ("HAART")), for AIDS,
approximately 15% of AIDS patients had active CMV disease and another 25% were
considered at risk. Because the introduction of HAART treatment has been
effective at delaying progression of AIDS, the introduction of HAART treatment
has reduced the incidence of new cases of CMV retinitis in AIDS patients by
about three-fold.
The Company believes that aggressive AIDS treatment will prolong the
time that patients are living with CMV retinitis. Between 1994 and 1996, the
mean time of survival of CMV patients increased from 12 to 18 months. The
Company expects such period to increase to 30 months by the end of 1998. As
patients live longer and with less evidence of disease, the Company believes
there is likely to be a marked decrease in tolerance of cumbersome dosing
regimens and adverse side-effects characteristic of present therapies.
Although the market for CMV drugs is relatively small, the Company
expects the market to grow due to (i) failures of HAART therapy and (ii) CMV
breakthrough during HAART therapy at CD4+ lymphocyte counts above 100. Failures
of HAART therapy may occur as a result of development of resistance, intolerance
and lack of compliance due to complex dosing regimens involving multiple
products. The Company believes that although HAART therapy is effective for a
limited period of time, the duration of HAART therapy is highly variable.
Several reports presented at the 1997 Interscience Conference on Antimicrobial
Agents and Chemotherapy suggest CMV reactivation in protease-experienced
patients at CD4+ lymphocyte counts greater than 100 and, in some cases, greater
than 200.
The Company is conducting clinical trials of GEM 132, its
second-generation antisense oligonucleotide for the treatment of CMV infection.
In these trials, the Company is studying two different routes of administration.
In an escalating dose, Phase I/II multicenter trial in the U.S. and Canada, in
which GEM 132 is
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administered by injection into the vitreous of the eye, the Company is studying
the safety and activity of GEM 132 in patients with CMV retinitis who are no
longer able to benefit from marketed therapies. In Phase I trials in normal
volunteers, the Company is administering a series of single and multiple dose
regimens, employing two-hour intravenous infusions of up to 150 mg/dose at
weekly intervals over four weeks. In Phase I/II studies involving patients
infected both with HIV and CMV, the Company is evaluating the effects of
multiple two-hour intravenous infusions, given at weekly or biweekly intervals,
on the quantities of CMV cultured from the semen as a measure of antiviral
activity. All doses studied to date in these clinical trials have been well
tolerated. The Company anticipates these trials will result in the
identification of one or more promising doses and a schedule of administration
for more extended evaluation in patients with CMV infection.
GEM 132 has demonstrated significant inhibition of the replication of
CMV in tissue culture assays. GEM 132 has demonstrated activity in cell culture
against both clinical isolates and viruses which have become resistant to
current therapies, such as ganciclovir. In addition, in cell culture studies,
GEM 132 has demonstrated significantly more potent anti-viral activity than the
two existing therapies against which it has been tested, ganciclovir and
foscarnet.
HIV-1 and AIDS
AIDS is caused by infection with HIV and leads to severe,
life-threatening impairment of the immune system. HIV causes immunosuppression
by attacking and destroying T-cells, which coordinate much of the network of
normal immune responses. HIV infection usually leads to AIDS, although
progression to symptomatic disease may take many years. The process of HIV
replication involves the integration of a DNA copy of the viral RNA into the
human genome, the transcription of the DNA copy into messenger RNA ("reverse
transcription") and the synthesis of viral proteins and copies of viral RNA for
packaging into new virus particles that may infect other cells.
As of June 30, 1996, approximately 548,100 cases of AIDS had been
reported to the U.S. Center for Disease Control and Prevention (CDC), and the
current population of surviving AIDS patients in the U.S. was estimated to be
approximately 200,000. As of June 30, 1996, AIDS was the second leading cause of
death in the U.S. for men between the ages of 25 and 44 and the third leading
cause of death in the U.S. for women between the ages of 25 and 44. In 1996, the
U.S. Public Health Service estimated that more than 1,000,000 other people in
the U.S. were infected with HIV. As of June 30, 1996, the World Health
Organization (the "WHO") reported that approximately 1,394,000 AIDS cases had
been reported worldwide, but it estimated that the actual total number of cases
was over 7,700,000. The WHO also estimated that, as of June 30, 1996,
approximately 21,800,000 individuals were infected with HIV/AIDS worldwide.
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A growing number of drugs for the treatment of HIV infection and AIDS
have received marketing approval from the FDA, and from other regulatory
authorities. All of those approved drugs are either inhibitors of the reverse
transcriptase enzyme or the protease enzyme of HIV-1. Although each of these
drugs has demonstrated some evidence of antiviral activity as a monotherapy by
reducing the quantities of virus in the plasma, any studies which have
demonstrated prolonged benefit on the surrogate markers (viral RNA and CD4+
lymphocyte counts) and sustained clinical remission have involved combinations
of these agents.
The standard HAART therapy involves treatment with a protease inhibitor
in conjunction with two inhibitors of reverse transcriptase. While use of these
regimens has been associated with decreased mortality rates and important
improvements in the quality of life for patients with AIDS, there are increasing
reports of failure of HAART therapy to sustain the initially-achieved viral
suppression and clinical benefit. The Company believes that these reports
underscore the need for new antiretroviral therapies, preferably active against
targets other than protease or reverse transcriptase.
The Company recently completed a pilot Phase I clinical study in Europe
of GEM 92, the Company's second-generation compound for the treatment of HIV-1
infection and AIDS. This study was designed to explore the safety and to provide
information on the pharmacokinetics of GEM 92 after oral and intravenous dosing.
All doses administered in the pilot study were well tolerated.
The Company is developing GEM 92 using insights gained in the
development and the clinical trials of GEM 91, which involved over 250
volunteers and patients with HIV-1 infection. The Company elected to discontinue
further development of GEM 91 in July 1997 based on preliminary data from a
Phase II clinical trial in which three of the nine subjects treated had
experienced decreases in platelet counts that required dose interruption. In
addition, a review of the virology data showed inconsistent responses to the
treatment and failed to confirm the decrease in cellular viremia observed in an
earlier trial.
GEM 92 differs from GEM 91 in that GEM 92 is based on the Company's
second-generation chemistries, which the Company believes provide the potential
for enhanced metabolic stability compared to the Company's first-generation
compounds. The Company believes that this improved stability may make it
possible to administer lower doses at less frequent intervals and may make the
oral route of administration feasible.
Protein Kinase A
Protein Kinase A ("PKA") is a protein that has been shown to be
expressed in human cancer cell lines and in primary tumors after cells have been
transformed with
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various oncogenes or after stimulation of cell growth with cell growth
stimulating factors. Based on cell culture studies, the Company believes that
overexpression of PKA may be associated with colon, breast, ovarian and lung
cancer. Hybridon has identified specific sequences on the PKA gene as targets
for chemically-modified antisense oligonucleotides and has synthesized an
advanced chemically-modified antisense compound, GEM 231, that has demonstrated
inhibition of the expression of PKA and tumor growth in animal model studies. In
these studies, repeated doses of Hybridon's oligonucleotide compound
administered either intraperitoneally or orally resulted in reduction of PKA,
associated with suppression of tumor growth. GEM 231 has also demonstrated in
cell culture tests and in an animal xenograft model that a combination of GEM
231 with cytotoxic drugs or other classes of anticancer agents may enhance the
antitumor effect of GEM 231.
In January 1998, the Company initiated a Phase I dose-escalation trial
of GEM 231 in patients with refractory solid tumors. In this safety trial, GEM
231 is being administered by two-hour intravenous infusions given twice a week.
If treatment is well tolerated and if there is no progression of the tumor at
eight weeks, treatment can be continued until there is toxicity or until there
is clearly no effect on the tumor. This trial is designed to establish a maximum
tolerated dose for GEM 231 when used as a single agent. The study is also
intended to assist the Company in selecting one or more doses to evaluate more
extensively in Phase II trials.
PRECLINICAL PROGRAMS
Vascular Endothelial Growth Factor. Vascular Endothelial Growth Factor
("VEGF") is a growth factor that stimulates angiogenesis, the process of new
blood vessel formation. Angiogenesis plays a major role in wound healing and
organ regeneration and also is involved in certain pathological processes, such
as tumor growth and metastasis. VEGF has been shown to be overexpressed in
developing tumors and is believed to be a key factor in providing new blood
supply to feed developing tumors. Hybridon has identified specific sequences on
the VEGF messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized an advanced chemically-modified antisense
oligonucleotide, GEM 220, that has inhibited the expression of the VEGF gene in
in vitro and tissue culture assays.
Dermatology. VEGF, in association with its role in angiogenesis, has
recently been implicated in psoriasis, which currently afflicts more than
6,000,000 people in the U.S. with between 150,000 and 260,000 new cases in the
U.S. each year. Hybridon has identified specific sequences on the VEGF messenger
RNA as targets for chemically-modified antisense oligonucleotides and has
synthesized chemically- modified antisense oligonucleotides that have inhibited
the expression of the VEGF gene in in vitro and tissue culture assays. The
Company has explored optimal forms of topical delivery of oligonucleotides to
the basal layers of the epidermis, where
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VEGF has been found to be overexpressed in psoriasis.
Ophthalmology. Overexpression of VEGF has also been implicated in four
major causes of blindness: late stage, age-related macular degeneration, which
afflicts approximately 500,000 people in the U.S.; proliferative diabetic
retinopathy, the major cause of blindness in diabetics which affects
approximately 250,000 people in the U.S.; central retinal vein occlusion, which
afflicts approximately 200,000 people in the U.S.; and retinopathy of
prematurity, which affects approximately 10,000 premature newborns annually in
the U.S. Hybridon has identified specific sequences on the VEGF messenger RNA as
targets for chemically-modified antisense oligonucleotides and is synthesizing
chemically-modified antisense oligonucleotides designed to inhibit the
expression of the VEGF gene in retinal cells. These oligonucleotides have been
shown in an animal model of retinopathy to inhibit vascular proliferation and
prevent aberrant angiogenesis in the retinas of mice in a model for retinopathy
of prematurity. Hybridon's antisense oligonucleotides have also been shown to
inhibit neovascularization in a primate animal model of neovascularization.
Oncology. Angiogenesis is a key prerequisite for solid tumor growth and
may also constitute an early event in tumorigenesis. In order for tumor cell
masses to grow beyond a few millimeters in size, additional vascularization is
needed. In fact, tumor growth will slow or stop in direct proportion to blood
supply.
VEGF has been shown to be a tumor angiogenesis factor, contributing to
new vessel growth. Several studies in experimental animal model systems have
shown that inhibition of VEGF will inhibit tumor vascularization. In addition,
VEGF has been shown in in vitro studies to provide an autocrine growth stimulus
for some tumor cell lines.
Hepatitis C Virus. There are approximately 3,500,000 people in the U.S.
carrying the hepatitis C virus, and approximately 150,000 individuals in the
U.S. become infected with hepatitis C each year. Approximately 80% of those who
contract the virus each year develop chronic hepatitis C infections and
approximately 30,000 cases each year ultimately result in cirrhosis of the
liver. Chronic infection due to hepatitis C is a significant disease in Japan
and other Pacific Rim countries that has been linked to the development of
primary liver cancer. Pursuant to its collaboration with Roche, Hybridon
identified through joint research with Roche specific sequences on the messenger
RNA as targets for chemically modified antisense oligonucleotides and
synthesized a lead compound that inhibited hepatitis C viral gene expression in
in vitro and tissue culture assays. In connection with the termination by Roche
of the
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Company's collaboration with Roche, Roche has agreed to assign all of its rights
to the lead compound to the Company, subject to the execution of definitive
documentation.
Murine Double Minute-2. MDM-2 is a human oncogene which has been shown
in in vitro studies to encode a protein that binds to and inactivates tumor
suppressor genes p53 and Rb. Recent studies by a number of academic institutions
have suggested that overexpression of the MDM-2 gene is present in approximately
70% of all breast cancers and correlates with increased malignancy as well as
drug resistance. The Company, in collaboration with two academic institutions,
has identified specific sequences on the messenger RNA as targets for
chemically-modified antisense oligonucleotides and have synthesized
chemically-modified antisense oligonucleotides that inhibit MDM-2 production in
tissue culture assays. Preliminary studies are being conducted in animal models.
The Company is in the process of seeking to obtain exclusive rights to these
sequences from its academic collaborators.
Amyloid Proteins. Alzheimer's disease is a neurodegenerative disease
which is the most common cause of dementia in the elderly. It is estimated to
affect approximately 4,000,000 individuals in the U.S. The presence of amyloid
precursor protein ("APP") in the brain at abnormal sites and in abnormal amounts
has been reported to be associated with Alzheimer's disease. Hybridon has
identified a specific sequence on the messenger RNA as a target for
chemically-modified antisense oligonucleotides and has synthesized
chemically-modified antisense oligonucleotides that inhibit APP production in
tissue culture assays.
Human Papilloma Viruses. Human papilloma viruses are associated with a
variety of warts, including benign genital warts which, if untreated, can lead
to cervical cancer. Each year, condyloma acuminata (genital warts) are diagnosed
in approximately 750,000 patients in the U.S. and accounts for more than
2,000,000 visits to health care providers in the U.S. HPV infections are the
most common sexually transmitted diseases in the world today, with an estimated
11 to 46 percent of sexually active women having DNA evidence of HPV infection.
Traditional therapies include wart removal through cryotherapy, laser therapy
or excisional surgery; topical application of formulations of podophyllotoxin,
trichloroacetic acid and salicylic acid or 5-flurouracil, or alternatively,
direct injections of interferon into the wart. While existing therapies may help
eliminate the warts, none of them eradicates the virus. Consequently, recurrence
of genital warts, as well as transmission of the virus, remains a significant
problem.
Pursuant to its collaboration with Roche, Hybridon identified through
joint research with Roche specific sequences on the messenger RNA of the
papilloma virus as targets for chemically-modified antisense oligonucleotides
and synthesized a lead compound that inhibited human papilloma virus gene
expression in tissue culture assays. This compound also has been shown in an
animal model to be active in preventing wart-like tissue proliferation. In
connection with the termination by
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Roche of the collaboration with Roche, Roche has agreed to assign all of its
rights to the lead compound to the Company, subject to the execution of
definitive documentation. The Company is currently considering the possibility
of a spin-out of this program.
Hepatitis B Virus. Hepatitis B is a major health problem throughout the
world, with endemic infection in some less developed countries. Hepatitis B
infections can lead to liver cirrhosis and cancer of the liver. The WHO
estimates there are more than 1,000,000 new cases of hepatitis B infection
annually in developed countries and 350 million chronically infected carriers
worldwide. Based on data from the CDC, an estimated 30 percent of these will
progress to symptomatic acute infections while a total of 10 to 15 percent will
become chronic hepatitis B carriers at risk of chronic liver disease and
progression to cirrhosis or hepatocellular carcinoma. The Company has acquired
an established cell-base assay for selecting compounds targeted to hepatitis B
as well as several active oligonucleotide compounds that the Company plans to
evaluate as potential pre-clinical candidates. Approximately 1,200,000
individuals in the U.S. carry the hepatitis B virus. There are an estimated
200,000 to 300,000 new hepatitis B infections in the U.S. each year. Pursuant to
its collaboration with Roche, Hybridon identified through joint research with
Roche specific sequences on the messenger RNA as targets for chemically-modified
antisense oligonucleotides and synthesized chemically-modified antisense
oligonucleotides that inhibit the expression of hepatitis B virus in cell
cultures. Although Roche determined not to pursue this program, the Company is
continuing its development efforts. All rights relating to the Roche- sponsored
research with respect to hepatitis B reverted to the Company when Roche
determined not to pursue the program. The Company is currently considering the
possibility of a spin-out of this program to a minority owned subsidiary.
DRUG DEVELOPMENT PROGRAMS IN HYBRIDON SPINOUT
DNA Methyltransferase. DNA methyltransferase is a regulatory protein
that has been implicated in the processes of cell growth and differentiation and
has been shown to be overexpressed in some tumors, such as small cell lung
cancer, colon cancer and breast cancer. Hybridon has identified specific
sequences on the messenger RNA as targets for chemically-modified antisense
oligonucleotides and has synthesized chemically-modified antisense
oligonucleotides that alter DNA methylation of cultured human cancer cells and
inhibit the ability of such cells to grow in cell culture and their ability to
form tumors in mice. The Company has licensed the technology relating to the
development of this compound to MethylGene, which is currently developing this
technology. See "Item 1. Business -- Financial Collaborations -- MethylGene
Inc."
CORPORATE COLLABORATIONS
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An important part of Hybridon's business strategy is to enter into
research and development collaborations, licensing agreements or other strategic
alliances with third parties, primarily biotechnology and pharmaceutical
corporations, for the development and commercialization of certain products. As
of the date hereof, the Company is a party to corporate collaborations with
Searle and Medtronic, all as summarized below. The Company intends to retain
manufacturing rights for many of the products, if any, it may license pursuant
to these collaborations.
G.D. Searle & Co.
In January 1996, the Company and Searle entered into a collaboration
relating to research and development of therapeutic antisense compounds directed
at up to eight molecular targets in the field of inflammation/immunomodulation
(the "Searle Field").
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the Searle
Field designated by Searle. In this project, Searle is funding certain research
and development efforts by the Company, and each of Searle and the Company have
committed certain of its own personnel to the collaboration. The initial phase
of research and development activities relating to the initial target will be
conducted through the earlier of (i) the achievement of certain product
candidate milestones and (ii) 36 months after commencement of the collaboration,
subject to early termination by Searle. The parties may extend the initial
collaboration by mutual agreement, including agreement as to additional research
funding by Searle.
In addition, under the collaboration Searle has the right, at its
option, to designate up to six additional molecular targets in the Searle Field
(the "Additional Targets") for collaborative research and development with
Hybridon on terms substantially consistent with the terms of the collaboration
applicable to the initial molecular target. This right is exercisable by Searle
with respect to each of the Additional Targets upon the payment by Searle of
certain research payments (beyond the project specific payments relating to the
particular Additional Target) and the purchase of additional Common Stock from
the Company by Searle (at the then fair market value). The aggregate amount to
be paid by Searle for such research payments and equity investment in order to
designate each of the Additional Targets is $10,000,000 per Additional Target.
In the event that Searle designates all of the Additional Targets, the aggregate
amount to be paid by Searle for research payments will be $24,000,000 and the
aggregate amount to be paid by Searle in equity investment will be $36,000,000.
If Searle has not designated all of the Additional Targets by the time it
advances the product candidate for the initial molecular target to certain
stages of preclinical development, Searle will be required to purchase an
additional $10,000,000 of Common Stock (at the then fair market value) on
specified
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dates in order to maintain its right to designate any of the Additional Targets
that it has not yet designated. The payment for any such Common Stock will be
creditable against the equity investment portion of the payments to be made by
Searle with respect to the designation of any of the Additional Targets that
Searle has not yet designated.
Searle also has the right, at its option, to designate a molecular
target in the Searle Field to develop a therapeutic agent for cancer that acts
through immunomodulation (the "Searle Cancer Target") for collaborative research
and development with the Company on terms substantially consistent with the
terms of the collaboration applicable to the initial molecular target. At the
time of such designation, Searle will be required to make certain research
payments to the Company and purchase additional Common Stock from the Company
(at the then fair market value). The aggregate amount to be paid by Searle for
such research payments and equity investment will range from $14,000,000
(comprised of $7,000,000 in research payments and $7,000,000 in equity
investment) if the Searle Cancer Target is designated in 1998 to $26,000,000
(comprised of $21,000,000 in research payments and $5,000,000 in equity
investment) if the Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting
from the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests and
clinical trials of the product candidate and will be responsible for regulatory
approvals for and marketing of the product. In certain instances and for
specified periods of time, the Company has agreed to perform research and
development work in the Searle Field exclusively with Searle. In addition, as to
each product candidate, the Company will be entitled to milestone payments from
Searle totalling up to an aggregate of $10,000,000 upon the achievement of
certain development benchmarks. The Company also will be entitled to royalties
from net sales of products resulting from the collaboration. Subject to
satisfying certain conditions relating to its manufacturing capacities and
capabilities, Hybridon will retain manufacturing rights, and Searle will be
required to purchase its requirements of products from the Company on an
exclusive basis at specified transfer prices. Upon a change in control of the
Company, Searle would have the right to terminate the Company's manufacturing
rights, although the royalty payable in respect of net sales would be increased
in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional Targets
or in certain other instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities,
Searle will have the right, exercisable in its sole discretion, to require the
Company to form a joint venture with Searle for the development of products in
the Searle Field (other than products relating to molecular targets that have
already been designated by Searle) to which each party will contribute
$50,000,000 in cash, although the Company's cash contribution
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would be reduced by the value of the technology and other rights contributed by
Hybridon to the joint venture. The Company and Searle would each own 50% of the
joint venture, although Searle's ownership interest in the joint venture would
increase based upon a formula to up to a maximum of 75% if the joint venture is
established in certain instances relating to the Company's failure to satisfy
certain requirements relating to its manufacturing capacities and capabilities.
Under the collaboration, Searle also purchased 200,000 shares of
Common Stock in the Company's initial public offering.
Medtronic, Inc.
In May 1994, the Company and Medtronic entered into a collaboration
involving the testing of a drug delivery device for use in delivering Hybridon's
antisense oligonucleotides for the treatment of Alzheimer's disease. See "Item
1. Business -- Hybridon Drug Development and Discovery Programs -- Preclinical
Programs -- Amyloid Proteins." Hybridon will be responsible for the development
of, and hold all rights to, any drug developed pursuant to this collaboration,
and Medtronic will be responsible for the development of, and hold all rights
to, any delivery system developed pursuant to this collaboration. The parties
may extend this collaboration by mutual agreement to other neurodegenerative
disease targets. The research and development to be conducted is determined and
supervised by a committee comprised of an equal number of designees of the
Company and Medtronic.
As part of the collaboration, Medtronic purchased an aggregate
of 131,667 shares of the Company's Common Stock.
FINANCIAL COLLABORATIONS
In order to maintain financial flexibility, Hybridon considers
innovative arrangements to finance certain applications of its GEM technology,
particularly applications that it would not develop in the near term without
external funding. The Company has entered into one such arrangement, which is
summarized below.
MethylGene Inc.
In 1996, the Company and certain Canadian institutional investors
formed a
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Quebec company, MethylGene, to develop and market (i) antisense compounds to
inhibit DNA methyltransferase for the treatment of cancers, (ii) other methods
of inhibiting DNA methyltransferase for the treatment of any indications and
(iii) antisense compounds to inhibit a second molecular target other than DNA
methyltransferase for the treatment of cancers, to be agreed upon by Hybridon
and MethylGene (such three product areas being referred to herein as the
"MethylGene Fields"). In December 1997, Hybridon and Methylgene expanded the
Methylgene Fields to include (a) antisense compounds to inhibit DNA
methyltransferase for any indication and (b) antisense compounds to inhibit a
second and third molecular target for any indications, as may be selected by
Methylgene, so long as such molecular targets are not bona fide targets under
investigation by the Company on or prior to the date that Methylgene notifies
the Company of the identity of such second or third molecular target.
Hybridon initially acquired a 49% minority interest in MethylGene for
approximately CDN$1,000,000, and the Canadian investors acquired a majority
interest in MethylGene for a total of approximately CDN$7,500,000. On March 4,
1998, Methylgene raised an additional CDN$15,800,000 from the private placement
of securities. As a result of such financing, Hybridon now owns an approximately
30% interest in Methylgene.
The Canadian investors who initially invested in the Company continue
to have the right to exchange all (but not less than all) of the shares of stock
in MethylGene that they initially purchased for shares of Common Stock of
Hybridon on the basis of 37.5 MethylGene shares (for which they paid
approximately US $56.25) for one share of Hybridon Common Stock (subject to
adjustment for stock splits, stock dividends and the like). This option is
exercisable only during a 90-day period commencing on the earlier of the date
five years after the closing of the Canadian investors' investment in MethylGene
or the date on which MethylGene ceases operations, and terminates sooner if
MethylGene satisfies certain conditions.
Hybridon has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the MethylGene Fields.
In addition, Hybridon and MethylGene have entered into a supply agreement
pursuant to which MethylGene is obligated to purchase from Hybridon all required
formulated bulk oligonucleotides at specified transfer prices. The Company is
currently finalizing a drug development advisory and services agreement pursuant
to which the Company will assist Methylgene in preparing an IND for its first
compound.
It is anticipated that MethylGene will continue to qualify to receive
certain Canadian tax benefits with respect to the research and development
activities which it carries on in Canada.
MANUFACTURING TECHNOLOGY AND THE HYBRIDON SPECIALTY PRODUCTS DIVISION
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The Company has developed a manufacturing technology platform which
integrates key elements of the manufacturing process to increase the purity of
oligonucleotide products, enhance the efficiency of the production process and
increase the scale of production. The Company has developed two separate
commercial scale oligonucleotide synthesizers. One of these machines was
developed in an internal program and the other in a collaboration with
Pharmacia. Both machines are designed with a capacity of up to 100 millimoles
(approximately 300 grams per batch), although the Company believes that these
machines may be able to exceed such capacity. Pharmacia has retained the right
to sell the machine developed under the collaboration to third parties, subject
to an obligation to pay Hybridon royalties on such third party sales. The
Company believes that its machines are the first commercial scale
oligonucleotide synthesizers designed for more advanced chemistries. In
addition, the Company has implemented proprietary purification processes, which
use water in place of chemical solvents, simplifying environmental compliance
and permitting purification of kilogram batches of oligonucleotides. The Company
has also developed proprietary chemical synthesis processes and novel reagents
used in the synthesis process, which the Company believes will further decrease
the cost of production of advanced oligonucleotides.
In 1996, Hybridon formed the HSP Division to capitalize on this
technology and know-how and manufacture highly purified oligonucleotide
compounds both for Hybridon's internal use and for sale to third parties,
including the Company's collaborative partners, on a custom contract basis. The
Company is manufacturing oligonucleotides at its 36,000 square foot leased
manufacturing facility, which the Company believes is the first commercial-scale
synthetic DNA production facility with a fully integrated manufacturing
technology platform, including large-scale synthesis, purification and
proprietary analytical support. The Company first began production of
oligonucleotide compounds for sale to third parties in June 1996 and had
revenues of approximately $1.1 million in 1996 and approximately $1.9 million in
1997. The Company's principal customers include Genta/JBL Scientific, Aronex
Pharmaceuticals, Inc. and Gen-Probe, Inc.
In order to strengthen the marketing of the HSP Division's products, in
1996 the Company entered into a four-year sales and supply agreement with the
Applied Biosystems Division of Perkin-Elmer. Under the agreement, Perkin-Elmer
agreed to refer potential customers for the custom contract manufacture of
oligonucleotides to Hybridon, and Hybridon agreed to purchase amidites from
Perkin- Elmer for the manufacture of oligonucleotides sold to such customers and
to pay Perkin-Elmer a percentage of the sales price paid by such customers. In
addition, Perkin-Elmer licensed to Hybridon its oligonucleotide synthesis
patents.
The Company is in discussions regarding a possible joint venture with
respect
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to the HSP Division, which the Company believes would enable it to maximize the
potential for third party manufacturing by the HSP Division, while ensuring for
the Company and its collaborators a source of oligonucleotides. However, there
can be no assurance that the Company will enter into any joint venture of the
HSP Division or that the terms of any joint venture will be as anticipated by
the Company.
The production of antisense compounds is similar to the chemical
synthesis used in the production of conventional pharmaceuticals, and in
contrast with typical biopharmaceuticals, does not involve any fermentation
processes or living cells. Moreover, unlike many conventional drugs, antisense
compounds targeted at different diseases can be manufactured with the same
nucleotide building blocks and using the same manufacturing processes and
equipment with minimal adjustments. As a result, the knowledge and experience
that the Company obtains in the manufacture of one compound is substantially
applicable to the manufacture of other oligonucleotide compounds for the
treatment of other diseases and results in other manufacturing efficiencies.
The Company may need to further increase its manufacturing capacity
through the purchase or construction of additional large-scale oligonucleotide
synthesizers in order to satisfy its anticipated future requirements for its
product candidates and in order to manufacture oligonucleotides on a custom
contract basis for sale 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. 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 believes that it is currently manufacturing
oligonucleotides in substantial compliance with FDA requirements for
manufacturing in compliance with GMP, although its facility and procedures have
not been formally inspected by the FDA and the procedures and documentation
followed may have to be enhanced in the future as the Company expands its
oligonucleotide production activities. Failure to establish to the FDA's
satisfaction compliance with GMP can result in the FDA denying authorization to
initiate or continue clinical trials, to receive approval of a product or to
begin or to continue commercial marketing.
In addition, the Company's manufacturing processes are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of certain materials and waste products.
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MARKETING STRATEGY
Hybridon plans to market the pharmaceutical products it is developing
either directly or through co-marketing, licensing, distribution or other
arrangements with pharmaceutical and biotechnology companies. Hybridon's current
strategy with respect to these products in development is to build a
hospital-targeted direct sales group for products for market areas that can be
accessed with a small to medium size sales force. Implementation of this
strategy will depend on many factors, including the market potential of any such
products the Company develops as well as on the Company's financial resources.
The Company does not expect to establish a direct sales capability with respect
to such products until such time as one or more of such products approach
marketing approval. To market those products that will serve a large,
geographically diverse patient population, the Company expects to enter into
licensing, distribution or partnering agreements with pharmaceutical and
biotechnology companies that have large, established sales organizations. To the
extent the Company enters into marketing arrangements with third parties, any
revenues received by the Company will be dependent on the efforts of such third
parties, and there can be no assurance that such efforts will be successful.
While the Company has developed general marketing strategies, it has not begun
the implementation of any of these strategies with respect to any of these
potential products.
ACADEMIC AND RESEARCH COLLABORATIONS
Hybridon enters into collaborative research agreements 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. With respect to certain of the
Company's drug development programs, the Company relies primarily upon outside
collaborators. Accordingly, termination of the Company's collaborative research
agreements with any of these collaborators could result in the termination of
the related research program.
In general, the Company's collaborative research agreements require the
payment by Hybridon of various amounts in support of the research to be
conducted. The Company usually provides the collaborator with selected
oligonucleotides, which the collaborator then tests in his or her assay systems.
If the collaborator creates any invention during the course of his or her
efforts, solely or jointly with the Company, Hybridon generally has an option to
negotiate an exclusive, worldwide, royalty-bearing license of the collaborator's
rights in the invention for the purpose of commercializing any product
incorporating such invention. Inventions developed solely by Hybridon's
scientists as part of the collaboration generally are owned exclusively by
Hybridon. Most of these collaborative agreements are non-exclusive and can be
cancelled on relatively short notice.
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Since July 1997, the Company has allowed a number of its collaborative
research agreements to expire and has terminated certain others. The Company
has, however, maintained the research agreements which it has determined are
appropriate to support its current drug development programs.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates, processes
and know-how is important to Hybridon's business. Thus, the Company plans to
prosecute and enforce aggressively its patents and proprietary technology. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development of
its business. Hybridon seeks to establish a comprehensive proprietary position
through a "layered" patent strategy covering the Company's families of
oligonucleotide chemistries, the antisense sequences of the Company's
oligonucleotide compounds and the overall chemical compositions of these
oligonucleotide compounds. The Company believes that this approach may provide
it with at least three independent levels of protection. Hybridon also seeks to
protect its proprietary analytical and manufacturing processes. The patents and
patent applications owned or exclusively licensed by the Company also are
directed to many aspects of the Company's proprietary oligonucleotide production
and analysis technology and ribozyme technology. The Company also relies upon
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
As of February 28, 1998, Hybridon owned or exclusively licensed 55
issued U.S. patents, seven issued foreign patents, 22 allowed U.S. patent
applications, two allowed European applications and 62 other U.S. and 105 other
non-U.S. patent applications. The patents and applications owned or exclusively
licensed by the Company cover various chemically advanced oligonucleotides,
proprietary target sequences, specific preferred oligonucleotide products,
methods for making and purifying oligonucleotides, analytical methods and
methods for oligonucleotide-based therapeutic treatment of various diseases. The
U.S. patents owned or exclusively licensed by Hybridon expire at various dates
ranging from 2006 to 2015.
Under the terms of a license agreement with the Worcester Foundation
(the "Foundation License"), Hybridon is the worldwide, exclusive licensee under
several U.S. issued or allowed patents and various patent applications owned by
the Worcester Foundation relating to oligonucleotides and their production and
use. Many of these patents and patent applications have corresponding
applications on file or corresponding patents in other major industrial
countries.
One of the issued U.S. patents (the "HIV Patent") and one of the issued
European patents licensed from the Worcester Foundation broadly claim antisense
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oligonucleotides as new compositions of matter for inhibiting the replication of
HIV. The other issued U.S. patents include claims covering composition and uses
of oligonucleotides based on the Company's advanced chemistries, methods of
oligonucleotide synthesis that are potentially applicable to large-scale
commercial production, compositions of certain modified oligonucleotides that
are useful for diagnostic tests or assays and methods of purifying full-length
oligonucleotides after synthesis. The earliest expiration of the patents
licensed to the Company by the Worcester Foundation is 2006, when the HIV Patent
expires.
The Company also is the exclusive licensee under various other U.S. and
foreign patents and patent applications, including two U.S. patents jointly
owned by the Worcester Foundation and the Mount Sinai Medical Center of New York
claiming the use of antisense oligonucleotides for the inhibition of influenza
viruses and two U.S. patent applications owned by McGill University relating to
oligonucleotides and DNA methyltransferase. The Company and Massachusetts
General Hospital ("MGH") jointly own one issued U.S. patent directed to
compositions of antisense oligonucleotides applicable to Alzheimer's disease.
The Company holds an exclusive license to MGH's interests under such patent.
The Company is a non-exclusive licensee of certain patents held by the
NIH relating to oligonucleotide phosphorothioates and a non-exclusive licensee
of an NIH patent covering the phosphorothiolation of oligonucleotides. The field
of each of these licenses extends to a wide variety of genetic targets. If
certain of the claims of the NIH patents non-exclusively licensed to Hybridon
are valid, certain of the Company's products in development would infringe these
patents in the absence of the license.
The U.S. Patent and Trademark Office ("the U.S. PTO") has informed
Hybridon that certain otherwise allowable patent applications exclusively
licensed by the Company from the Worcester Foundation have been submitted to the
Board of Patent Appeals and Interferences to determine whether an interference
should be declared with issued U.S. patents held by the NIH relating to
oligonucleotide phosphorothioates. An interference proceeding is an inter-
parties proceeding in the U.S. PTO to determine who is the first to invent a
claimed invention, and thus who is entitled to a patent for the claimed
invention. McDonnell Boehnen Hulbert & Berghoff, the Company's U.S. patent
counsel, is of the opinion that the Worcester Foundation patent application has
a prima-facie case for priority against the NIH for an invention that includes
phosphorothioate-modified oligonucleotides. However, there can be no assurance
an interference can be declared, or if declared, as to the outcome thereof. An
adverse outcome in the interference would not affect the non-exclusive license
from the NIH to Hybridon of the NIH phosphorothioate patents. The U.S. PTO has
also declared a four-way interference involving two additional U.S. patents
relating to the Company's chimeric oligonucleotides which Hybridon exclusively
licenses from the Worcester Foundation. There can be no assurance as to the
outcome of this interference.
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Under the licenses to which it is a party, the Company is obligated to
pay royalties on net sales by the Company of products or processes covered by a
valid claim of a patent or patent application licensed to it. The Company also
is required in some cases to pay a specified percentage of any sublicense income
that the Company may receive. These licenses 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 Foundation License also grants the Company a right of first refusal
to certain technology developed by the Worcester Foundation.
The patent positions of pharmaceutical and biotechnology firms,
including Hybridon, are generally uncertain and involve complex legal and
factual questions. Consequently, even though Hybridon and its licensors are
currently prosecuting their respective patent applications with the U.S. Patent
and Trademark Office and certain foreign patent authorities, the Company does
not know whether any of its applications or those of third parties under which
the Company has or may obtain a license will result in the issuance of any
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. 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, Hybridon cannot be certain that
it, or any licensor of patents to it, as the case may be, was the first creator
of inventions claimed by pending patent applications or that Hybridon or any
licensor, as the case may be, was the first to file patent applications for such
inventions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results -- Patents and Proprietary Rights."
Competitors of the Company and other third parties hold issued patents
and pending patent applications relating to antisense and other gene expression
modulation technologies, 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. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results -- Patents and Proprietary Rights." In
particular, the Company is aware of a European patent granted to a third party
relating to certain types of stabilized synthetic oligonucleotides for use as
therapeutic agents for selectively blocking the translation of a messenger RNA
into a targeted protein by binding with a portion of the messenger RNA to which
the stabilized synthetic oligonucleotide is substantially complementary. This
European patent was revoked in entirety in an opposition proceeding before the
European Patent Office in September 1995. The holder of this patent has appealed
such decision.
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Hybridon's practice is to require its employees, consultants, members
of its Scientific and Clinical Advisory Boards, outside scientific collaborators
and sponsored researchers and other advisors to execute confidentiality
agreements upon the commencement of employment or consulting relationships with
the Company. These agreements provide that all confidential information
developed or made known to the individual during the course of the individual's
relationship with Hybridon is to be kept confidential and not disclosed to third
parties, subject to a right to publish certain information in the scientific
literature in certain circumstances and subject to other specific exceptions. In
the case of employees, the agreements provide that all inventions conceived by
the individual shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information.
Hybridon engages in collaborations and sponsored research agreements
and enters into preclinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as the NIH, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patients, and related technology. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements may provide
that developments and results will be freely published, that information or
materials supplied by Hybridon will not be treated as confidential and that
Hybridon may be required to negotiate a license to any such developments and
results in order to commercialize products incorporating them. There can be no
assurance that the Company will be able successfully to obtain any such license
at a reasonable cost or that such developments and results will not be made
available to competitors of the Company on an exclusive or nonexclusive basis.
See "Item 1. Business -- Academic and Research Collaborations."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety, effectiveness
and quality by numerous governmental authorities in the U.S. and other
countries. The Company believes that it is in material compliance with all
federal, state and foreign legal and regulatory requirements under which it
operates. However, there can be no assurance that such legal or regulatory
requirements will not be amended or that new legal or regulatory requirements
will not be adopted, any one of which could have a material adverse effect on
the Company's business or results of operations.
FDA Approval
In the U.S., pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process of
completing clinical
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trials and obtaining FDA approvals for a new drug is likely to take a number of
years and requires the expenditure of substantial resources. There can be no
assurance that any product will receive such approval on a timely basis, if at
all. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors That May Affect Future Results --
No Assurance of Regulatory Approval; Government Regulation."
The steps required before a new oligonucleotide-based pharmaceutical
product for use in humans may be marketed in the U.S. include (i) preclinical
tests, (ii) submission to the FDA of an IND application, which must become
effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the product, (iv) submission of a New Drug Application ("NDA") to the FDA,
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies, to assess the potential safety and
effectiveness of the product. Compounds must be manufactured according to GMP
and preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding GLP. See "Item 1. Business -- Manufacturing." The
results of the preclinical tests are submitted to the FDA as part of an IND and
are reviewed by the FDA prior to the commencement of human clinical trials.
Unless the FDA objects to, or makes comments or raises questions concerning, an
IND, the IND will become effective 30 days following its receipt by the FDA.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers and to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board (an "IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety
(adverse effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have
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an acceptable safety profile in Phase II evaluation, Phase III trials are
undertaken to further evaluate clinical effectiveness and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all, with respect to any of the Company's products subject to such testing.
Furthermore, the Company, an IRB or the FDA may suspend clinical trials at any
time if it is felt that the participants are being exposed to an unacceptable
health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. In any event, the
FDA may deny an NDA if applicable regulatory criteria are not satisfied.
Moreover, if regulatory approval of a product is granted, such approval may
require postmarketing testing and surveillance to monitor the safety of the
product or may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
In addition to product approval, the Company may be required to obtain
a satisfactory inspection by the FDA covering the Company's manufacturing
facilities before a product manufactured by the Company can be marketed in the
U.S. The FDA will review the Company's manufacturing procedures and inspect its
facilities and equipment for compliance with GMP and other applicable rules and
regulations. Any material change by the Company in its manufacturing process,
equipment or location would necessitate additional FDA review and approval.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental regulatory authorities in
foreign countries must be obtained prior to the commencement of clinical trials
and subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be longer or
shorter than that required for FDA approval.
Under European Union ("EU") law, either of two approval procedures may
apply to the Company's products: a centralized procedure, administered by the
EMEA (the European Medicines Evaluation Agency); or a decentralized procedure,
which requires approval by the medicines agency in each EU Member State where
the Company's products will be marketed. The centralized procedure is mandatory
for certain biotechnology products and available at the applicant's option for
certain other products. Whichever procedure is used, the safety, efficacy and
quality of the
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Company's products must be demonstrated according to demanding criteria under EU
law and extensive nonclinical tests and clinical trials are likely to be
required. In addition to premarket approval requirements, national laws in EU
Member States will govern clinical trials of the Company's products, adherence
to good manufacturing practice, advertising and promotion and other matters. In
certain EU Member States, pricing or reimbursement approval may be a legal or
practical precondition to marketing.
Other Regulation
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act and other
present and potential future federal, state or local regulations. Furthermore,
because the Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds, the
Company's operations are subject to U.S. Department of Transportation and
Environmental Protection Agency requirements and other federal, state and
foreign laws and regulations regarding hazardous waste disposal, air emissions
and wastewater discharge, including without limitation the Environmental
Protection Act, the Toxic Substances Control Act and the Resource Conservation
and Recovery Act. Although the Company believes that its procedures for handling
and disposing of such materials comply with the standards prescribed by
applicable 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.
COMPETITION
The Company's products under development are expected to address
several different markets defined by the potential indications for which such
products are developed and ultimately approved by regulatory authorities. For
several of these indications, the Company's proposed products will be competing
with products and therapies either currently existing or expected to be
developed, including antisense oligonucleotides developed by third parties.
Competition among these products will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position. An
important factor will be the timing of market introduction of the Company's or
competitive products. Accordingly, the relative speed with which Hybridon can
develop products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend upon its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise develop proprietary products or processes, and to
secure sufficient capital resources for the often substantial period between
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technological conception and commercial sales.
There are a number of companies, both privately and publicly held, that
are conducting research and development activities on technologies and products
aimed at therapeutic modulation of gene expression. The Company believes that
the industry-wide interest in these technologies and products will continue and
will accelerate as the techniques which permit their application to drug
development become more widely understood. There can be no assurance that the
Company's competitors will not succeed in developing products based on
oligonucleotides or other technologies that are more effective than any
which are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive prior to recovery by the
Company of the research, development and commercialization expenses incurred
with respect to those products. Furthermore, because of the fundamental
differences between gene expression modulation and other technologies, there may
be indications for which such other technologies are superior to gene expression
modulation. The development by others of new treatment methods not based on gene
expression modulation technology for those indications for which the Company is
developing compounds could render the Company's compounds noncompetitive or
obsolete.
Competitors of the Company engaged in all areas of drug discovery in
the U.S. and other countries are numerous and include, among others, major
pharmaceutical and chemical companies, biotechnology firms, universities and
other research institutions. Many of these competitors have substantially
greater financial, technical and human resources than 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. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. 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.
In its HSP Division operations, the Company competes against a number
of third parties, and there is the possibility of internal production by the
Company's customers. Many of these third parties and customers 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."
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EMPLOYEES
As of March 30, 1998, Hybridon employed 78 individuals full-time, of
whom 40 held advanced degrees. Sixty-three of these employees are engaged in
research and development activities and 15 are employed in finance, corporate
development and legal and general administrative activities. In addition, 27 of
these employees are employees of the HSP Division, of whom eight are employed in
process development and quality control. Many of the Company's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical products companies. None of the Company's employees is
covered by collective bargaining agreements, and management considers relations
with its employees to be good.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
recognized expertise in gene expression modulation technology, antisense
oligonucleotides, oligonucleotide biochemistry, human genetics, medicine and
related fields who advise the Company about current and long-term scientific
planning, research and development. The Scientific Advisory Board holds
approximately three or four formal meetings annually. All members of the
Scientific Advisory Board are employed by employers other than the Company,
primarily academic institutions, and may have commitments to or consulting or
advisory agreements with other entities that may limit their availability to the
Company. These companies may also be competitors of Hybridon. Several members of
the Scientific Advisory Board have, from time to time, devoted significant time
and energy to the affairs of the Company. However, except for Drs. Zamecnik and
Wyngaarden, who are parties to consulting agreements with the Company, no
members are regularly expected to devote more than a small portion of their time
to Hybridon.
As part of its efforts to reduce expenditures, the Company plans to
reduce the size of the Scientific Advisory Board and rely in part on individual
consultants.
The following persons are currently members of the Scientific Advisory
Board:
Paul C. Zamecnik, M.D. (Chairman) is a founder of Hybridon and serves
as a director of the Company. Dr. Zamecnik has served as a Principal Scientist
of the Worcester Foundation and as the Collis P. Huntington Professor of
Oncologic Medicine Emeritus at the Harvard Medical School since 1979.
Daniel M. Brown, Sc.D., F.R.S. has been a Fellow of King's College,
University of Cambridge, since 1953, and currently serves as Vice-Provost of
King's College and as an Attached Scientific Worker in the Medical Research
Council Laboratory of Molecular Biology at the University of Cambridge. Dr.
Brown is also an Emeritus
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Reader in Organic Chemistry at the University of Cambridge and became a Fellow
of the Royal Society in 1982.
Har Gobind Khorana, Ph.D. has served as a Sloan Professor in the
Departments of Biology and Chemistry at the Massachusetts Institute of
Technology since 1970. Dr. Khorana has been awarded numerous prestigious honors,
including the Nobel Prize in Medicine or Physiology in 1968 and the National
Medal of Science in 1987.
Roger E. Monier, Ph.D. has served as Director of Molecular Oncology at
the Institute Gustave Roussy in Paris since 1985. From 1980 to 1985, Dr. Monier
served as the Director of Life Sciences at the Centre Nationale de Recherches
Scientifiques in Paris. Dr. Monier was elected to the French Academy of Science
in 1992.
Peter Palese, Ph.D. has served as a Professor in the Department of
Microbiology at Mount Sinai School of Medicine in New York since 1978 and has
served as Chairman of the Department of Microbiology since 1987.
Thoru Pederson, Ph.D. is a Principal Scientist of Cell Biology at the
Worcester Foundation and has served as its President and Director since 1985.
Dr. Pederson is also a Professor of Biochemistry and Molecular Biology at the
University of Massachusetts Medical School. From February 1990 to November 1993,
Dr. Pederson served as a director of the Company.
Jerry A. Weisbach, Ph.D. is an independent consultant to biotechnology
and pharmaceutical companies. Dr. Weisbach served as Director of Technology
Transfer and as an Adjunct Professor at The Rockefeller University from 1988 to
1994. Dr. Weisbach served as Corporate Vice President of Warner-Lambert Company,
an international pharmaceutical company, from 1981 to 1987 and President of the
Parke- Davis Pharmaceutical Research Division of Warner-Lambert Company from
1979 to 1987.
James B. Wyngaarden, M.D. a director of the Company, served as the
Foreign Secretary of the National Academy of Sciences and the Institute of
Medicine of the National Academy of Sciences from 1990 to 1994. Dr. Wyngaarden
also served as the Director of the NIH from 1982 to 1989 and as a council member
of the Human Genome Organization from 1990 to 1993 and as its Director from 1990
to 1991.
Members of the Company's Scientific Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings. Members
of the Scientific Advisory Board also have received options to purchase Common
Stock of the Company under the Company's stock option plans.
CLINICAL ADVISORY BOARD
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The Company's Clinical Advisory Board was formally established in
November 1993 to advise the Company with respect to clinical trials of the
Company's product candidates. The Clinical Advisory Board holds approximately
three or four formal meetings annually. The Clinical Advisory Board consists of
individuals with recognized expertise in the conduct of clinical trials and the
regulatory approval process. All members of the Clinical Advisory Board are
employed by employers other than the Company, primarily academic institutions,
and may have commitments to or consulting or advisory agreements with other
entities that may limit their availability to the Company. These companies may
also be competitors of Hybridon. Several members of the Clinical Advisory Board
have, from time to time, devoted significant time and energy to the affairs of
the Company. However, except for Drs. Wyngaarden, who is a director of and a
consultant to the Company, and Drs. Groopman and Weisbach, who are consultants
to the Company, no members are regularly expected to devote more than a small
portion of their time to Hybridon.
As part of its efforts to reduce expenditures, the Company plans to
reduce the size of the Clinical Advisory Board and rely in part on individual
consultants.
The following persons are currently members of the Clinical Advisory
Board:
Dr. Wyngaarden's (Chairman) background and experience are described
above under "Item 1. Business -- Scientific Advisory Board."
Robert M. Chanock, M.D. has served as an infectious disease
epidemiologist and laboratory virologist at the NIH since 1957. Prior to that
Dr. Chanock held academic appointments at the University of Cincinnati College
of Medicine and the Johns Hopkins University School of Hygiene and Public
Health. Dr. Chanock has been awarded numerous prestigious honors, including the
ICN International Prize in Virology in 1990, the Bristol-Myers Squibb Award for
Distinguished Achievement in Infectious Diseases Research in 1993 and the Albert
B. Sabin Foundation award.
Vincent T. DeVita, Jr., M.D. has served as Director of the Yale Cancer
Center since 1993. Dr. DeVita served as an attending physician and member of the
Program of Molecular Pharmacology and Therapeutics from 1988 to 1993, and as
Physician-in- Chief from 1988 to 1991, at Memorial Sloan Kettering Cancer
Center. From 1980 to 1988, Dr. DeVita served as Director of the National Cancer
Institute, NIH. In 1995, he was honored with the City of Medicine Award.
Jerome Groopman, M.D. has served as Chief of the Division of
Hematology/Oncology at the New England Deaconess Hospital since 1985. He has
also served as a Professor of Medicine at Harvard Medical School since 1993. Dr.
Groopman is a member of the AIDS Advisory Committee, the Biologics Committee of
the FDA, the AIDS Clinical Trials Group of the NIH and the AIDS Basic Science
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Research Study Section A, NIAID.
Paul Meier, Ph.D. has served as Professor and Chairman of the
Department of Statistics and Division of Biological Sciences at Columbia
University since 1985. Dr. Meier has served as an advisor to the FDA on the
statistical analysis of clinical trials since 1991.
Dr. Weisbach's background and experience are described under "Item 1.
Business -- Scientific Advisory Board."
Members of the Company's Clinical Advisory Board are paid $2,500 per
calendar quarter for their services in such capacity and are reimbursed for
their expenses incurred in connection with attendance at its meetings.
ITEM 2. PROPERTIES.
The Company's executive, administrative and research and development
facilities, comprising approximately 91,500 square feet (a portion of which is
subleased as described below), currently are located in Cambridge,
Massachusetts. These facilities are held under a lease which expires in 2012,
but may be extended at Hybridon's option for two additional five-year terms. The
lease provides for an annual rent of approximately $38.00 per square foot for
the first five years, approximately $42.00 per square foot for the second five
years and approximately $47.00 per square foot for the third five years.
A substantial portion of the Cambridge headquarters facility
(approximately 41,500 square feet of office and laboratory space) has been
subleased to a third party under an agreement extending to September 1, 1999.
The Company is evaluating several long term options for the Cambridge facility,
including a possible transfer of its leases or a sale of its ownership interest
in the Cambridge facility. In either case, such transaction would require the
Company to relocate its headquarters.
In addition, the Company leases additional space in Cambridge,
Massachusetts comprising approximately 26,000 square feet for a term expiring
April 30, 2007 at an annual rent of approximately $23 per square foot. The
Company is currently subleasing approximately 20,000 square feet of this
facility to a third party under a sublease expiring September 30, 2000.
The Company leases its 36,000 square foot manufacturing facility in
Milford, Massachusetts under a lease which expires in 2004. The term of the
lease may be extended at Hybridon's option for two additional five-year terms.
In addition to its manufacturing operations, the Company conducts process and
analytical chemistry operations at this facility.
Effective March 31, 1998, the Company has terminated the lease for its
offices in Paris, France.
For a description of various arrangements relating to the Cambridge
headquarters facility
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and the Paris facility, see "Certain Relationships and Related Transactions --
Transactions with Pillar S.A. and Certain Affiliates" in the Company's 1998
Proxy Statement (as defined in "Item 10. Directors and Executive Officers of the
Registrant").
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation that it believes could
have a material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Stockholders held on November 18, 1997, the
Company's stockholders, by the vote specified below, approved an amendment to
the Company's Certificate of Incorporation to effect a reverse split of the
Company's Common Stock, pursuant to which each five shares of Common Stock then
outstanding were converted into one share of Common Stock.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
14,652,634 77,698 13,563 0
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
The executive officers and significant employees of the Company and
their ages as of March 13, 1998 are as follows:
NAME AGE POSITION
---- --- --------
Executive Officers
E. Andrews Grinstead, III...... 52 Chairman of Board of Directors,
President and Chief Executive Officer
Sudhir Agrawal, D. Phil........ 44 Senior Vice President of Discovery,
Chief Scientific Officer and Director
Significant Employees
Robert G. Andersen............. 47 Vice President of Operations and
Planning and Treasurer
Jose E. Gonzalez, Ph.D......... 51 Vice President of Manufacturing and
General Manager, Hybridon Specialty
Products Division
Philippe Guinot, M.D., Ph.D.... 48 Vice President of Drug Development and
General Manager, Hybridon Europe
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NAME AGE POSITION
---- --- --------
R. Russell Martin, M.D......... 62 Vice President of Drug Development
Jin-Yan Tang, Ph.D............. 52 Vice President of Production
Mark C. Wiggins................ 42 Vice President of Business Development
and Marketing
Mr. Grinstead joined the Company in June 1991 and was appointed
Chairman of the Board and Chief Executive Officer in August 1991 and President
in January 1993. He has served on the Board of Directors since June 1991. Prior
to joining the Company, Mr. Grinstead served as Managing Director and Group Head
of the life sciences group at Paine Webber, Incorporated, an investment banking
firm, from 1987 to October 1990; Managing Director and Group Head of the life
sciences group at Drexel Burnham Lambert, Inc., an investment banking firm, from
1986 to 1987; and Vice President at Kidder, Peabody & Co. Incorporated, an
investment banking firm, from 1984 to 1986, where he developed the life sciences
corporate finance specialty group. Mr. Grinstead served in a variety of
operational and executive positions with Eli Lilly and Company ("Eli Lilly"), an
international pharmaceutical company, from 1976 to 1984, most recently as
General Manager of Venezuelan Pharmaceutical, Animal Health and Agricultural
Chemical Operations and at Lilly Corporate Staff as Administrator, Strategic
Planning and Acquisitions. Since 1991, Mr. Grinstead has served as a director of
EcoScience Corporation, a development stage company engaged in the development
of biopesticides, and as a director of Pharmos Corporation, a development stage
company engaged in the development of novel pharmaceutical compounds and drug
delivery systems. Mr. Grinstead also serves as a director of Meridian Medical
Technologies, Inc., a pharmaceutical and medical device company. Mr. Grinstead
was appointed to The President's Council of the National Academy of Sciences and
the Institute of Medicine in January 1992 and the Board of the Massachusetts
Biotech Council in 1997. Since 1994, Mr. Grinstead has served as a member of the
Board of Trustees of the Albert B. Sabin Vaccine Foundation, a charitable
foundation dedicated to disease prevention. Mr. Grinstead received an A.B. from
Harvard College in 1967, a J.D. from the University of Virginia School of Law in
1974 and an M.B.A. from the Harvard Graduate School of Business Administration
in 1976.
Dr. Agrawal joined the Company in February 1990 and served as Principal
Research Scientist from February 1990 to January 1993 and as Vice President of
Discovery from December 1991 to January 1993 prior to being appointed Chief
Scientific Officer in January 1993 and Senior Vice President of Discovery in
March 1994. He has served on the Board of Directors since March 1993. Prior to
joining the Company, Dr. Agrawal served as a Foundation Scholar at the Worcester
Foundation from 1987 through 1991. Dr. Agrawal served as a Research Associate at
the Medical
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Research Council Laboratory of Molecular Biology in Cambridge, England, from
1985 to 1986, studying synthetic oligonucleotides. Dr. Agrawal received a B.Sc.
in chemistry, botany and zoology in 1973, an M.Sc. in organic chemistry in 1975
and a D. Phil. in chemistry in 1980 from Allahabad University in India.
Mr. Andersen joined the Company and was appointed Vice President of
Systems Engineering and Management Information Systems in November 1996 prior to
being appointed Vice President of Operations and Planning in 1997 and Treasurer
of the Company in January 1998. Prior to joining the Company, Mr. Andersen
served in a variety of positions at Digital Equipment Corporation, a computer
company, from 1986 to 1996, most recently as Group Manager of the Applied
Objects Group. From 1978 to 1986, Mr. Andersen served in a variety of positions
at United Technologies Corporation, an aviation technology company, most
recently as Director of Quality. Mr. Andersen received his B.E.E. in Electrical
Engineering from The City College of New York in 1972 and a M.S. from
Northeastern University in 1978.
Dr. Gonzalez joined the Company and was appointed Vice President of
Manufacturing in August 1995 and was appointed General Manager, Hybridon
Specialty Products Division, in September 1997. Prior to joining the Company,
Dr. Gonzalez served as Vice President of Manufacturing Operations at Enzon
Corporation, a biotechnology company, from 1993 to 1995. From 1977 to 1993, Dr.
Gonzalez served in a variety of positions at The Upjohn Company, a
pharmaceutical company, most recently as Associate Director of Bioprocess
Development. Dr. Gonzalez received a B.S. in chemistry from the University of
Miami in 1969 and a Ph.D. in biochemistry from Purdue University in 1974.
Dr. Guinot joined the Company and was appointed Vice President of
European Drug Development and General Manager of Hybridon Europe in September
1995. Prior to joining the Company, Dr. Guinot served as a consultant to the
Laboratoire Francais du Fractionnemant et des Biotechnologies (the "LFB") from
1994 to 1995, where he was responsible for conducting audits of all of the LFB's
research and development programs. From 1981 to 1994, Dr. Guinot served in a
variety of positions at the Beaufour-Ipsen Group, a group of affiliated
pharmaceutical companies, most recently as General Manager of the Institute
Henri Beaufour where he was responsible for the planning, strategy, budget and
coordination of the Beaufour-Ipsen Group's product development efforts. In
addition, Dr. Guinot has served as an Adjunct Professor of Medicine at the
University of California, Davis since 1992, an Adjunct Professor of Physiology
at New York Medical College since 1991 and Consultant Physician in Internal
Medicine at Broussais Hospital in Paris. Dr. Guinot received an M.D. from the
University of Paris in 1975 and a Ph.D. in biophysics from Clermont Ferrand in
1994.
Dr. Martin joined the Company and served as Vice President of Clinical
Research from April 1994 to February 1997 prior to being appointed Vice
President of
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Drug Development in February 1997. Prior to joining the Company, Dr. Martin
served in a variety of positions at Bristol Myers Squibb from 1983 to 1994, most
recently as Vice President of Clinical Research (Infectious Diseases). During
such period, he served as an Adjunct Associate Professor of Medicine and
Associate Clinical Professor at Yale University School of medicine from 1987 to
1994, Clinical Professor at University of Connecticut School of Medicine from
1986 to 1993 and Adjunct Professor of Medicine at Baylor College of Medicine
from 1993 to 1994. Prior to joining Bristol Myers Squibb, Dr. Martin served as
Professor of Medicine, Microbiology and Immunology at Baylor College from 1975
to 1983. Dr. Martin received an A.B. in American studies from Yale University in
1956 and an M.D. from the Medical College of Georgia in 1960.
Dr. Tang joined the Company in 1991 and served as Senior Research
Scientist from 1991 to 1993, Director of Oligonucleotide Chemistry from 1993 to
1994 and Executive Director of Process Chemistry from 1994 to April 1995 prior
to being appointed Vice President of Process Development in April 1995. In
November of 1997, Dr. Tang was appointed Vice President of Production. Prior to
joining the Company, Dr. Tang served as a Visiting Fellow at the Worcester
Foundation from 1988 to 1991. He also served as a Visiting Professor at the
University of Colorado in 1988. Dr. Tang received a B.S. in biochemistry from
Shanghai University of Sciences and Technology in 1965 and a Ph.D. from the
Shanghai Institute of biochemistry in 1978.
Mr. Wiggins joined the Company and was appointed Vice President of
Business Development and Marketing in November 1996. Prior to joining the
Company, Mr. Wiggins served in a variety of positions at Schering-Plough
Corporation, a pharmaceutical company, from 1986 to 1996, most recently as the
Director of Business Development. From 1980 to 1986, Mr. Wiggins held various
marketing positions at Ortho Pharmaceuticals, Inc., a pharmaceutical company,
and Pfizer, Inc., a pharmaceutical company. Mr. Wiggins received his B.S. in
Finance from Syracuse University in 1978 and a M.B.A. from the University of
Arizona in 1980.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From January 24, 1996 until December 2, 1997, the Company's Common
Stock was traded on the Nasdaq National Market under the symbol "HYBN." Prior to
January 24, 1996, there was no established public trading market for the
Company's Common Stock.
On December 2, 1997, the Company's Common Stock was delisted from the
Nasdaq National Market and began being quoted on the Nasdaq OTC Bulletin Board.
Prices reflected on the Nasdaq OTC Bulletin Board may reflect inter-dealer
prices, without retail mark-up, mark-downs or commissions and may not
necessarily represent actual transactions.
On December 10, 1997 the Company effected a one-for-five reverse stock
split of its Common Stock. As a result of the reverse stock split, each five
shares of Common Stock was automatically converted into one share of Common
Stock, with cash paid in lieu of any fractional shares.
The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market and the Nasdaq OTC
Bulletin Board since January 24, 1996 and as adjusted to reflect the December
1997 reverse stock split.
HIGH LOW
---- ---
1996
- ----
First Quarter (from January 24, 1996).......... $71.250 $43.750
Second Quarter................................. 59.375 25.625
Third Quarter.................................. 59.375 33.125
Fourth Quarter................................. 43.125 26.250
1997
- ----
First Quarter.................................. $43.125 $28.125
Second Quarter................................. 35.625 25.000
Third Quarter.................................. 28.125 7.500
Fourth Quarter................................. 4.859 2.609
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The reported closing bid price of the Common Stock on the Nasdaq OTC
Bulletin Board on March 13, 1998 was $2.4375 per share. The number of
stockholders of record on March 13, 1998 was 297.
The Company has never declared or paid cash dividends on its capital
stock, and the Company does not expect to pay any cash dividends on its Common
Stock in the foreseeable future. The indenture under which the Company issued
$50.0 million of the 1997 9% Notes on April 2, 1997 limits the Company's ability
to pay dividends or make other distributions on its Common Stock. In addition,
the Company is currently prohibited from paying cash dividends under a credit
facility with a commercial bank (the "Bank Credit Facility").
Recent Sales of Unregistered Securities
During the quarterly period ended December 31, 1997, the Company did
not sell any securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
Company's Consolidated Financial Statements that have been audited by Arthur
Andersen LLP, independent public accountants. This financial data should be
read in conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Consolidated Financial Statements and
the Notes thereto and the other financial information appearing elsewhere in
this Annual Report on Form 10-K.
Years Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Research and development ............ $ 917 $ 1,032 $ 1,186 $ 1,419 $ 945
Product revenue ..................... -- -- -- 1,080 1,877
Royalty income ...................... -- -- -- 62 48
Interest income ..................... 267 135 219 1,447 1,079
-------- -------- -------- -------- --------
1,184 1,167 1,405 4,008 3,949
Operating Expenses
Research and development ............ 16,168 20,024 29,685 39,390 46,828
General and administrative .......... 4,372 6,678 6,094 11,347 11,026
Interest ............................ 380 69 173 124 4,536
Restructuring ....................... -- -- -- -- 11,020
-------- -------- -------- -------- --------
Total operating expenses ... 20,920 26,771 35,952 50,861 73,410
-------- -------- -------- -------- --------
Net Loss .................................. $(19,736) $(25,604) $(34,547) $(46,853) $(69,461)
======== ======== ======== ======== ========
Basic and Diluted Net Loss per Common
Share(1) .................................. (55.80) (70.77) $ (94.70) $ (10.24) $ (13.76)
======== ======== ======== ======== ========
Shares Used in Computing Basic and
Diluted Net Loss per Common Share(1)....... 354 362 365 4,576 5,050
======== ======== ======== ======== ========
Pro Forma Net Loss per Common Share(1) .... (11.71) (11.04) $ (11.02) $ (9.67) $ (13.76)
======== ======== ======== ======== ========
Shares Used in Computing Pro Forma Net
Loss per Common Share(1)................... 1,686 2,320 3,135 4,843 5,050
======== ======== ======== ======== ========
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December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments(2) ......................... $ 8,767 $ 3,396 $ 5,284 $ 16,419 $ 2,202
Working capital (deficit) .................. 8,357 (1,713) 210 8,888 (24,100)
Total assets ............................... 15,243 11,989 19,618 41,537 35,072
Long-term debt and capital lease
obligations, net of current portion ..... 79 1,522 1,145 9,032 3,282
9% Convertible Subordinated
Notes Payable............................... -- -- -- -- 50,000
Deficit accumulated in the
development stage ........................ (42,190) (67,794) (102,341) (149,194) (218,655)
Total stockholders' equity (deficit) ....... 12,178 4,774 12,447 22,855 (46,048)
-------- -------- --------- -------- ---------
(1) Computed on the basis described in Note 2(b) of Notes to Consolidated
Financial Statements attached as APPENDIX A hereto.
(2) Short-term investments consisted of U.S. government securities with
maturities greater than three months but less than one year from the
purchase date.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is engaged in the discovery and development of genetic
medicines based 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. 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 HSP Division.
The Company has very limited cash resources and substantial obligations
to lenders, equipment lessors, real estate landlords and trade creditors. The
Company's ability to continue operations in 1998 depends on its success in
raising new funds. If the Company is unable to raise substantial additional new
funding beginning in April 1998, it will be required to terminate its operations
or seek relief under applicable bankruptcy laws by the end of April 1998.
In the Report of Independent Public Accountants set forth in Appendix A
attached to this Annual Report on Form 10-K, Arthur Andersen LLP, the Company's
independent public accountants, states that there is substantial doubt about the
Company's ability to continue as a going concern.
As part of its efforts to seek new funding, in January 1998, the
Company commenced a private offering (the "1998 Unit Financing") of up to 400
units, each unit (a "Unit") consisting of a Note Due 2007 (the "1998 Unit
Notes") in the original principal amount of $100,000 and warrants to purchase
Common Stock. The Company is offering the Units at a price of $100,000 per Unit.
As of March 30, 1998, the Company had sold 48 Units for an aggregate purchase
price of $4.8 million. There can be no assurance as to whether the Company will
be able to sell any additional Units or as to the timing of the Company's sale
of additional Units. See "1998 Financing Activities" below.
The Company has incurred cumulative losses from inception through
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December 31, 1997 of approximately $218.7 million. The Company implemented a
restructuring plan in the second half of 1997 which it expects will
significantly reduce the Company's operating expenses and cost requirements in
1998 from 1997 levels. However, the Company expects that its research and
development expenses will continue to be significant in 1998 and future years as
it pursues its core drug development programs and expects to continue to incur
operating losses and have significant capital requirements that it will not be
able to satisfy with internally generated funds. The Company continues to
explore opportunities to reduce operating expenses in an effort to conserve its
cash resources.
This Annual Report on Form 10-K 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," "expects" and
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, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
RESTRUCTURING PLAN
During the second half of 1997, the Company implemented a restructuring
plan to reduce expenditures on a phased basis over the balance of 1997 and into
the first half of 1998 in an effort to conserve its cash resources. As part of
this restructuring plan, in addition to terminating the clinical development of
GEM 91, the Company reduced or suspended selected programs unrelated to its core
advanced chemistry antisense drug development programs, including its ribozyme
program. In connection with the reduction and suspension of programs, the
Company has accrued termination fees related to research contracts and has
incurred restructuring charges relating to programs that have been suspended or
canceled. In addition, the Company terminated the employment of 84 employees at
its Cambridge and Milford, Massachusetts facilities in the second half of 1997
and substantially reduced operations at its Paris, France office and terminated
ten employees at that location in August 1997. As part of the restructuring, the
Company reviewed all outside testing, public relations, travel and entertainment
and consulting arrangements and terminated or renegotiated various of these
arrangements.
As part of the restructuring, the Company subleased one facility in
Cambridge, Massachusetts and a substantial portion of its corporate headquarters
located at 620 Memorial Drive, Cambridge, Massachusetts. The Company incurred
expenses relating to these subleases for broker fees and renovation expenses
incurred in preparing the Memorial Drive space for the new tenant. In addition,
the Company has accrued the estimated lease loss of subleasing the remaining
space at its corporate
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headquarters. The Company has accrued the remaining lease costs prior to
terminating the lease for its offices in Paris, France effective March 31, 1998.
Because of the significant costs involved in terminating employees,
subleasing its facilities, terminating research contracts, suspending or
cancelling research programs and substantially reducing operations, the Company
did not begin to experience a material decrease in its expenditure rate until
the fourth quarter of 1997. The Company recorded a restructuring charge of $11.0
million for the actions that occurred in 1997.
RESULTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
Revenues
The Company had total revenues of $3.9 million in 1997, $4.0 million in
1996 and $1.4 million in 1995. During 1997, 1996 and 1995, the Company received
revenues from research and development collaborations of $945,000, $1.4 million
and $1.2 million, respectively. Research and development collaboration revenues
decreased in 1997 from 1996 because the research funding, which the Company had
been receiving under the Company's collaboration with Roche in 1996 and 1995,
was terminated by Roche as of March 31, 1997. Research and development
collaboration revenues increased in 1996 from 1995 because collaboration
revenues in 1996 included revenues earned under a collaborative agreement with
Searle, which the Company entered into in January 1996.
Revenues from the custom contract manufacturing of synthetic DNA and
reagent products by the HSP Division were $1.9 million in 1997 and $1.1 million
in 1996. The increase in revenues in 1997 resulted from a full year of
operations for the HSP Division, which commenced operations in the third quarter
of 1996. This increase in revenues in 1997 was significantly lower than the
Company had anticipated. As of December 31, 1997, the HSP Division had a backlog
of $1,200,000. The Company anticipates filling this backlog in the first half of
1998.
Revenues from interest income were $1.1 million in 1997, $1.4 million
in 1996 and $219,000 in 1995. The decrease in interest income in 1997 from 1996
was the result of lower cash balances available for investment in 1997 than in
1996. The increase in interest income in 1996 from 1995 was the result of
substantially higher cash balances available for investment as a result of the
Company's initial public offering, which was completed on February 2, 1996.
Research and Development Expenses
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During 1997, 1996 and 1995, the Company expended $46.8 million, $39.4
million and $29.7 million, respectively, on research and development activities.
The increases in research and development expenses in 1997 and 1996 reflected
increasing expenses related primarily to ongoing clinical trials of the
Company's product candidates, including clinical trials of two different
formulations of GEM 132, which were first initiated during the third quarter of
1996 and the first quarter of 1997, clinical trials of GEM 92, which were
initiated in the third quarter of 1997 and clinical trials of GEM 91, which were
initiated in France in October 1993 and in the U.S. in May 1994 and terminated
in July 1997. Clinical expenses related to GEM 91 decreased significantly during
the second half of 1997 after the Company elected to terminate development of
this compound.
Research and development expenses also increased in 1997 and 1996 due
to significant increases in preclinical expenses incurred to meet the filing
requirements to initiate the domestic clinical trials of the Company's product
candidates.
The facilities expense related to the research and development area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts.
Research and development salaries and related costs remained at
approximately the same level in 1997 as 1996 because of the costs involved in
terminating employees in 1997. Research and development salaries and related
costs increased significantly in 1996 over 1995 as the number of employees
engaged in research and development increased to 206 at December 31, 1996 from
124 at December 31, 1995.
Patent expenses also remained at approximately the same level in 1997
as 1996 as the Company limited the scope of patent protection that it sought as
part of its effort to conserve its cash resources. Patent expenses increased in
1996 as compared to 1995, as the Company continued to develop a patent portfolio
both domestically and internationally.
General and Administrative Expenses
The Company incurred general and administrative expenses of $11.0
million in 1997, $11.3 million in 1996, and $6.1 million in 1995, respectively.
The facilities expense related to the general and administrative area
increased significantly in 1997 as a result of the relocation of the corporate
offices to Cambridge, Massachusetts. However, as a result of the implementation
of the restructuring plan in the second half of 1997, such increase was offset
by decreases in
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general and administrative salaries and related costs and in consulting expenses
in the second half of 1997. As part of the restructuring, approximately 11
general and administrative positions were eliminated. General and administrative
expenses related to business development, public relations and legal expenses
remained at approximately the same level in 1997 as 1996.
The increase in general and administrative expenses in 1996 from 1995
was primarily attributable to an increase in expenses for business development
activity, public relations and legal expenses incurred primarily as a result of
being a public company and salaries and related costs.
Interest Expense
Interest expense was $4.5 million in 1997, $124,000 in 1996 and
$173,000 in 1995. The increase in interest expense in 1997 from 1996 reflected
an increase in the Company's debt outstanding associated with the Company's
issuance of $50,000,000 of 1997 9% Notes and interest incurred on borrowings to
finance the purchase of property and equipment. The decrease in interest expense
in 1996 from 1995 reflected a decrease in the outstanding balance of borrowings
to finance the purchase of property and equipment.
Restructuring Charge
In connection with the implementation of the restructuring plan in the
second half of 1997, the Company recorded a restructuring charge of $11.0
million for the actions that occurred in 1997. The Company made cash payments
of approximately $1.5 million in 1997 and expects to make additional cash
payments of approximately $3.7 million in 1998 in connection with the
restructuring.
Net Loss
As a result of the above factors, the Company incurred net losses of
$69.5 million in 1997, $46.9 million in 1996 and $34.5 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
General
From inception through December 31, 1997, the Company financed its
operations, including capital expenditures, through a public offering of common
stock, private placements of equity securities and the 1997 9% Notes and the
exercise of stock options and warrants with aggregate gross proceeds totalling
$212.6 million, as well as through bank and other borrowings of $10.1 million,
capital leases of $5.6
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million, research and development and milestone payments from corporate
collaborators totalling $5.5 million and sales of synthetic DNA and reagent
products by the HSP Division totalling $3.0 million. Through December 31, 1997,
the Company utilized approximately $179.0 million to fund operating activities
and $29.3 million to finance capital expenditures, including leasehold
improvements at the Company's Cambridge, Massachusetts corporate headquarters
and at its manufacturing facility in Milford, Massachusetts.
During the year ended December 31, 1997, the Company utilized
approximately $51.1 million to fund operating activities and approximately $7.5
million for capital expenditures. The primary use of cash for operating
activities was to fund the Company's cash operating loss of $63.4 million.
Capital expenditures during 1997 included amounts expended for the build-out and
equipping of the Company's corporate headquarters and primary research and
development laboratories in Cambridge, Massachusetts and of its leased
manufacturing facility in Milford, Massachusetts. The Company expects to
purchase a minimal amount of capital equipment in 1998 as part of its effort to
conserve cash resources.
Cash Resources
The Company had cash and cash equivalents of $2.2 million at December
31, 1997. Since such date, the Company has received $4.8 million in gross
proceeds from the 1998 Unit Financing. However, the Company has expended
substantially all of the cash resources that it had available at December 31,
1997 and that it received subsequent to that date and continues to have
substantial obligations to lenders, equipment lessors, real estate landlords and
trade creditors. On March 30, 1998, the Company's obligations included $50.0
million principal amount of 1997 9% Notes, $4.8 million principal amount of 1998
Unit Notes, a $5.0 million Note payable to Silicon Valley Bank (the "Bank"),
$3.2 million of capital leases and approximately $7.7 million of accounts
payable. Because of the Company's financial condition, many trade creditors are
only willing to provide the Company with products and services on a cash on
delivery basis.
The Company's ability to continue operations in 1998 depends on its
success in raising new funds in the 1998 Unit Financing or otherwise. The
Company believes that if the Company raises approximately an additional $25.0
million in gross proceeds from the 1998 Unit Financing by April 30, 1998, and at
least $40 million principal amount of 1997 9% Notes are exchanged for preferred
stock of the Company pursuant to the 1998 Unit Financing, then such $25 million,
together with the committed collaborative research and development payments from
Searle for 1998 and anticipated sales of DNA products and reagents to third
parties by the HSP Division and margins on such sales, will be adequate to fund
the Company's capital requirements through 1998. However, there can be no
assurance that the Company will receive any additional proceeds from the 1998
Unit Financing or as to the timing thereof or obtain funds from other sources.
If the Company is unable to obtain substantial additional new funding in April
1998, it will be required to terminate its operations or seek relief under
applicable bankruptcy laws by the end of April 1998.
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Even if the Company obtains sufficient cash to fund its operations in
1998, it will be required to raise substantial additional funds through external
sources, including through collaborative relationships and public or private
financings, to support its operations beyond 1998. 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 HSP Division).
No assurance can be given that additional funds will be available to
fund the Company's operations for the balance of 1998 or in future years, or, if
available, that such funds will be available on acceptable terms. If additional
funds are raised by issuing equity securities, further dilution to then existing
stockholders will result. Additionally, the terms of any such additional
financing may adversely affect the holdings or rights of then existing
stockholders.
If adequate funds are not available, the Company may be required to
curtail significantly one or more of its core drug development programs, 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 or
terminate operations or seek relief under applicable bankruptcy laws. It is also
possible that creditors of the Company may seek to commence involuntary
bankruptcy proceedings against the Company.
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 third parties by the
HSP 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.
1998 Unit Financing
On January 22, 1998, the Company commenced the 1998 Unit Financing.
For a description of this financing, see
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"1998 Financing Activities" below.
1997 9% Notes
On April 2, 1997, the Company issued $50.0 million of the 1997 9% Notes
with a maturity date of April 1, 2004. Under the terms of the 1997 9% Notes, the
Company is required to make semiannual interest payments on the outstanding
principal balance of the Notes on April 1 and October 1 of each year during
which the 1997 9% Notes are outstanding. The outstanding principal balance of
the 1997 9% Notes will become due on the maturity date. The Company made the
first interest payment of $2.3 million at the beginning of October 1997. On
February 6, 1998, in connection with the 1998 Unit Financing, the Company
commenced an exchange offer to the holders of the 1997 9% Notes offering to
issue to such holders shares of Series A Convertible Preferred Stock and
warrants to purchase shares of Common Stock in exchange for such Notes, as
described below under the caption "1998 Financing Activities". In addition, as
of March 30, 1998, holders of approximately $42.0 million of the outstanding
aggregate principal amount of the 1997 9% Notes have agreed to defer the
interest payment due to them on April 1, 1998 to October 1, 1998.
Bank Facility
In December 1996, the Company entered into a five-year $7.5 million
credit facility with the Bank to finance the leasehold improvements of the
Company's manufacturing facility. The Bank Credit Facility is payable in equal
monthly payments of $62,500 plus interest with a balloon payment of $3.8 million
due on January 1, 2002. The Bank Credit Facility contains certain financial
covenants that
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require the Company to maintain minimum tangible net worth (as defined) and
minimum liquidity (as defined) and prohibits the payment of dividends. The
Company has secured its obligations to the Bank with a lien on all of its
assets. If, at specified times, the Company's minimum liquidity is less than
$15.0 million, $10.0 million or $5.0 million, the Company is required to make
prepayments of the Bank Credit Facility equal to 25%, 50% and 100%,
respectively, of the then outstanding balance due under the Bank Credit
Facility. On January 15, 1998 the Bank granted the Company a waiver of
compliance with the minimum liquidity requirement at December 31, 1997, January
31, 1998 and February 28, 1998. As part of this waiver certain terms of the Bank
Credit Facility were amended to increase the interest rate on the Borrower's
obligations under the Bank Credit Facility to the institution's prime rate plus
5%. Prior to the amendment interest was payable at the lesser of (i) such
financial institution's prime rate plus 1%, or (ii) such financial institution's
LIBOR rate plus 3.5%. On March 30, 1998 the Bank granted the Company a waiver of
compliance with the minimum tangible net worth requirement at December 31, 1997
and March 31, 1998 and the minimum liquidity requirement at March 31, 1998. As
of March 30, 1998, the outstanding principal balance of the Bank Credit Facility
is approximately $5.0 million. For an additional description of the Bank Credit
Facility see "Note 6(a) of the Notes to Consolidated Financial Statements."
Equipment Leases
In 1997, the Company financed the purchase of furniture for the
Cambridge facility through a lease line transaction of approximately $1.2
million. These borrowings are payable in 60 monthly payments of approximately
$26,000.
In 1996, the Company financed the purchase of manufacturing equipment
and other equipment at the Milford manufacturing facility through a
sale/leaseback transaction of approximately $1.7 million under a $2.9 million
lease line with a leasing company in the fourth quarter of 1996. These
borrowings are payable in 48 monthly payments ranging from $36,000 to $50,000.
In June 1997, the Company used the remaining $1.2 million under the lease line
to finance the purchase of equipment through a sale/leaseback transaction. These
borrowings are payable in 48 monthly payments ranging from $24,000 to $34,000.
Facility Leases
The Company entered into a lease for its corporate headquarters and
primary research and development laboratories in Cambridge, Massachusetts and
moved its operations to this facility in the first quarter of 1997. The
Company's facilities costs increased significantly upon occupying the Cambridge
facility. As part of the lease agreement, the Company elected to treat $5.5
million of payments to the landlord (primarily related to tenant improvements)
as contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord. All other expenses
incurred to equip and build-out the facility in excess of $5.5 million are
included in leasehold improvements and are not exchangeable for a partnership
interest under the lease. The Cambridge landlord is an affiliate of three
directors of the Company. The Company also is a party to leases for its
facilities in
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Milford, Massachusetts and the ancillary facility in Cambridge, Massachusetts,
under which it has significant payment obligations. Effective March 31, 1998,
the Company has terminated the lease for its office space in Paris, France. As
discussed in Note 15 to the Consolidated Financial Statements, at December 31,
1997 the Company had facility lease commitments amounting to approximately
$59.6 million.
As of December 31, 1997, the Company had approximately $206 million and
$3.4 million of net operating loss and tax credit carryforwards, respectively.
The Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may
limit the Company's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period. The
Company has completed several financings since the effective date of the Tax
Act, which, as of December 31, 1997, have resulted in ownership changes in
excess of 50%, as defined under the Tax Act.
1998 FINANCING ACTIVITIES
On January 22, 1998, the Company commenced the 1998 Unit Financing
referred to above under the caption "General." The 1998 Unit Notes bear interest
at a rate of 14% per annum; provided that if the 1998 Unit Financing is
terminated before the Mandatory Conversion Event (as defined below) has
occurred, the interest rate shall increase to 18% per annum. The Company is
required to make semi-annual interest payments on the outstanding principal
balance of the 1998 Unit Notes on April 1 and October 1 of each year during
which such 1998 Unit Notes are outstanding, with the first such payment being
due on April 1, 1998, which interest payment obligation may be satisfied through
the issuance of additional 1998 Unit Notes valued at their principal amount. The
Company plans to satisfy the interest payment due April 1, 1998 by issuing 1998
Unit Notes. The outstanding principal balance of the 1998 Unit Notes will become
due on December 31, 2007. The 1998 Unit Notes are secured by substantially all
of the Company's assets, subject to the lien on the Company's assets held by the
Bank, are subordinate to the Company's existing indebtedness to the Bank, are
senior to approximately 80% of the 1997 9% Notes to the extent provided in a
subordination agreement executed by certain holders of the 1997 9% Notes and,
except as otherwise provided in this sentence, rank on a parity with the 1997 9%
Notes.
The 1998 Unit Notes are not convertible at the option of the holder,
but will automatically convert into a new issue of Series B Convertible
Preferred Stock of the Company if the aggregate net proceeds from the 1998 Unit
Financing exceeds $20.0 million and the holders of at least 80% of the
aggregate principal amount of the 1997 9% Notes have exchanged such Notes for a
new issue of Series A Convertible Preferred Stock of the Company pursuant to
the exchange offer (the "Exchange Offer") described in the following paragraph
(such two conditions, the "Mandatory Conversion Event"). The Series B
Convertible Preferred Stock underlying the 1998 Unit Notes would rank as to
liquidation junior to the Series A Convertible Preferred Stock issuable in the
Exchange Offer.
Each Unit includes warrants to purchase 15% (or, in certain
circumstances, 20%) of the number of shares of Common Stock underlying the
Series B Convertible Preferred Stock underlying the 1998 Unit Notes included in
such Unit and may include additional warrants in certain circumstances described
below. The Series B Convertible Preferred Stock, if issued, and warrants are
convertible into, and exercisable for, Common Stock at a conversion or exercise
price equal to the lowest of (i) 80% of the average closing bid price of the
Company's Common Stock for the 30 consecutive trading days immediately preceding
any closing in the 1998 Unit Financing or (ii) 80% of the average closing bid
price of the Company's Common Stock for the five consecutive trading dates
immediately preceding any closing in the 1998 Unit Financing; provided, however,
that if on the termination date of the 1998 Unit Financing the Company has not
received least $20,000,000 in net proceeds from the 1998 Unit Financing or the
holders of less than $40,000,000 in principal amount of the 1997 9% Notes accept
the Exchange Offer, holders of Units will be entitled to receive additional
warrants to purchase, at an exercise price of $0.001 per share, a number of
shares of Common Stock equal to 100% of the Common Stock then issuable upon
conversion of the Series B Convertible Preferred Stock then issuable upon
conversion of the 1998 Unit Notes purchased by such investors, in which case the
1998 Unit Notes will not be convertible into equity securities. If the market
price of the Common Stock is less than 125% of the conversion price of the
Series B Preferred Stock on the one-year anniversary of the final closing date
of the 1998 Unit Financing, the conversion price of the Series B Convertible
Preferred Stock will be further adjusted (the "Series B Reset") to the greater
of (a) the market price of the Common Stock at such time divided by 1.25 and (b)
50% of the conversion price of the Series B Convertible Preferred Stock at such
time, and holders of the Series B Convertible Preferred Stock will also be
entitled to receive additional warrants to purchase a number of shares of Common
Stock equal to 50% of the additional number of shares of Common Stock issuable
upon conversion of the Series B Convertible Preferred Stock following the Series
B Reset.
On February 6, 1998, the Company commenced an Exchange Offer to the
holders of its 1997 9% Notes to exchange such 1997 9% Notes for Series A
Convertible Preferred Stock and certain warrants of the Company. In the Exchange
Offer, each $1,000 of principal amount and accrued but unpaid interest on the
1997 9% Notes may be exchanged, upon the terms and subject to the conditions set
forth in the Exchange Offer documents, for 10 shares of Series A Convertible
Preferred Stock, stated value $100 per share, and warrants to purchase such a
number of shares of Common Stock of the Company equal to 15% of the number of
shares of Common Stock into which such Series A Convertible Preferred Stock
would be convertible at 212.5% of the initial conversion price of the Series B
Convertible Preferred Stock (the "Stated Price"). Such Series A Convertible
Preferred Stock would have a liquidation preference of $100 per share plus
accrued but unpaid dividends and would bear a dividend of the 6.5% per annum,
payable on April 1 and October 1 of each year in cash or additional Series A
Preferred Stock, at the option of the Company. The conversion price would be $35
per share of Common Stock through April 1, 2000 and the Stated Price thereafter,
which conversion price would be reset upon the occurrence of any Series B Reset
to 212.5% of the re-set Series B conversion price. Exchanging holders of 1997 9%
Notes will be granted the right to designate a nominee to the Board of
Directors of the Company (the "Designated Director"). There can be no assurance
that the Exchange Offer will be successful.
On March 30, 1998, the Company amended its Exchange Offer to provide
that the terms of the Series A Convertible Preferred Stock and warrants issuable
in the Exchange Offer would be revised as described below if the following
conditions (the "Equity Conditions") had been met no later than the date the
Company accepts for exchange in the Exchange Offer at least $40 million
principal amount of 1997 9% Notes: (i) the Company consummates an offering, the
size of which is acceptable to the Designated Director, of units consisting of
Common Stock priced (the "Common Stock Offering Price") at the greater of $2.00
and 85% of the Market Price (as defined below) of the Common Stock and warrants
to purchase a number of shares of Common Stock equal to 25% of such Common Stock
sold at an exercise price equal to 120% of the Common Stock Offering Price (the
"120% Exercise Price"); (ii) the Company consummates an offering, with gross
proceeds of at least $10 million, of Units consisting of shares of preferred
stock having the same terms as the preferred stock issuable in the amended
Exchange Offer, and warrants with the same 25% coverage as the warrants issuable
in the amended Exchange Offer, as described in the following paragraph, but at
the 120% Exercise Price (which shares are expected to be sold at a 30% discount
from stated value); and (iii) all 1998 Note Units previously sold and accrued
interest thereon are exchanged for Common Stock and warrants to purchase a
number of shares of Common Stock equal to 30% of the Common Stock issued in such
1998 Note Unit exchange, such Common Stock and Warrants to be valued, and to
have the terms, described in clause (i) above. "Market Price" means the average
reported closing bid price of the Common Stock for the five consecutive trading
days immediately preceding the closing date.
The amended Exchange Offer provides that if the Equity Conditions are
met, (a) the conversion terms of the Series A Convertible Preferred Stock will
be revised as follows: (i) the conversion price will be 212.5% of the Common
Stock Offering Price described above, (ii) such Series A Convertible Preferred
Stock will not be convertible for one year following the closing; and (iii) such
Series A Convertible Preferred Stock will have no conversion price reset
mechanism and (b) the warrant coverage will increase from 15% to 25% of the
number of shares of Common Stock underlying the Series A Convertible Preferred
Stock (such warrants being exercisable at 212.5% of the Common Stock Offering
Price) and will not have any conversion price reset provisions.
The Company intends to use its best efforts to achieve the Equity
Conditions, although no assurance can be given that such attempt will be
successful. If the same cannot be accomplished in a timely manner, the Company
will continue to proceed with the original financing plan.
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.
Capital Needs; Uncertainty of Additional Funding; Risk of Insolvency
The Company has very limited cash resources and substantial obligations
to lenders, equipment lessors, real estate landlords and trade creditors. The
Company commenced the 1998 Unit Financing in January 1998 and to date has
received aggregate gross proceeds of approximately $4.8 million at closings held
in the first quarter of 1998. The Company's ability to continue operations in
1998 depends on its success in raising new funds in the 1998 Unit Financing or
otherwise. The Company believes that if it raises approximately an additional
$25.0 million in gross proceeds from the 1998 Unit Financing by April 30, 1998,
and at least $40 million principal amount of 1997 9% Notes are exchanged for
preferred stock of the Company pursuant to the 1998 Unit Financing, then such
$25 million, together with the committed collaborative research and development
payments from Searle for 1998 and anticipated sales of DNA products and reagents
to third parties by the HSP Division and margins on such sales, will be adequate
to fund the Company's capital requirements through 1998. However, there can be
no assurance that the Company will receive any additional proceeds from the 1998
Unit Financing or obtain funds from other sources. If the Company is unable to
obtain substantial additional new funding in April 1998, it will be
required to terminate its operations or seek relief under applicable
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bankruptcy laws by the end of April 1998. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company anticipates that, even if it obtains sufficient cash to
fund its operations in 1998, 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
1998. 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, sell the HSP Division or terminate operations or seek relief
under applicable bankruptcy laws. It is also possible that creditors of the
Company may seek to commence involuntary bankruptcy proceedings against the
Company.
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 third parties
manufactured on a custom contract basis by the HSP 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.
Early Stage of Development; Technological Uncertainty
The Company'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.
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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 a 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.
In July 1997, the Company discontinued the development of GEM 91, its
first- generation antisense drug for the treatment of AIDS and HIV infection,
based on a review of 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. The Company had devoted significant funding and development
efforts in GEM 91, and GEM 91 was the Company's most advanced product candidate.
Although the Company is conducting clinical trials on 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
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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 enrolment 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 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.
History of Operating Losses and Accumulated Deficit
The Company has incurred net losses since its inception. At December
31, 1997, the Company's accumulated deficit was approximately $218.7 million.
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 HSP 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. In 1997, revenues generated
from the sale of synthetic DNA products and reagents were significantly 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 drug sales or profitability.
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.
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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 it 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 applicable 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 may hold 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.
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 other parties' proprietary rights. The
Company also will 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.
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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
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
Attraction and Retention of Key Employees and Scientific Collaborators;
Employment Agreements
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 material adverse
effect on the Company. The Company has executed Employment Agreements with
Messrs. Grinstead and Agrawal. Mr. Grinstead's agreement provides for an
employment term ending on June 30, 2001 (unless sooner terminated in accordance
with the provisions of the agreement), and Mr. Agrawal's agreement provides for
an employment term ending on June 30, 2000 (unless sooner terminated in
accordance with the agreement). For further information, see "Compensation of
Executive Officers" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 15, 1998.
From June 30, 1997 to March 30, 1998, the number of employees of the
Company has decreased from 213 to 78. As a result, the Company has lost
significant expertise and will be required to recruit and retain new personnel
in order to perform its operations. In addition, any growth or expansion of the
Company will require recruiting and retaining qualified scientific personnel to
perform research and development work. There can be no assurance that under
either circumstance the Company will be able to attract and retain such
personnel on acceptable terms given the competition for experienced scientists
among numerous pharmaceutical, biotechnology and health care companies,
universities and non-profit research institutions. In addition, the Company's
growth and expansion into areas and activities requiring additional expertise,
such as clinical testing, governmental approvals, production and marketing,
would be expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. The
failure to acquire such services or to develop such expertise could have a
material adverse effect on the Company.
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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.
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 HSP Division will be dependent upon
the demand for and margins on these products. Demand for such products was
significantly lower than anticipated in 1997. The results of operations of the
HSP 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 regulations. See "Certain Factors That May Affect
Future Results -- Limited Manufacturing Capability."
The Company believes that it is currently manufacturing
oligonucleotides in substantial compliance with FDA requirements for
manufacturing in compliance with GMP, although its facility and procedures have
not been formally inspected by the FDA and the procedures and documentation
followed may have to be enhanced in the future as the Company expands its
oligonucleotide production activities. Failure to establish to the FDA's
satisfaction compliance with GMP can result in the FDA denying authorization to
initiate or continue clinical trials, to receive approval of a product or to
begin or to continue commercial marketing.
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 HSP 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
"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 purchase or the purchaser's customers. The
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Company has limited experience in sales, marketing and distribution and is
relying in part upon the efforts of a third party, Perkin-Elmer, in connection
with the marketing and sale of products by the HSP Division. See "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 party to a corporate
collaboration with Searle, a subsidiary of Monsanto Company, in the field of
inflammation/immunomodulation and Medtronic relating to Alzheimers, 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. For example, in 1997, Roche
terminated the collaborative relationship with the Company that was established
in 1992 without selecting any compounds for further development.
The Company expects that under certain of its collaborations, 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 will also 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 its 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 arrangements.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity
for the Company's Securities.
Since the Common Stock is not listed on a national securities exchange
or on a qualified automated quotation system, it is subject to Rule 15g-9 under
the Securities
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Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers that sell such securities. Rule
15g-9 defines a "penny stock" to be any equity security that has a market price
(as therein defined) of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions including the
securities being quoted on the Nasdaq National Market or SmallCap Market. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale.
The foregoing required penny stock restrictions would not apply to the
Company's securities if the Company's Common Stock was listed on the Nasdaq
National Market or SmallCap Market or met certain minimum net tangible assets or
average revenue criteria. The Company's securities, however, do not qualify for
exemption from the penny stock restrictions. There can be no assurance that the
Common Stock will qualify for listing on the Nasdaq National Market or SmallCap
Market in the foreseeable future, if at all. In any event, even if the Company's
securities are exempt from such restrictions, the Company would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Securities and Exchange
Commission (the "Commission") the authority to restrict any person from
participating in a distribution of penny stock, if the Commission finds that
such a restriction would be in the public interest.
The market liquidity for the Company's securities is likely to be
materially adversely affected by these requirements. In addition, such rules are
likely to adversely affect the Company's ability to raise funds and the ability
of broker-dealers to sell the Company's securities in the secondary market.
No Assurance of Regulatory Approval; Government Regulation
The Company's preclinical studies and clinical trials, as well as the
manufacturing and marketing of the potential products being developed by it and
the products sold by the HSP 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. Satisfaction of these requirements, which
include demonstrating to the satisfaction of the FDA and foreign regulatory
agencies that the product is both safe and effective, typically takes several
years or more and can vary substantially based upon the type, complexity and
novelty of the product. There can be no assurance that such testing will show
any product to be safe or efficacious. Preclinical studies of the Company's
product development candidates are subject to Good Laboratory Practices ("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 the HSP Division, will be subject to GMP requirements
prescribed by the FDA.
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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 carrying interpretations which could
delay, limit or prevent regulatory approval by the FDA or other regulatory
agencies. The Company, an independent Institutional Review Board (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
limitations 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 daily regulatory approval of the Company's potential products.
Even if initial regulatory approvals for the Company's product
candidates are obtained, the Company, its products and its manufacturing
facilities would be subject to continual review and periodic inspection.
Moreover, additional government regulations from future legislation or
administrative action may be established which could prevent or delay regulatory
approval of the Company's products or further regulate the prices at which the
Company's proposed products may be sold. The regulatory standards for
manufacturing are applied stringently by the FDA. In addition, a marketed drug
and its manufacturer are subject to continual review and any 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.
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.
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66
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 the 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 oligonucleotides 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 many of
the disease targets being pursued by the Company.
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.
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, the HSP 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 HSP
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
successfully to 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.
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67
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 products in 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.
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. There can be no assurance that nucleotide
building blocks will be obtainable at acceptable costs, if at all. The inability
of Hybridon to obtain these nucleotide building blocks from one of these
suppliers, or to obtain them at an acceptable cost, could have a material
adverse effect on Hybridon.
Absence of Sales and Marketing Experience
The Company expects eventually to market and sell certain of its
prospective 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 and 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, if at all. 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 HSP Division,
the Company has entered into a sales and marketing arrangement with Perkin-Elmer
with respect to such products and is reliant in part 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
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68
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-market 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.
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 HSP 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.
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
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69
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 organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products and
services. There can be no assurance that any of the Company's potential products
will be considered cost-effective or that adequate third-party reimbursement
will be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on its investment. Also the trend towards managed
health care in the U.S. and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the 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 times 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.
Concentration of Ownership by Directors and Executive Officers
The Company's directors and executive officers and their affiliates
beneficially own a significant percentage of the Company's outstanding Common
Stock. 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
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Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial statements required to be filed hereunder are filed as
APPENDIX A hereto, are listed under Item 14(a), and are incorporated herein by
this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item is contained in part under the caption
"Executive Officers and Significant Employees of the Company" in Part I of this
Annual Report on Form 10-K and in part in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 15, 1998 (the "1998 Proxy
Statement") under the caption "Proposal 1--Election of Directors," which section
is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of
the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this item is contained in the 1998 Proxy Statement
under the caption "Proposal 1--Election of Directors," which section is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is contained in the 1998 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management,"
which section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is contained in the 1998 Proxy Statement
under the caption "Certain Relationships and Related Transactions," which
section is incorporated herein by this reference.
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71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as APPENDIX A hereto and are
included as part of this Annual Report on Form 10-K:
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) The Company is not filing any financial statement schedules as
part of this Annual Report on Form 10-K because they are not
applicable or the required information is included in the
financial statements or notes thereto.
(c) The list of Exhibits filed as a part of this Annual Report on
Form 10-K are set forth on the Exhibit Index immediately
preceding such Exhibits, and is incorporated herein by this
reference.
(d) REPORTS ON FORM 8-K. The following reports on Form 8-K were
filed during the last quarter of the Company's fiscal year
ended December 31, 1997.
On November 19, 1997, the Company filed a Current Report on
Form 8-K, dated October 18, 1997, announcing that the Company
planned to commence a private offering of up to $50.0 million
of its Common Stock.
On December 10, 1997, the Company filed a Current Report on
Form 8-K, dated December 3, 1997, announcing that, effective
as of the close of business on December 2, 1997, the Company's
Common Stock was delisted from the Nasdaq National Market and
the Company's Common Stock would be quoted on the OTC Bulletin
Board commencing on December 3, 1997.
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72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ E. Andrews Grinstead, III
------------------------------------
E. Andrews Grinstead, III
Chairman of the Board, President and
Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ E. Andrews Grinstead, III Chairman of the Board, March 30, 1998
- ----------------------------- President and Chief Executive
E. Andrews Grinstead, III Officer and Director (Principal
Executive Officer)
/s/ Robert G. Andersen Treasurer (Principal Financial March 30, 1998
- ----------------------------- and Accounting Officer)
Robert G. Andersen
/s/ Sudhir Agrawal Director March 30, 1998
- -----------------------------
Sudhir Agrawal
/s/ Mohamed El-Khereiji Director March 30, 1998
- -----------------------------
Mohamed El-Khereiji
/s/ Youssef El-Zein Director March 30, 1998
- -----------------------------
Youssef El-Zein
/s/ Nasser Menhall Director March 30, 1998
- -----------------------------
Nasser Menhall
/s/ James B. Wyngaarden Director March 28, 1998
- -----------------------------
James B. Wyngaarden
/s/ Paul C. Zamecnik Director March 30, 1998
- -----------------------------
Paul C. Zamecnik
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73
Appendix A
INDEX
PAGE
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1997, and for the period from
inception (May 25, 1989) to December 31, 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
period from inception (May 25, 1989) to December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997, and for the period from
inception (May 25, 1989) to December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
F-1
74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hybridon, Inc.:
We have audited the accompanying consolidated balance sheets of Hybridon, Inc.
(a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997 and for the period from inception
(May 25, 1989) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hybridon, Inc. and subsidiaries
as of December 31, 1996 and 1997 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
and for the period from inception (May 25, 1989) to December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred significant losses which it has funded through the issuance of equity
securities, debt issuances and through research and development collaborations
and licensing agreements. As of December 31, 1997, the Company had a working
capital deficit of $(24.1) million and a stockholders' deficit of $(46.0)
million. Subsequent to December 31, 1997, the Company has raised $4.8 million
through the equity financing discussed in Note 1, as of March 30, 1998. The
Company expects such resources to fund operations through March 1998. There is
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. See Note 1 for management's plans.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 18, 1998 (except
with respect to the matters
discussed in Note 1 and Note 6(a)
as to which date is March 30, 1998)
F-2
75
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ 12,633,742 $ 2,202,202
Short-term investments 3,785,146 --
Accounts receivable 573,896 529,702
Prepaid expenses and other current assets 1,545,324 1,005,825
------------- -------------
Total current assets 18,538,108 3,737,729
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 9,257,516 16,027,734
Laboratory equipment 5,884,861 6,770,402
Equipment under capital leases 2,904,688 4,879,190
Office equipment 1,496,639 1,947,818
Furniture and fixtures 499,957 645,264
Construction-in-progress 2,193,400 45,409
------------- -------------
22,237,061 30,315,817
Less--Accumulated depreciation and amortization 6,596,293 11,085,013
------------- -------------
15,640,768 19,230,804
------------- -------------
OTHER ASSETS:
Restricted cash 437,714 3,050,982
Notes receivable from officers 317,978 247,250
Deferred financing costs and other assets 1,152,034 3,354,767
Investment in real estate partnership 5,450,000 5,450,000
------------- -------------
7,357,726 12,102,999
------------- -------------
$ 41,536,602 $ 35,071,532
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ 1,308,511 $ 7,868,474
Accounts payable 4,064,419 8,051,817
Accrued expenses 4,190,766 11,917,298
Deferred revenue 86,250 --
------------- -------------
Total current liabilities 9,649,946 27,837,589
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 9,031,852 3,282,123
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE -- 50,000,000
------------- -------------
COMMITMENTS (Notes 10 and 15)
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--5,029,315 and
5,059,650 at December 31, 1996 and 1997,
respectively 5,029 5,060
Additional paid-in capital 173,247,476 173,695,698
Deficit accumulated during the development stage (149,193,775) (218,655,101)
Deferred compensation (1,203,926) (1,093,837)
------------- -------------
Total stockholders' equity (deficit) 22,854,804 (46,048,180)
------------- -------------
$ 41,536,602 $ 35,071,532
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
76
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997
REVENUES:
Research and development $ 1,186,124 $ 1,419,389 $ 945,000 $ 5,499,263
Product revenue -- 1,080,175 1,876,862 2,957,037
Royalty income -- 62,321 48,000 110,321
Interest income 218,749 1,446,762 1,079,122 3,220,739
------------ ------------ ------------- -------------
1,404,873 4,008,647 3,948,984 11,787,360
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Research and development 29,684,707 39,390,525 46,827,915 165,459,815
General and administrative 6,094,085 11,346,670 11,026,748 47,816,616
Interest 172,757 124,052 4,535,647 6,146,030
Restructuring -- -- 11,020,000 11,020,000
------------ ------------ ------------- -------------
35,951,549 50,861,247 73,410,310 230,442,461
------------ ------------ ------------- -------------
Net loss $(34,546,676) $(46,852,600) $ (69,461,326) $(218,655,101)
============ ============ ============= =============
Basic and Diluted Net Loss per Common Share $ (94.70) $ (10.24) $ (13.76)
============ ============ =============
Shares Used in Computing Basic and Diluted
Net Loss per Common Share 364,810 4,575,555 5,049,840
============ ============ =============
Pro Forma Net Loss per Common Share (Note 2(b)) $ (11.02) $ (9.67) $ (13.76)
============ ============ =============
Shares Used in Computing Pro Forma Net Loss
per Common Share (Note 2(b)) 3,134,854 4,843,414 5,049,840
============ ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
77
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
NUMBER OF NUMBER OF $.001 PAR
SHARES $.01 PAR VALUE SHARES VALUE
Initial Issuance of Common Stock -- $ -- 133,700 $ 134
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 175,000 1,750 -- --
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 129,629 1,296 -- --
Issuance of common stock -- -- 133,460 133
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1990 304,629 3,046 267,160 267
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 104,000 1,040 -- --
Repurchase of common stock -- -- (52,500) (53)
Deferred compensation related to restricted stock
awards -- -- -- --
Amortization of deferred compensation -- -- -- --
Compensation expense related to stock option grants -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1991 408,629 4,086 214,660 214
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 184,000 1,840 -- --
Issuance of common stock related to restricted stock
awards -- -- 100,053 100
Issuance of common stock related to the exercise of
stock options -- -- 34,615 35
Issuance of warrants -- -- -- --
Deferred compensation related to stock options and
restricted stock awards -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1992 592,629 5,926 349,328 349
Issuance of Series D convertible preferred stock in
exchange for convertible promissory notes payable,
including accrued interest, net of cash issuance
costs of $113,955 378,351 3,784 -- --
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 275,862 2,759 -- --
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 407,800 4,078 -- --
Issuance of common stock related to the exercise of
stock options -- -- 8,725 9
Reduction in deferred compensation due to stock
option termination prior to vesting -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT DEFERRED EQUITY
CAPITAL STAGE COMPENSATION (DEFICIT)
Initial Issuance of Common Stock $ 535 $ -- $ -- $ 669
Issuance of Series A convertible preferred stock, net
of cash issuance costs of $18,000 855,250 -- -- 857,000
Issuance of Series B convertible preferred stock, net
of cash issuance costs of $11,900 1,736,801 -- -- 1,738,097
Issuance of common stock 534 -- -- 667
Net loss -- (1,110,381) -- (1,110,381)
----------- ----------- ----------- -----------
Balance, December 31, 1990 2,593,120 (1,110,381) -- 1,486,052
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $23,197 2,575,763 -- -- 2,576,803
Repurchase of common stock (210) -- -- (263)
Deferred compensation related to restricted stock
awards 2,328,764 -- (2,328,764) --
Amortization of deferred compensation -- -- 727,738 727,738
Compensation expense related to stock option grants 669,433 -- -- 669,433
Net loss -- (6,648,899) -- (6,648,899)
----------- ----------- ----------- -----------
Balance, December 31, 1991 8,166,870 (7,759,280) (1,601,026) (1,189,136)
Issuance of Series C convertible preferred stock, net
of cash issuance costs of $20,291 4,577,869 -- -- 4,579,709
Issuance of common stock related to restricted stock
awards 122,644 -- -- 122,744
Issuance of common stock related to the exercise of
stock options 3,303 -- -- 3,338
Issuance of warrants 2,776,130 -- -- 2,776,130
Deferred compensation related to stock options and
restricted stock awards 2,249,428 -- (2,249,428) --
Amortization of deferred compensation -- -- 1,332,864 1,332,864
Net loss -- (14,694,693) -- (14,694,693)
----------- ----------- ----------- -----------
Balance, December 31, 1992 17,896,244 (22,453,973) (2,517,590) (7,069,044)
Issuance of Series D convertible preferred stock in
exchange for convertible promissory notes payable,
including accrued interest, net of cash issuance
costs of $113,955 9,596,767 -- -- 9,600,551
Issuance of Series E convertible preferred stock, net
of cash issuance costs of $61,251 9,935,988 -- -- 9,938,747
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $2,097,604 18,288,318 -- -- 18,292,396
Issuance of common stock related to the exercise of
stock options 26,679 -- -- 26,688
Reduction in deferred compensation due to stock
option termination prior to vesting (290,287) -- 290,287 --
Amortization of deferred compensation -- -- 1,124,839 1,124,839
Net loss -- (19,736,365) -- (19,736,365)
----------- ----------- ----------- -----------
F-5
78
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
NUMBER OF NUMBER OF $.001 PAR
SHARES $.01 PAR VALUE SHARES VALUE
BALANCE, DECEMBER 31, 1993 1,654,642 16,547 358,053 358
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 116,900 1,169 -- --
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 318,302 3,183 -- --
Issuance of common stock related to the exercise of
stock options -- -- 4,800 5
Cancellation of warrants -- -- -- --
Reduction in deferred compensation due to stock
option termination prior to vesting -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 2,089,844 20,899 362,853 363
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 1,106,591 11,066 -- --
Issuance of common stock related to the exercise of
stock options -- -- 5,880 6
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 3,196,435 31,965 368,733 369
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 -- -- 1,150,000 1,150
Conversion of convertible preferred stock to common
stock (3,196,435) (31,965) 3,371,330 3,371
Issuance of common stock related to the exercise of
stock options -- -- 57,740 58
Issuance of common stock related to the exercise of
warrants -- -- 81,512 81
Deferred compensation related to grants of common
stock options to nonemployees -- -- -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 -- -- 5,029,315 5,029
Issuance of common stock related to the exercise of
stock options -- -- 25,005 26
Issuance of common stock related to the exercise of
warrants -- -- 330 --
Issuance of common stock for services rendered -- -- 5,000 5
Deferred compensation related to grants of common
stock options to nonemployees -- -- -- --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 -- $ -- 5,059,650 $ 5,060
=========== =========== =========== ===========
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT DEFERRED EQUITY
CAPITAL STAGE COMPENSATION (DEFICIT)
BALANCE, DECEMBER 31, 1993 55,453,709 (42,190,338) (1,102,464) 12,177,812
Issuance of Series F convertible preferred stock, net
of cash issuance costs of $79,677 5,764,154 -- -- 5,765,323
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $1,006,841 11,722,072 -- -- 11,725,255
Issuance of common stock related to the exercise of
stock options 13,395 -- -- 13,400
Cancellation of warrants (68,000) -- -- (68,000)
Reduction in deferred compensation due to stock
option termination prior to vesting (14,062) -- 14,062 ---
Amortization of deferred compensation -- -- 764,228 764,228
Net loss -- (25,604,161) -- (25,604,161)
-------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1994 72,871,268 (67,794,499) (324,174) 4,773,857
Issuance of Series G convertible preferred stock, net
of cash issuance costs of $2,409,926 41,842,632 -- -- 41,853,698
Issuance of common stock related to the exercise of
stock options 41,494 -- -- 41,500
Amortization of deferred compensation -- -- 324,174 324,174
Net loss -- (34,546,676) -- (34,546,676)
-------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1995 114,755,394 (102,341,175) -- 12,446,553
Issuance of common stock related to initial public
offering, net of issuance costs of $5,268,756 52,230,094 -- -- 52,231,244
Conversion of convertible preferred stock to common
stock 28,594 -- -- ---
Issuance of common stock related to the exercise of
stock options 1,089,618 -- -- 1,089,676
Issuance of common stock related to the exercise of
warrants 3,176,660 -- -- 3,176,741
Deferred compensation related to grants of common
stock options to nonemployees 1,967,116 -- (1,967,116) --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- 763,190 763,190
Net loss -- (46,852,600) -- (46,852,600)
-------------- -------------- -------------- -------------
BALANCE, DECEMBER 31, 1996 173,247,476 (149,193,775) (1,203,926) 22,854,804
Issuance of common stock related to the exercise of
stock options 86,300 -- -- 86,326
Issuance of common stock related to the exercise of
warrants 9,075 -- -- 9,075
Issuance of common stock for services rendered 146,869 -- -- 146,874
Deferred compensation related to grants of common
stock options to nonemployees 205,978 -- (205,978) --
Amortization of deferred compensation relating to
grants of common stock options to nonemployees -- -- 316,067 316,067
Net loss -- (69,461,326) -- (69,461,326)
-------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1997 $ 173,695,698 $ (218,655,101) $ (1,093,837) $ (46,048,180)
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
79
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989)
YEARS ENDED DECEMBER 31 TO DECEMBER 31,
1995 1996 1997 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(34,546,676) $(46,852,600) $(69,461,326) $(218,655,101)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 2,023,553 2,393,751 4,488,719 11,186,454
Issuance of common stock for services
rendered -- -- 146,874 146,874
Compensation on grant of stock options,
warrants and restricted stock 324,174 763,190 316,067 8,123,798
Amortization of discount on convertible
promissory notes payable -- -- -- 690,157
Amortization of deferred financing costs -- -- 479,737 696,469
Write-down of assets related to
restructuring -- -- 600,000 600,000
Noncash interest on convertible
promissory notes payable -- -- -- 260,799
Changes in assets and liabilities-
Accounts receivable -- (573,896) 44,194 (529,702)
Prepaid expenses and other current
assets (769,562) (593,797) 539,499 (1,005,825)
Notes receivable from officers 8,446 (9,845) 70,728 (247,250)
Accounts payable and accrued expenses 483,585 2,747,122 11,713,930 19,969,116
Deferred revenue -- -- (86,250) --
Amounts payable to related parties (80,351) (12,500) -- (200,000)
------------ ------------ ------------ -------------
Net cash used in operating
activities (32,556,831) (42,138,575) (51,147,828) (178,964,211)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term
investments -- (3,785,146) 3,785,146 --
Purchases of property and equipment (4,889,624) (8,902,989) (7,509,755) (29,312,465)
Investment in real estate partnership (1,698,448) (3,751,552) -- (5,450,000)
------------ ------------ ------------ -------------
Net cash used in investing
activities (6,588,072) (16,439,687) (3,724,609) (34,762,465)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
preferred stock 41,853,698 -- -- 96,584,154
Proceeds from issuance of common stock
related to stock options and restricted
stock grants 41,500 1,089,676 86,326 1,260,928
Net proceeds from issuance of common stock -- 52,231,244 -- 52,355,324
Repurchase of common stock -- -- -- (263)
Proceeds from notes payable -- 7,500,000 -- 9,450,000
Proceeds from issuance of convertible
promissory notes payable -- -- 50,000,000 59,191,744
Proceeds from long-term debt -- -- -- 662,107
Proceeds from issuance of common stock
related to stock warrants -- 3,176,741 9,075 3,185,816
Proceeds from sale/leaseback of fixed assets -- 1,722,333 1,205,502 4,001,018
Payments on long-term debt and capital
leases (537,977) (446,163) (1,564,268) (3,365,880)
(Increase) decrease in restricted cash and
other assets (44,912) 401,990 (2,474,948) (4,139,131)
(Increase) decrease in deferred financing
costs (278,927) 251,921 (2,820,790) (3,256,939)
------------ ------------ ------------ -------------
Net cash provided by financing
activities 41,033,382 65,927,742 44,440,897 215,928,878
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,888,479 7,349,480 (10,431,540) 2,202,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,395,783 5,284,262 12,633,742 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,284,262 $ 12,633,742 $ 2,202,202 $ 2,202,202
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
80
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
devoted substantially all of its efforts toward product research and
development and raising capital. Management anticipates that
substantially all future revenues will be derived from the sale of
proprietary biopharmaceutical products under development or to be
developed in the future, and custom contract manufacturing of synthetic
DNA products and reagent products (by the Hybridon Specialty Products
Division (HSPD)), as well as from research and development revenues and
fees and royalties derived from licensing of the Company's technology.
Accordingly, although the Company has begun to generate revenues from its
custom 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.
On December 3, 1997, the Company was delisted from the Nasdaq Stock
Market, Inc. (NASDAQ) because the Company was not in compliance with the
continued listing requirements of the NASDAQ National Market. The Company
is currently trading on the NASDAQ OTC Bulletin Board.
As of December 31, 1997, the Company had a working capital deficit of
$(24.1) million and a stockholders' deficit of $(46.0) million. Although
the Company has raised approximately $4.8 million in gross proceeds from
the 1998 Unit Financing, subsequent to December 31, 1997, the Company
continues to have very limited cash resources and substantial obligations
to lenders. The Company's ability to continue operations in 1998 depends
on its success in raising new funds. There is substantial doubt
concerning the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. If the Company is
unable to obtain a substantial amount of additional funding in April
1998, it will be required to terminate its operations or seek relief
under applicable bankruptcy law by the end of April 1998. Management's
plans to obtain additional financing are described below.
On January 22, 1998, the Company commenced a private placement (the 1998
Unit Financing) of units consisting of notes (the 1998 Unit Notes) and
warrants to issue common stock. The 1998 Unit Financing is being offered
through Pillar Investments Ltd., an entity with which two directors of
the Company are affiliated and which is a significant shareholder of the
Company (the placement agent), as the Company's placement agent, on a
best effort basis. As consideration for these services, Pillar
Investments Ltd., will receive fees consisting of 9% of the gross
proceeds of the 1998 Unit Financing, a non-accountable expense allowance
equal to 4% of the gross proceeds of the 1998 Unit Financing and warrants
to purchase common stock. The 1998 Unit Notes bear interest at a rate of
14% per annum; provided that if the 1998 Unit Financing is terminated
before the Mandatory Conversion Event (as defined below) has occurred,
the interest rate shall increase to 18% per annum. The Company is
required to make semi-annual interest payments on the outstanding
principal balance of the 1998 Unit Notes on April 1 and October 1 of each
year during which such 1998 Unit Notes are outstanding, with the first
such payment being due on April 1, 1998, which interest payment
obligation may be satisfied through the issuance of additional 1998 Unit
Notes valued at their principal amount. The Company plans to satisfy the
interest payment due April 1, 1998 by issuing 1998 Unit Notes. The
outstanding principal balance of the 1998 Unit Notes will become due on
December 31, 2007. The 1998 Unit Notes are secured by substantially all
of the Company's assets, subject to the lien on the Company's assets held
by the Bank, are subordinate to the Company's existing indebtedness to
the Bank, are senior to approximately 80% of the 9.0% Convertible
Subordinated Notes ( the 9% Notes, see Note 6(d)) to the extent provided
in a subordination agreement executed by certain holders of the 9% Notes
and, except as otherwise provided in this sentence, rank on a parity with
the 9% Notes.
The 1998 Unit Notes are not convertible at the option of the holder, but
will automatically convert into a new issue of Series B Convertible
Preferred Stock of the Company if the aggregate net proceeds from the
1998 Unit Financing exceeds $20.0 million and the holders of at least 80%
of the aggregate principal amount of the 9% Notes have exchanged such
Notes for a new issue of Series A Convertible Preferred Stock of the
Company pursuant to the exchange offer (the Exchange Offer) described in
the following paragraph (such two conditions, the Mandatory Conversion
Event). The Series B Convertible Preferred Stock underlying the 1998
Unit Notes would rank as to liquidation junior to the Series A
Convertible Preferred Stock issuable in the Exchange Offer.
Each Unit includes warrants to purchase 15% (or, in certain
circumstances, 20%) of the number of shares of common stock underlying
the Series B Convertible Preferred Stock underlying the 1998 Unit Notes
included in such Unit and may include additional warrants in certain
circumstances described below. The Series B Convertible Preferred Stock,
if issued, and warrants are convertible into, and exercisable for, common
stock at a conversion or exercise price equal to the lowest of (i) 80% of
the average closing bid price of the Company's common stock for the 30
consecutive trading days immediately preceding any closing in the 1998
Unit Financing or (ii) 80% of the average closing bid price of the
Company's common stock for the five consecutive trading dates immediately
preceding any closing in the 1998 Unit Financing; provided, however, that
if on the termination date of the 1998 Unit Financing the Company has not
received at least $20,000,000 in net proceeds from the 1998 Unit
Financing or the holders of less than $40,000,000 in principal amount of
the 9% Notes accept the Exchange Offer, holders of Units will be entitled
to receive additional warrants to purchase, at an exercise price of
$0.001 per share, a number of shares of common stock equal to 100% of the
common stock then issuable upon conversion of the Series B Convertible
Preferred Stock then issuable upon conversion of the 1998 Unit Notes
purchased by such investors, in which case the 1998 Unit Notes will not
be convertible into equity securities. If the market price of the common
stock is less than 125% of the conversion price of the Series B Preferred
Stock on the one-year anniversary of the final closing date of the 1998
Unit Financing, the conversion price of the Series B Convertible
Preferred Stock will be further adjusted (the Series B Reset) to the
greater of (a) the market price of the common stock at such time divided
by 1.25 and (b) 50% of the conversion price of the Series B Convertible
Preferred Stock at such time, and holders of the Series B Convertible
Preferred Stock will also be entitled to receive additional warrants to
purchase a number of shares of common stock equal to 50% of the
additional number of shares of common stock issuable upon conversion of
the Series B Convertible Preferred Stock following the Series B Reset.
As of March 30, 1998, the Company has received $4.8 million of gross
proceeds from the 1998 Unit Financing.
On February 6, 1998, the Company commenced an Exchange Offer to the
holders of the 9% Notes to exchange the 9% Notes for a Series A
Convertible Preferred Stock and certain warrants of the Company. In the
Exchange Offer, each $1,000 of principal amount and accrued but unpaid
interest on the 9% Notes may be exchanged, upon the terms and subject to
the conditions set forth in the Exchange Offer documents, for 10 shares
of Series A Convertible Preferred Stock, stated value $100 per share, and
warrants to purchase such a number of shares of common stock of the
Company equal to 15% of the number of shares of common stock into which
such Series A Convertible Preferred Stock would be convertible at 212.5%
of the initial conversion price of the Series B Convertible Preferred
Stock (the Stated Price). Such Series A Convertible Preferred Stock
would have a liquidation preference of $100 per share plus accrued but
unpaid dividends and would bear a dividend of the 6.5% per annum,
payable on April 1 and October 1 of each year in cash or additional
Series A Preferred Stock, at the option of the Company. The conversion
price would be $35 per share of common stock through April 1, 2000 and
the Stated Price thereafter, which conversion price would be reset upon
the occurrence of any Series B Reset to 212.5% of the re-set Series B
conversion price. Exchanging holders of the 9% Notes will be granted the
right to designate the nominee to the Board of Directors of the Company
(the Designated Director). As part of the Exchange Offer, approximately
82% of the 9% Note holders have consented as of March 30, 1998 to defer
the interest payment due on April 1, 1998 to October 1, 1998. There can
be no assurance that the Exchange Offer will be successful.
On March 30, 1998, the Company amended its Exchange Offer to provide that
the terms of the Series A Convertible Preferred Stock and warrants
issuable in the Exchange Offer would be revised as described below if the
following conditions (the Equity Conditions) had been met no later than
the date the Company accepts for exchange in the Exchange Offer at least
$40 million principal amount of the 9% Notes: (i) the Company consummates
an offering, the size of which is acceptable to the Designated Director,
of units consisting of common stock priced (the Common Stock Offering
Price) at the greater of $2.00 and 85% of the Market Price (as defined
below) of the common stock and warrants to purchase a number of shares of
common stock equal to 25% of such Common Stock sold at an exercise price
equal to 120% of the Common Stock Offering Price (the 120% Exercise
Price); (ii) the Company consummates an offering, with gross proceeds of
at least $10 million, of Units consisting of shares of preferred stock
having the same terms as the preferred stock issuable in the amended
Exchange Offer, and warrants with the same 25% coverage as the warrants
issuable in the amended Exchange Offer, as described in the following
paragraph, but at the 120% Exercise Price (which shares are expected to
be sold at a 30% discount from stated value); and (iii) all 1998 Note
Units previously sold and accrued interest thereon are exchanged for
common stock and warrants to purchase a number of shares of common stock
equal to 30% of the common stock issued in such 1998 Note Unit exchange,
such common stock and warrants to be valued, and to have the terms,
described in clause (i) above. Market Price means the average reported
closing bid price of the common stock for the five consecutive trading
days immediately preceding the closing date.
The amended Exchange Offer provides that if the Equity Conditions are
met, (a) the conversion terms of the Series A Convertible Preferred Stock
will be revised as follows: (i) the conversion price will be 212.5% of
the Common Stock Offering Price described above; (ii) such Series A
Convertible Preferred Stock will not be convertible for one year
following the closing; and (iii) such Series A Convertible Preferred
Stock will have no conversion price reset mechanism and (b) the warrant
coverage will increase from 15% to 25% of the number of shares of common
stock underlying the Series A Convertible Preferred Stock (such warrants
being exercisable at 212.5% of the Common Stock Offering Price) and will
not have any conversion price reset provisions.
F-8
81
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Net Loss per Common Share
Effective December 31, the Company adopted Statement of Financial
Accounting Standards (SFAS) No 128, Earnings per Share. Under SFAS
No. 128, basic net loss per common share is computed using the
weighted average number of shares of common stock outstanding
during the period. Diluted net loss per common share is the same
as basic net loss per common share as the effects of the Company's
potential common stock equivalents are antidilutive. The Company
has applied the provisions of SFAS No. 128 retroactively to all
periods presented. In accordance with staff Accounting Bulleting
(SAB) No. 98, the Company has determined that there were no
nominal issuances of capital in the period prior to the Company's
initial public offering (IPO). Antidilutive securities which
consist of stock options and warrants that are not included in
diluted net loss per common share were 2,441,436, 2,595,496, and
2,404,561 for 1995, 1996, and 1997, respectively. The calculation
of pro forma basic net loss per share assumes that all series of
convertible preferred stock had been converted to common stock as
of the original issuance date. Calculations of net loss per common
share and potential common share are as follows:
1995 1996 1997
Net loss $(34,546,676) $(46,852,600) $(69,461,326)
============ ============ ============
Weighted average shares outstanding 364,810 4,575,555 5,049,840
============ ============ ============
Basic and diluted net loss per share $ (94.70) $ (10.24) $ (13.76)
============ ============ ============
Weighted average shares outstanding 364,810 4,575,555 5,049,840
Convertible preferred stock 2,770,044 267,859 --
============ ============ ============
Pro forma weighted average shares
outstanding 3,134,854 4,843,414 5,049,840
============ ============ ============
Pro forma basic and diluted net loss per
share $ (11.02) $ (9.67) $ (13.76)
============ ============ ============
F-9
82
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
results of the Company and its subsidiaries, Hybridon S.A.
(Europe), a French corporation and Hybridon Canada, Inc. (an
inactive majority-owned subsidiary). The consolidated financial
statements also reflect the Company's 49% interest in MethylGene,
Inc. (MethylGene), a Canadian corporation which is accounted for
under the equity method (see Note 13). All material intercompany
balances and transactions have been eliminated in consolidation.
(d) Cash Equivalents and Short-Term Investments
The Company applies SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115,
debt securities that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost and are
classified as held-to-maturity securities. These securities
include cash equivalents, short term investments and restricted
cash. At December 31, 1996 and 1997, the Company has classified
all investments as held-to-maturity. The Company considers all
highly liquid investments with maturities of three months or less
when purchased to be cash equivalents. Short-term investments
mature within one year of the balance sheet date. Cash and cash
equivalents, short-term investments and restricted cash at
December 31, 1996 and 1997 consisted of the following (at
amortized cost, which approximates fair market value):
DECEMBER 31,
1996 1997
Cash and Cash Equivalents-
Cash and money market funds $10,144,367 $1,702,272
Corporate bond -- 499,930
U.S. government securities 2,489,375 --
----------- ----------
Total cash and cash equivalents $12,633,742 $2,202,202
=========== ==========
Short-Term Investments-
U.S. government securities $ 3,785,146 $ --
=========== ==========
Restricted Cash (Note 5)-
Certificates of deposit $ 437,714 $2,016,364
Savings Account -- 1,034,618
----------- ----------
$ 437,714 $3,050,982
=========== ==========
F-10
83
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(e) Depreciation and Amortization
Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the related assets
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Leasehold improvements Life of lease
Laboratory equipment 5 years
Equipment under capital lease 5 years
Office equipment 3-5 years
Furniture and fixtures 5 years
(f) Accrued Expenses
Accrued expenses on the accompanying consolidated balance sheets
consist of the following:
DECEMBER 31,
1996 1997
Restructuring $ -- $ 8,316,148
Interest -- 1,125,000
Payroll and related costs 1,593,451 742,452
Outside research and clinical costs 1,381,124 1,231,818
Professional fees 390,440 150,000
Other 825,751 351,880
----------- -----------
$ 4,190,766 $11,917,298
=========== ===========
(g) Revenue Recognition
The Company has recorded research and development revenue under
the consulting and research agreements discussed in Notes 7 and 8.
Revenue is recognized as earned on a straight-line basis over the
term of the agreement, which approximates when work is performed
and costs are incurred. Revenues from product sales are recognized
when the products are shipped. Product revenue during 1996 and
1997 represents revenues from the sale of oligonucleoutides
manufactured on a custom contract basis by HSPD.
F-11
84
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(h) Research and Development Expenses
The Company charges research and development expenses to
operations as incurred.
(i) Patent Costs
The Company charges patent expenses to operations as incurred.
(j) Reclassifications
Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the current
periods presentation.
(k) New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
requires disclosure of all components of comprehensive income on
an annual basis and interim basis. Comprehensive income is defined
as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner
sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not expect this
accounting pronouncement to materially effect its financial
statements.
In July 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable
segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior period information
upon adoption. The Company does not expect this accounting
pronouncement to materially effect its financial statements.
(3) RESTRUCTURING
Beginning in July 1997, the Company implemented 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 terminating the clinical development of GEM 91, the
Company's first generation antisense drug for the treatment of AIDS and
HIV infection, the Company reduced or suspended selected programs
unrelated to its core advanced chemistry antisense drug development
programs, including its ribozyme program. In connection with the
reduction in programs, the Company has accrued termination fees related
to research contracts and has incurred restructuring charges related to
programs that have been suspended or canceled. As part of the
restructuring, all outside testing, public relations, travel and
entertainment and consulting arrangements were reviewed and where
appropriate the terms were
F-12
85
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
renegotiated, contracts cancelled or the terms were significantly
reduced. In addition, the Company terminated the employment of 84
employees at its Cambridge and Milford, Massachusetts facilities since
July of 1997 and substantially reduced operations at its Paris, France
office and terminated 10 employees at that location in August 1997.
In connection with the restructuring the Company entered into two
different sub-leasing arrangements. The Company has sub-leased one
facility in Cambridge, Massachusetts and a portion of its headquarters
located at 620 Memorial Drive, Cambridge, Massachusetts. The Company
incurred expenses relating to these sub-leases for broker fees and
renovation expenses incurred in preparing the Memorial Drive space for
the new tenant. In addition, the Company has accrued the estimated lease
loss of subleasing 620 Memorial Drive. The Company has accrued the
remaining lease costs of its Paris, France office prior to terminating
the lease effective March 31, 1998.
The following are the significant components of the charge for
restructuring:
Estimated loss on facility leases $ 6,930,000
Employee severance, benefits and related costs 2,579,000
Writedown of assets to net realizable value 600,000
Termination costs of certain development programs 911,000
-----------
$11,020,000
===========
The total cash impact of the restructuring amounted to approximately
$5,165,000. The total cash paid as of December 31, 1997 was approximately
$1,453,000 and the remaining amount will be paid in 1998.
(4) NOTES RECEIVABLE FROM OFFICERS
At December 31, 1996 and 1997 the Company had notes receivable, including
accrued interest, from officers of $317,978 and $247,250, respectively.
As of December 31, 1997 one note remains outstanding with an interest
rate of 6.0% per annum and matures in April 2001.
F-13
86
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) RESTRICTED CASH
At December 31, 1996 and 1997, restricted cash was made up of the
following:
1996 1997
Capital lease obligations (Note 6(c)) $ 437,714 $ 257,822
Note payable to bank (Note 6(a)) -- 1,758,542
Foreign bank account -- 1,034,618
---------- ----------
$ 437,714 $3,050,982
========== ==========
In November 1997, the Company was notified by Bank Fur Vermogensanlagen
Und Handel AG (BVH) that the Federal Banking Supervisory Office (BAKred)
in Germany had imposed a moratorium, effective as of August 19, 1997 on
BVH and had closed BVH for business. Accordingly, the Company classified
its deposit with BVH as restricted cash. The Company has contacted BVH
and is actively pursuing the release of its deposit or sale of the
deposit to a third party, including possibly an entity affiliated with a
director of the Company. The Company expects to recover substantially all
of its deposit in BVH through such means. However, the timing of the
recovery may be over a period of up to one year. There can be no
assurance that the Company will be able to recover all of its deposit or
that the Company will not be required to write off a portion of the
$1,034,618. Through March 18, 1998, the Company had recovered $250,000 of
the BVH deposit.
(6) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(a) Note Payable to a Bank
In December 1996, the Company entered into a five year $7,500,000
note payable with a bank. The note contains certain financial
covenants that require the Company to maintain minimum tangible
net worth and minimum liquidity and prohibits the payment of
dividends. On January 15, 1998 and March 30, 1998, the Company
received waivers from the bank which included the following terms:
(1) a waiver of any event of default that would otherwise arise as
a result of the 1998 Unit Financing discussed in Note 1; (2) a
requirement that the Company deposit at least 50% of its
unencumbered cash with the bank, including proceeds raised from
the 1998 Unit Financing discussed in Note 1; (3) in an event of
default, a requirement that all net cash proceeds of any
dispositions of assets of the Company permitted by the bank, as
defined, shall be applied as a prepayment against the note (if the
Company is not in default, only 50% of the net proceeds will be
applied against the note); (4) a waiver of covenants of
non-compliance through March 31, 1998 and; (5) an increase in the
interest rate to the bank's prime rate plus 5%. Prior to the
amendment the note bore interest at either the bank's prime rate
plus 1% or LIBOR plus 3.5% (9.5% at December 31, 1997), at the
Company's election. The Company has secured the obligations under
the note with a lien on all of its assets, including intellectual
property. The note is payable in 59 equal installments of $62,500
commencing on February 1, 1997 with a balloon payment of
$3,812,500, due on January 1, 2002. Prior to the amendments
discussed above, if at specified times, the Company's minimum
liquidity is less than $15,000,000, $10,000,000, or $5,000,000,
the Company is required to pledge cash collateral to the bank
equal to 25%, 50% or 100%, respectively, of the then outstanding
balance under the
F-14
87
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
note, pursuant to a cash pledge agreement. During 1997, the
Company's minimum liquidity had fallen below $15,000,000 and the
Company deposited $1,758,542 as collateral under the cash pledge
agreement. The Company has classified the outstanding balance of
$6,873,332 at December 31, 1997 as a current liability in the
accompanying balance sheet as it does not currently have the
financing to remain in compliance with the financial covenants.
Also, in connection with the note, the Company issued 5 year
warrants to purchase 13,000 shares of common stock at an exercise
price of $34.49 per share. These warrants are fully exercisable at
December 31, 1997.
(b) Note Payable to Landlord
In December 1994, the Company issued a $750,000 promissory note to
its landlord to fund specific construction costs associated with
the development of its manufacturing plant in Milford,
Massachusetts. The promissory note bears interest at 13% per annum
and is to be paid in equal monthly installments of principal and
interest over the remainder of the 10-year lease term.
(c) Capital Lease Obligations
The Company has entered into various capital leases for equipment.
In 1994, the Company received $1,073,000 as a part of a
sale/leaseback transaction with a leasing company. These lease
amounts are subject to interest at an effective rate of 4.29% and
are being paid in equal installments of approximately $24,000 over
48-months through June 1998. In connection with this lease
agreement, the Company is required to maintain a certain amount of
cash in escrow as collateral. At December 31, 1997, the Company
had $257,822 in escrow related to the agreement.
In December 1996, the Company sold certain laboratory equipment to
a leasing company, at its original cost of $1,722,333. In
connection with this transaction, the Company entered into a
capital lease to lease the equipment from this leasing company for
48 monthly payments ranging from $36,000 to $50,000. The sale of
the equipment resulted in a gain of $291,960 which has been offset
against the cost of the asset in the accompanying consolidated
balance sheet and is being amortized over the life of the lease.
In June 1997, the Company sold additional laboratory equipment to
the leasing company, at its original cost of $1,205,502. In
connection with this transaction, the Company entered into a
capital lease to lease the equipment from this leasing company for
24 monthly payments ranging from $24,000 to $34,000. The sale of
the equipment resulted in a gain of $127,378, which has been
offset against the cost of the asset in the accompanying
consolidated balance sheet and is being amortized over the life of
the lease.
In January 1997, the Company entered into a five year $1,169,000
lease with a leasing company to finance certain furniture and
fixtures in the Cambridge facility. The lease bears interest at a
F-15
88
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
rate of 13.7% and is payable in 60 equal monthly installments of
approximately $26,000 through February 2002.
Future minimum payments due under various notes payable and
capital lease obligations, excluding the 9% Notes due April 1,
2004, are as follows at December 31, 1997:
CALENDAR YEAR AMOUNT
1998 $ 8,206,684
1999 1,404,777
2000 1,324,184
2001 601,038
2002 136,000
Thereafter 195,881
-----------
Total long-term debt and capital 11,868,564
lease obligations
Less--Amount representing interest 717,967
-----------
Principal obligations 11,150,597
Less--Current portion 7,868,474
-----------
$ 3,282,123
===========
(d) 9.0% Convertible Subordinated Notes
On April 2, 1997, the Company issued $50,000,000 of 9.0%
convertible subordinated notes (the 9% Notes). Under the terms of
the 9% Notes, the Company must make semiannual interest payments
on the outstanding principal balance through the maturity date of
April 1, 2004. If the 9% 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 9% Notes are subordinate to substantially all
of the Company's existing indebtedness. The 9% Notes are
convertible at any time prior to the maturity date at a conversion
price equal to $35.0625, subject to adjustment under certain
circumstances, as defined.
F-16
89
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Beginning April 1, 2000, the Company may redeem the 9% 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 9% Notes
may not be redeemed unless the closing price of the common stock
equals or exceeds 150% of the conversion price for a period of at
least 20 out of 30 consecutive trading days and the 9% Notes are
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 9% Notes at 150% of the
original issuance price.
(7) G.D. SEARLE & CO. AGREEMENT
In January 1996, the Company and G.D. Searle & Co. (Searle) entered into
a collaboration relating to research and development of therapeutic
antisense compounds directed at up to eight molecular targets in the
field of inflammation/immunomodulation (the Searle Field).
Pursuant to the collaboration, the parties are conducting research and
development relating to a compound directed at a molecular target in the
Searle Field designated by Searle. In this project, Searle is funding
certain research and development efforts by the Company, and each of
Searle and the Company have committed certain of its own personnel to the
collaboration. The initial phase of research and development activities
relating to the initial target will be conducted through the earlier of
(i) the achievement of certain product candidate milestones or (ii) 36
months after commencement of the collaboration, subject to early
termination by Searle (although in any event Searle is required to
F-17
90
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
pay 18 months of research and development funding). The parties may
extend the initial collaboration by mutual agreement, including agreement
as to additional research funding by Searle.
In addition, Searle has the right, at its option, to designate up to six
additional molecular targets in the Searle Field (the Additional Targets)
for collaborative research and development with the Company on terms
substantially consistent with the terms of the collaboration applicable
to the initial molecular target. This right is exercisable by Searle with
respect to each of the Additional Targets upon the payment by Searle of
certain research payments (beyond the project-specific payments relating
to the particular Additional Target) and the purchase of additional
common stock from the Company by Searle (at the then fair market value).
The aggregate amount to be paid by Searle for such research payments and
equity investment in order to designate each of the Additional Targets is
$10,000,000 per Additional Target. In the event that Searle designates
all of the Additional Targets, the aggregate amount to be paid by Searle
for research payments will be $24,000,000, and the aggregate amount to be
paid by Searle in equity investment will be $36,000,000. If Searle has
not designated all of the Additional Targets by the time it advances the
product candidate for the initial molecular target to certain stages of
preclinical development, Searle will be required to purchase an
additional $10,000,000 of common stock (at the then fair market value) on
specified dates in order to maintain its right to designate any of the
Additional Targets that it has not yet designated. The payment for any
such common stock will be creditable against the equity investment
portion of the payments to be made by Searle with respect to the
designation of any of the Additional Targets that Searle has not yet
designated.
Searle also has the right, at its option, to designate a molecular target
in the Searle Field to develop a therapeutic agent for cancer that acts
through immunomodulation (the Searle Cancer Target) for collaborative
research and development with the Company on terms substantially
consistent with the terms of the collaboration applicable to the initial
molecular target. At the time of such designation, Searle will be
required to make certain research payments to the Company and purchase
additional common stock from the Company (at the then fair market value).
The aggregate amount to be paid by Searle for such research payments and
equity investment will range from $12,000,000 (composed of $5,000,000 in
research payments and $7,000,000 in equity investment) if the Searle
Cancer Target is designated in 1997 to $26,000,000 (composed of
$21,000,000 in research payments and $5,000,000 in equity investment) if
the Searle Cancer Target is designated in 2000.
Searle has exclusive rights to commercialize any products resulting from
the collaboration. If Searle determines, in its sole discretion, to
commercialize a product, Searle will fund and perform preclinical tests
and clinical trials of the product candidate and will be responsible for
regulatory approvals for and marketing of the product. In certain
instances and for specified periods of time, the Company has agreed to
perform research and development work in the Searle Field exclusively
with Searle. In addition, as to each product candidate, the Company will
be entitled to milestone payments from Searle totaling up to an aggregate
of $10,000,000 upon the achievement of certain development benchmarks.
The Company also will be entitled to royalties from net sales of products
resulting from
F-18
91
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the collaboration. Subject to satisfying certain conditions relating to
its manufacturing capacities and capabilities, the Company will retain
manufacturing rights, and Searle will be required to purchase its
requirements of products from the Company on an exclusive basis at
specified transfer prices. Upon a change in control of the Company,
Searle would have the right to terminate the Company's manufacturing
rights, although the royalty payable would be increased in such event.
Under the collaboration, in the event that Searle designates (and makes
the required payments and equity investments for) all of the Additional
Targets or in certain other instances relating to Hybridon's failure to
satisfy certain requirements relating to its manufacturing capacities and
capabilities, Searle will have the right, exercisable in its sole
discretion, to require Hybridon to form a joint venture with Searle for
the development of products in the Searle Field (other than products
relating to molecular targets that have already been designated by
Searle) to which each party will contribute $50,000,000 in cash, although
the Company's cash contribution would be reduced by the value of the
technology and other rights contributed by the Company to the joint
venture. The Company and Searle would each own 50% of the joint venture,
although Searle's ownership interest in the joint venture would increase
based upon a formula to up to a maximum of 75% if the joint venture is
established in certain instances relating to the Company's failure to
satisfy certain requirements relating to its manufacturing capacities and
capabilities.
During 1996 and 1997, the Company earned $400,000 and $600,000,
respectively, in research and development revenues from Searle. Under the
collaboration, Searle also purchased 200,000 shares of common stock in
the Company's initial public offering of common stock at the initial
public offering price as discussed in Note 14(b).
(8) F. HOFFMANN-LA ROCHE LTD. COLLABORATION
In December 1992, the Company and Roche entered into a collaboration
involving the application of Hybridon's antisense oligonucleotide
chemistry to the development of compounds for the treatment of hepatitis
B, hepatitis C and human papilloma virus.
Under this collaboration, Roche funded research and development efforts
relating to the collaboration and committed personnel of its own to the
collaboration. In 1995, Roche notified the Company that it had selected
an antisense oligonucleotide directed at hepatitis C as a lead compound
for further development and made a milestone payment to the Company in
connection with such designation. In the third quarter of 1996, Roche
notified the Company that it had selected an antisense oligonucleotide
directed at human papilloma virus as a lead compound for further
development, and in the fourth quarter of 1996, made a milestone payment
to the Company in connection with such designation. At such time, Roche
also notified the Company that Roche had elected not to continue the
hepatitis B program under the research and development collaboration. In
addition, Roche notified the Company that Roche
F-19
92
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
was exercising its option to terminate the entire research and
development phase of the collaboration as of March 31, 1997. On September
3, 1997, Roche notified the Company that it had decided not to pursue
further collaboration with the Company and was terminating the
collaboration effective February 28, 1998.
The Company has recorded $1,186,124, $1,019,389 and $345,000 of research
and development revenue related to this collaboration in 1995, 1996 and
1997, respectively.
In conjunction with the Roche Collaboration, Roche purchased 163,678
shares of common stock for $6,000,000. Roche was also issued five-year
warrants for the purchase of 110,345 shares of common stock at an initial
price of $57.50 per share, such exercise price increases commencing on
August 12, 1995 on an annual basis at a compound rate of 25%. At December
31, 1997, the exercise price of these warrants are $112.30 per share. The
warrants expired on February 12, 1998.
(9) MEDTRONIC, INC. COLLABORATIVE STUDY AGREEMENT
In May 1994, the Company and Medtronic, Inc. (Medtronic) entered into a
collaborative study agreement (the Medtronic Agreement) involving the
development of antisense compounds for the treatment of Alzheimer's
disease and a drug delivery system to deliver such compounds into the
central nervous system. The Company will be responsible for the
development of, and hold all rights to, any drug developed pursuant to
this collaboration, and Medtronic will be responsible for the development
of, and hold all rights to, any delivery system developed pursuant to
this collaboration. The parties may extend this collaboration by mutual
agreement to other neurodegenerative disease targets. The research and
development to be conducted is determined and supervised by a committee
comprised of an equal number of designees of the Company and Medtronic.
As part of the Medtronic Agreement, Medtronic purchased 131,667 shares of
common stock for $5,000,000.
(10) LICENSING AGREEMENT
The Company has entered into a licensing agreement with the Worcester
Foundation for Biomedical Research, Inc., which merged in 1997 into the
University of Massachusetts Medical Center (the Foundation License),
under which the Company has received exclusive licenses to technology in
certain patents and patent applications. The Company is required to make
royalty payments based on future sales of products employing the
technology or falling under claims of a
F-20
93
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
patent, as well as a specified percentage of sublicense income received
related to the licensed technology. Additionally, the Company is required
to pay an annual maintenance fee through the life of the patents.
(11) PHARMACIA BIOTECH, INC. AGREEMENT
In December 1994, the Company and Pharmacia Biotech, Inc. (Pharmacia)
entered into a collaboration involving the design and development of a
large-scale oligonucleotide synthesis machine. Following completion of
the machine, the collaboration expired in December 1996, and Pharmacia
retained the right to sell the machine to third parties, subject to an
obligation to pay the Company royalties on such third party sales. During
1996 and 1997, the Company has received $62,321 and $48,000,
respectively, of royalty income related to such third party sales.
(12) PERKIN-ELMER CORPORATION SUPPLY AGREEMENT
In September 1996 the Company and the Applied Biosystems Division of
Perkin-Elmer signed a four year sales and supply agreement under which
Perkin-Elmer agreed to refer potential customers to HSPD for the
manufacture of custom oligonucleotides and the Company agreed that
amidites for the manufacture of these oligonucleotides would be purchased
from Perkin-Elmer and a percentage of the sales price would be paid to
Perkin-Elmer. In addition, Perkin-Elmer licensed to the Company its
oligonucleotide synthesis patents.
(13) INVESTMENT IN METHYLGENE, INC.
In January 1996, the Company and certain institutional investors formed a
Quebec company, MethylGene, Inc. (MethylGene) to develop and market
certain compounds and procedures to be agreed upon by the Company and
MethylGene.
The Company has granted to MethylGene exclusive worldwide licenses and
sublicenses in respect of certain technology relating to the methylgene
fields. These fields are defined as (i) antisense compounds to inhibit
DNA methyltransferase for the treatment of cancers, (ii) other methods of
inhibiting DNA methyltransferase for the treatment of any indications,
and (iii) antisense compounds to inhibit a second molecular target other
than DNA methyltransferase for the treatment of cancers, to be agreed
upon by the Company and MethylGene. In December 1997, the Company and
MethylGene expanded the methylgene fields to include (a) antisense
compounds to inhibit DNA methyltransferase for any indication and (b)
antisense compounds to inhibit a second and third molecular target for
any indications, as may be selected by MethylGene, so long as such
molecular targets are not already targeted by the Company. In addition,
the Company and MethylGene have entered into a supply agreement pursuant
to which MethylGene is obligated to purchase from the Company all
required formulated bulk oligonucleotides at specified transfer prices.
The Company acquired a 49% interest in MethylGene for approximately
$734,000, and the Canadian investors acquired a 51% interest in
MethylGene for a total of approximately $5,500,000 (the Institution
Investors). The Institutional Investors have the right to exchange (the
MethylGene Exchange) all (but not less than all) of their shares of stock
in MethylGene for an aggregate of 100,000 shares of Hybridon common stock
(subject to adjustment for
F-21
94
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
stock splits, stock dividends and the like). This option is exercisable
only during a 90-day period commencing on the earlier of the date five
years after the closing of the Institutional Investors' investment in
MethylGene or the date on which MethylGene ceases operations. This option
terminates sooner if MethylGene raises certain additional amounts of
equity or debt financing or if MethylGene enters into a corporate
collaboration that meets certain requirements. Subsequent to December 31,
1997, MethylGene raised additional proceeds from outside investors that
decreased the Company's interest to 30%, which did not terminate the
MethyGene Exchange available to the Institutional Investors. The Company
is accounting for its investment in MethylGene under the equity method
and, due to the existence of the investors exchange rights, the Company
has recorded, up to its original investment, 100% of MethylGene's losses
in the accompanying consolidated statement of operations.
(14) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Common Stock
The Company has 100,000,000 authorized shares of common stock,
$.001 par value, of which 5,059,650 shares were issued and
outstanding at December 31, 1997.
(b) Initial Public Offering
On February 2, 1996, the Company completed its initial public
offering of 1,150,000 shares of common stock at $50.00 per share.
The sale of common stock resulted in net proceeds to the Company
of approximately $52,231,000 after deducting expenses related to
the offering.
(c) Reverse Stock Split
On December 10, 1997, the Board of Directors declared a
one-for-five reverse split of its common stock. Share quantities
and related per share amounts have been retroactively restated to
reflect the stock split.
F-22
95
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(d) Warrants
The Company has the following exercisable warrants outstanding for
the purchase of common stock at December 31, 1997:
EXERCISE
PRICE
EXPIRATION DATE SHARES PER SHARE
February 12, 1998 110,345 $112.30
March 31, 1998-October 25, 2000 953,936 50.00
February 28, 2000 20,000 37.50
December 31, 2001 13,000 34.49
April 2, 2002 71,301 35.06
--------- -------
1,168,582
=========
Average per share exercise price $ 54.59
=======
As a component of the sale of preferred stock in 1994 and 1995,
the Company issued to the investors in such offering warrants for
the purchase of 585,425 shares of common stock at $40.00 to $50.00
per share. Warrants to purchase 331,382 shares of common stock at
an exercise price of $50.00 per share expire on March 31, 1998,
and the remaining warrants for the purchase of 254,043 shares of
common stock at an exercise price of $40.00 per share expired on
October 25, 1997.
Five-year warrants to purchase 368,620 shares of common stock at
$50.00 per share were issued in 1994 and 1995 as a component of
the compensation for services of several placement agents of the
Company's convertible preferred stock. Of these warrants, 304,335
were issued to a company that is controlled by two directors of
the Company (see Note 15(a)). The remaining 64,285 warrants were
issued to various other companies that acted as placement agents.
(e) Stock Options
In 1990 and 1995, the Company established the 1990 Stock Option
Plan (the 1990 Option Plan) and the 1995 Stock Option Plan (the
1995 Option Plan), respectively, which provide for the grant of
incentive stock options and nonqualified stock options. Options
granted under these plans vest over various periods and expire no
later than 10 years from the date of grant. However, under the
1990 Option Plan in the event of a change in control (as defined
in the 1990 Plan), the exercise dates of all options then
outstanding shall be accelerated in full and any restrictions on
exercising outstanding options issued pursuant to the 1990 Option
Plan shall terminate. In October 1995, the Company terminated the
issuance of additional options under the 1990 Option Plan. As of
December 31, 1997, options to purchase a total of 604,863 shares
of common stock remained outstanding under the 1990 Option Plan.
F-23
96
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A total of 700,000 shares of common stock may be issued upon the
exercise of options granted under the 1995 Option Plan. The
maximum number of shares with respect to which options may be
granted to any employee under the 1995 Option Plan shall not
exceed 500,000 shares of common stock during any calendar year.
The Compensation Committee of the Board of Directors has the
authority to select the employees to whom options are granted and
determine the terms of each option, including (i) the number of
shares of common stock subject to the option; (ii) when the option
becomes exercisable; (iii) the option exercise price, which, in
the case of incentive stock options, must be at least 100% (110%
in the case of incentive stock options granted to a stockholder
owning in excess of 10% of the Company's common stock) of the fair
market value of the common stock as of the date of grant; and (iv)
the duration of the option (which, in the case of incentive stock
options, may not exceed 10 years). As of December 31, 1997,
options to purchase a total of 534,914 shares of common stock
remained outstanding under the 1995 Option Plan.
In October 1995, the Company adopted the 1995 Director Stock
Option Plan (the Director Plan). A total of 50,000 shares of
common stock may be issued upon the exercise of options granted
under the Director Plan. Under the terms of the Director Plan,
options to purchase 1,000 shares of common stock were granted to
eligible directors upon the closing of the Company's initial
public offering at the fair market value of the common stock on
the date of the closing. Thereafter, options to purchase 1,000
shares of common stock will be granted to each eligible director
on May 1 of each year commencing in 1997. All options will vest on
the first anniversary of the date of grant or, in the case of
annual options, on April 30 of each year with respect to options
granted in the previous year. As of December 31, 1997, options to
purchase a total of 14,000 shares of common stock remained
outstanding under the Director Plan.
In May 1997, the Company adopted the 1997 Stock Option Plan (the
1997 Option Plan), which provides for the grant of incentive and
non-qualified stock options. A total of 600,000 shares of common
stock may be issued upon the exercise of options granted to any
employee under the 1997 Option Plan. The maximum number of shares
with respect to which options may be granted to any employee under
the 1997 Option Plan shall not exceed 500,000 shares of common
stock during any calendar year. The Compensation Committee of the
Board of Directors has the authority to select the employees to
whom options are granted and determine the terms of each option,
including (i) the number of shares of common stock subject to the
option; (ii) when the option becomes exercisable; (iii) the option
exercise price, which, in the case of incentive stock options,
must be at least 100% (110% in the case of incentive stock) of the
fair market value of the common stock as of the date of grant; and
(iv) the duration of the option (which, in the case of incentive
stock options, may not exceed ten years). As of December 31, 1997,
options to purchase a total of 36,720 shares of common stock
remained outstanding under the 1997 Option Plan.
F-24
97
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
All stock option activity since inception is summarized as
follows:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
Options granted 66,940 $ .01 $ .01
Options exercised (33,460) .01 .01
---------- ----------------- --------
Outstanding, December 31, 1990 33,480 .01 .01
Options granted 1,700 .01 .01
Options terminated (540) .01 .01
---------- ----------------- --------
Outstanding, December 31, 1991 34,640 .01 .01
Options granted 192,540 1.25 - 25.00 9.90
Options exercised (34,615) .01 - 5.00 .10
Options terminated (4,865) 2.50 - 5.00 2.80
---------- ----------------- --------
Outstanding, December 31, 1992 187,700 .01 - 25.00 10.05
Options granted 288,108 17.50 - 62.50 41.90
Options exercised (8,725) .01 - 5.00 3.05
Options terminated (25,275) .01 - 50.00 3.95
---------- ----------------- --------
Outstanding, December 31, 1993 441,808 .01 - 62.50 31.30
Options granted 134,500 25.00 - 35.00 26.65
Options exercised (4,800) .01 - 5.00 2.80
Options terminated (15,000) .01 - 25.00 19.15
---------- ----------------- --------
Outstanding, December 31, 1994 556,508 .01 - 62.50 30.50
Options granted 407,108 37.50 - 50.00 37.75
Options exercised (5,880) 2.50 - 25.00 7.05
Options terminated (219,528) 2.50 - 62.50 49.10
---------- ----------------- --------
Outstanding, December 31, 1995 738,208 .01 - 50.00 29.15
Options granted 476,020 25.00 - 65.60 49.55
Options exercised (57,740) .01 - 37.50 18.85
Options terminated (20,100) 25.00 - 57.85 40.20
---------- ----------------- --------
Outstanding, December 31, 1996 1,136,388 1.25 - 65.60 38.05
Options granted 315,675 27.50 - 32.50 30.75
Options exercised (25,005) 1.25 - 40.00 12.60
Options terminated (236,561) 2.50 - 65.60 40.35
---------- ----------------- --------
Outstanding, December 31, 1997 1,190,497 $ .01 - $ 65.60 $ 36.18
========== ================ ========
Exercisable, December 31, 1997 740,780 $ .01 - $ 65.60 $ 34.40
========== ================ ========
F-25
98
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires the measurement of
the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial
statements. The Company has determined that it will continue to
account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. In 1996 and 1997,
the Company recorded $1,967,116 and $205,978 of deferred
compensation related to grants to nonemployees which will be
amortized over the vesting period of the options. The Company has
recorded compensation expense of $763,190 and $316,067 in 1996 and
1997, respectively.
The Company has computed the pro forma disclosures require by SFAS
No. 123 for all stock options and warrants granted after January
1, 1995 using the Black-Scholes option pricing model. The
assumptions used are as follows:
DECEMBER 31,
1995 1996 1997
Risk free interest rate 6.41% 6.14% 6.22%
Expected dividend yield -- -- --
Expected lives 6 years 6 years 6 years
Expected volatility 60% 60% 60%
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective
assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-26
99
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The effect of applying SFAS No. 123 would be as follows:
DECEMBER 31,
1995 1996 1997
Net Loss, as reported: $ (34,546,676) $ (46,852,600) $ (69,461,326)
================ =============== ===============
Pro forma Net Loss: $ (41,447,381) $ (52,890,455) $ (73,402,170)
================ =============== ===============
Basic and Diluted net loss, as reported
Basic and Diluted $ (94.70) $ (10.24) $ (13.76)
========= ========= =========
Pro forma $ (11.02) $ (9.67) $ --
========= ========= =========
Basic and Diluted net loss, pro forma
Basic and Diluted $ (113.61) $ (11.56) $ (14.54)
========= ========= =========
Pro forma $ (13.22) $ (10.92) $ --
========= ========= =========
(f) Employee Stock Purchase Plan
In October 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the Purchase Plan), under which up to 100,000
shares of common stock may be issued to participating employees of
the Company or its subsidiaries. All full-time employees of the
Company, except those who would immediately after the grant own 5%
or more of the total combined voting power or value of the stock
of the Company or any subsidiary, are eligible to participate.
On the first day of a designated payroll deduction period (the
Offering Period), the Company will grant to each eligible employee
who has elected to participate in the Purchase Plan an option to
purchase shares of common stock as follows: the employee may
authorize an amount (a whole percentage from 1% to 10% of such
employee's regular pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering
Period, the employee is deemed to have exercised the option, at
the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the Purchase Plan, the option price
is an amount equal to 85% of the fair market value per share of
the common stock on either the first day or the last day of the
Offering Period, whichever is lower. In no event may an employee
purchase in any one Offering Period a number of shares which is
more than 15% of the employee's annualized base
F-27
100
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
pay divided by 85% of the market value of a share of common stock
on the commencement date of the Offering Period. The Compensation
Committee may, in its discretion, choose an Offering Period of 12
months or less for each of the Offerings and choose a different
Offering Period for each Offering. No shares have been issued
under the Plan.
(g) Preferred Stock
The Certificate of Incorporation of the Company permits its Board
of Directors to issue up to 5,000,000 shares of preferred stock,
par value $.01 per share (the Preferred Stock), in one or more
series, to designate the number of shares constituting such
series, and fix by resolution, the powers, privileges, preferences
and relative, optional or special rights thereof, including
liquidation preferences and dividends, and conversion and
redemption rights of each such series. No shares of Preferred
Stock are currently outstanding.
F-28
101
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(15) COMMITMENTS
The Company has entered into a lease for a production plant in Milford,
Massachusetts. The lease has a 10-year term, which commenced on July 1,
1994, with certain extension options.
On February 4, 1994, the Company entered into a lease for an
approximately 91,500 square-foot building in Cambridge, Massachusetts
(the Cambridge Lease). The Cambridge Lease is with a partnership that is
affiliated with three directors of the Company. The Cambridge Lease has a
term of 15 years, commencing February 1, 1997, and may be extended for
three additional five-year terms at the option of the Company. The
Cambridge Lease provides for annual rent of $37.79 per year per
F-29
102
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
square foot for the first five years, $42.73 per year per square foot for
the second five years and $47.00 per year per square foot for the third
five years. As compensation for arranging this lease, the Company issued
Pillar Limited (see Note 15(a)) five-year warrants for the purchase of
100,000 shares of the Company's common stock at an exercise price of
$50.00 per share. These warrants are exercisable through February 4,
1999.
Under the terms of the Cambridge Lease, the Company elected to treat
$5,450,000 of its payments for a portion of the costs of the construction
of the leased premises (primarily relating to tenant improvements) as
contributions to the capital of the Cambridge landlord in exchange for a
limited partnership interest in the Cambridge landlord (the Partnership
Interest). The Company's Partnership Interest represents a 32.15%
interest in the Cambridge Landlord. The Company's right to receive
distributions of cash generated from operations or from any sale or
refinancing of the property would be subordinate to the distribution to
certain other limited partners of priority amounts currently totaling
approximately $6,500,000 (approximately $3,500,000 of which is subject to
annual increase at a rate of between 12% and 15% as a result of a
cumulative return to one of the limited partners of the Cambridge
Landlord). In the case of a sale or refinancing of the property, after
payment of the priorities described in the preceding sentence, the
Company would be entitled to a return of its capital contribution and,
thereafter, to its pro rata share of the remaining funds available for
distribution. The Company has the right, at any time prior to February
2000 to sell the Partnership Interest back to certain limited partners of
the Cambridge Landlord for a price equal to the greater of (i) the total
paid for the Partnership Interest ($5,450,000) or (ii) the fair market
value of the Partnership Interest at the time. The assets of these
limited partners are limited to their investment in the Cambridge
Landlord.
Future approximate minimum rent payments as of December 31, 1997, under
the lease agreements through 2012 discussed above, net of sublease
agreements are as follows:
CALENDAR YEAR AMOUNT
1998 $ 2,275,000
1999 2,831,000
2000 4,248,000
2001 4,677,000
2002 4,991,000
Thereafter 40,586,000
-----------
$59,608,000
===========
During 1995, 1996 and 1997, facility rent expense, net of sublease
revenue, was approximately $2,142,000, $2,352,000 and $4,613,000,
respectively.
F-30
103
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(a) Consulting Agreements with Affiliates of Stockholders and
Directors
The Company has entered into consulting agreements, stock
placement agreements and an advisory agreement with several
companies that are controlled by two shareholders and directors of
the Company. The terms of the agreements with the affiliated
companies, S.A. Pillar Investment N.V. (Pillar Investment), Pillar
S.A. (formerly Commerce Consult S.A.) and Pillar Investment
Limited (formerly Ash Properties Limited) (Pillar Limited), are
described below.
In March 1994, the Company entered into a consulting agreement
with Pillar S.A., which was amended in March 1995 (the 1994 Pillar
Consulting Agreement). Under the 1994 Pillar Consulting Agreement,
the Company agreed to pay to Pillar S.A. cash compensation for
financial advisory and managerial services in connection with the
Company's overseas operations, including support services in
connection with contracts, agreements and arrangements with the
Agence Nationale de Recherches sur le SIDA (ANRS), and for
overhead costs and reimbursement of certain authorized
out-of-pocket expenditures. The Company is committed to pay Pillar
S.A. a monthly fee of approximately $96,000 with respect to this
agreement. The agreement expires on February 28, 1998, as amended.
During 1995, 1996 and 1997, the Company had expensed $1,226,000,
$1,106,000 and $998,000 under this consulting agreement,
respectively.
In connection with the 1994 Pillar Consulting Agreement, the
Company issued to Pillar S.A. two, five-year warrants to purchase
up to 40,000 shares of the Company's common stock. The first
warrant was issued on March 1, 1994 at an exercise price of $50.00
per share and will expire on February 28, 1999 and is fully
exercisable as of December 31, 1997. The second warrant was issued
on March 1, 1995 at an exercise price of $37.50 per share and will
expire on February 28, 2000 and is fully exercisable as of
December 31, 1997.
All of the warrants issued to Pillar S.A. under the 1994 Pillar
Consulting Agreements and certain other warrants previously issued
to Pillar S.A. provide that within 15 days after the date of any
exercise, in full or in part, Pillar S.A. will pay to the Company
an amount in cash equal to the lesser of (i) 50% of all amounts
paid to Pillar S.A. as compensation under the various Pillar S.A.
consulting agreements and (ii) the positive difference, if any,
between the aggregate fair market value of the shares of common
stock purchased upon such exercise and the aggregate exercise
price for such shares.
On September 9, 1994, the Company entered into modifications to
its arrangements with Pillar S.A. and its affiliates, including:
(i) a reduction in the exercise price of certain warrants
previously issued to $50.00 per share; (ii) an amendment to the
terms of each of the warrants issued to Pillar S.A. and its
affiliates described above to provide for cashless exercise in
connection with a sale or change in control of the Company; (iii)
a grant of additional five-year warrants (the Additional Pillar
Warrants) to purchase 22,800 shares of Common Stock at an
F-31
104
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
exercise price of $50.00 per share; and a right of first
negotiation for Pillar S.A. to provide seed financing for any
spin-offs by the Company which do not involve or relate to
antisense therapeutic compounds.
On July 8, 1995, the Company entered into an agreement (the Pillar
Europe Agreement) with Pillar S.A. pursuant to which Pillar S.A.
agreed to provide to the Company certain consulting, advisory and
related services and serve as the Company's exclusive agent in
connection with potential corporate partnerships in Europe and as
a nonexclusive placement agent of the Company in connection with
future private placements of securities of the Company for a
period of two years. As discussed below, the Pillar Europe
Agreement was significantly amended on November 1, 1995.
The Company and Pillar S.A. agreed to modify the Pillar Europe
Agreement to provide that (i) Pillar would cease to serve as the
Company's exclusive agent in connection with potential corporate
partnerships in Europe but would continue to serve as a
nonexclusive agent in such respect; (ii) Pillar would receive a
retainer of $26,470 per month for the balance of the term of the
Pillar Europe Agreement; (iii) certain fees to be received by
Pillar in connection with European license or collaboration
agreements would only be payable to Pillar in connection with
potential collaborations with five specified French pharmaceutical
companies; and (iv) any compensation payable to Pillar S.A. in
connection with its services with respect to other corporate
collaborations or any placements of securities would be negotiated
on a case-by-case basis and would be subject to the approval of
the independent members of the Board of Directors of the Company.
In consideration of such modification, the Company paid Pillar in
1995 a fee totaling $300,000.
Pillar Limited acted as a placement agent for the Company for
certain sales of convertible preferred stock outside the United
States and, in addition, provided the Company with certain
financial advisory services with respect to the sale of such
preferred stock outside the United States. In connection with such
services, Pillar earned fees of $492,604 and $2,020,751 during
1994 and 1995, respectively. Pillar received payment for such fees
through $2,435,883 of cash payments and through the issuance of
five-year warrants for the purchase of 438,267 shares of common
stock at $50.00 per share, expiring on various dates beginning on
July 14, 1998 through October 25, 2000.
(b) Other Research and Development Agreements
The Company has entered into consulting and research agreements
with the universities, research and testing organizations and
individuals, under which consulting and research support is
provided to the Company. These agreements are for varying terms
through
F-32
105
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and provide for certain minimum annual or per diem fees plus
reimbursable expenses to be paid during the contract periods.
Future minimum fees payable under these contracts as of December
31, 1997 are approximately as follows:
CALENDAR YEAR AMOUNT
1998 $ 253,000
1999 129,000
---------
$ 382,000
=========
Total fees and expenses under these contracts were approximately
$5,470,000, $7,171,000 and $9,372,000 during 1995, 1996 and 1997,
respectively.
(c) Employment Agreements
The Company has entered into employment agreements with certain of
its executive officers which provide for, among other things, each
officer's annual salary, cash bonus, fringe benefits, and vacation
and severance arrangements. Under the agreements, the officers are
generally entitled to receive severance payments of two to three
year's base salary.
(16) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes. At
December 31, 1997, the Company had net operating loss and tax credit
carryforwards for income tax purposes of approximately $205,997,000 and
$3,436,000, respectively, available to reduce federal taxable income and
federal income taxes, respectively. The Tax Reform Act of 1986 (the Act),
enacted in October 1986, limits the amount of net operating loss and
credit carryforwards that companies may utilize in any one year in the
event of cumulative changes in ownership over a three-year period in
excess of 50%. The Company has completed several financings since the
effective date of the Act, which, as of December 31, 1997, have resulted
in ownership changes in excess of 50%, as defined under the Act.
Ownership changes in future periods may limit the Company's ability to
utilize net operating loss and tax credit carryforwards.
F-33
106
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The federal net operating loss carryforwards and tax credit carryforwards
expire approximately as follows:
NET
OPERATING LOSS TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS
December 31,
2005 $ 666,000 $ 15,000
2006 3,040,000 88,000
2007 7,897,000 278,000
2008 18,300,000 627,000
2009 25,670,000 689,000
2010 36,134,000 496,000
2011 44,947,000 493,000
2012 69,343,000 750,000
------------- -----------
$ 205,997,000 $ 3,436,000
============= ===========
The components of the deferred tax amounts, carryforwards and the
valuation allowance are approximately as follows:
DECEMBER 31,
1996 1997
Operating loss carryforwards $ 54,661,000 $ 82,399,000
Temporary differences 1,325,000 5,243,000
Tax credit carryforwards 2,686,000 3,436,000
------------ ------------
58,672,000 91,078,000
Valuation allowance (58,672,000) (91,078,000)
------------ ------------
$ -- $ --
============ ============
A valuation allowance has been provided, as it is uncertain if the
Company will realize the deferred tax asset. The net change in the total
valuation allowance during 1997 was an increase of approximately
$32,406,000.
F-34
107
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(17) EMPLOYEE BENEFIT PLAN
On October 10, 1991, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows employees to
make contributions up to a specified percentage of their compensation.
Under the plan, the Company may, but is not obligated to, match a portion
of the employees' contributions up to a defined maximum. The Company is
currently matching 50% of employee contributions to the plan, up to 6% of
the employee's annual base salary, and charged to operations
approximately $125,000, $224,000 and $253,000 during 1995, 1996 and 1997,
respectively.
F-35
108
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(18) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The accompanying consolidated financial statements include the following
cash flow information:
CUMULATIVE FROM
INCEPTION
(MAY 25, 1989)
--------------DECEMBER 31------------- TO DECEMBER 31,
1995 1996 1997 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 172,757 $ 124,052 $3,264,596 $3,630,450
============ ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Purchase of property and equipment under
capital leases $ 90,562 $1,722,333 $2,374,502 $5,604,370
============ ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of Series C convertible preferred
stock in exchange for convertible
promissory notes $ -- $ -- $ -- $1,700,000
Issuance of Series D convertible preferred
stock in exchange for convertible -- -- -- 9,382,384
promissory notes and accrued interest
Issuance of Series E convertible preferred
stock in exchange for subscriptions
receivable -- -- -- 555,117
Issuance of Series F convertible preferred -- -- -- 2,535,000
stock in exchange for subscriptions
receivable -- -- -- 2,535,000
Issuance of Series G convertible preferred
stock in exchange for subscriptions
receivable -- -- -- 906,016
Issuance of convertible promissory notes
in exchange for subscriptions receivable -- -- -- 937,000
Issuance of stock warrants in exchange for
deferred financing costs -- -- 238,000
Cancellation of warrants and reduction of
deferred financing costs -- -- -- 68,000
Conversion of preferred stock into common
stock -- 159,822 -- 159,822
Issuance of common stock for services
rendered -- -- 146,874 146,874
Deferred compensation related to
restricted stock awards and grant of
stock options -- 1,967,116 205,978 6,751,286
F-36
109
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Registrant, as
amended.
3.2* Amended and Restated By-Laws of the Registrant.
3.3### Form of Certificate of Designation of Series A Preferred
Stock.
3.4### Form of Certificate of Designation of Series B Preferred
Stock.
4.1* Specimen Certificate for shares of Common Stock, $.00l par
value, of the Registrant.
4.2# Indenture dated as of March 26, 1997 between Forum Capital
Markets L.P. and the Registrant.
+10.1* License Agreement dated February 21, 1990 and restated as of
September 8, 1993 between the Registrant and the Worcester
Foundation for Biomedical Research, Inc., as amended.
+10.2* Patent License Agreement dated September 21, 1995 between the
Registrant and National Institutes of Health.
+10.3* License Agreement effective as of October 13, 1994 between the
Registrant and McGill University.
+10.4* License Agreement effective as of October 25, 1995 between the
Registrant and The General Hospital Corporation.
+10.5* License Agreement dated as of October 30, 1995 between the
Registrant and Yoon S. Cho-Chung.
+10.6* Collaborative Study Agreement effective as of December 30,
1992 between the Registrant and Medtronic, Inc.
+10.7* System Design and Procurement Agreement dated as of December
16, 1994 between the Registrant and Pharmacia Biotech, Inc.
10.8* Lease dated March 10, 1994 between the Registrant and
Laborer's Pension/Milford Investment Corporation for space
located at 155
110
Fortune Boulevard, Milford, Massachusetts, including Note in
the original principal amount of $750,000.
10.9* Lease dated February 4, 1994 between the Registrant and
Charles River Building Limited Partnership for space located
at 620 Memorial Drive, Cambridge, Massachusetts.
10.10* Series G Convertible Preferred Stock and Warrant Purchase
Agreement dated as of September 9, 1994 among the Registrant
and certain Purchasers, as amended (the "Series G Agreement").
10.11* Registration Rights Agreement dated as of February 21, 1990
between the Registrant, the Worcester Foundation for
Biomedical Research, Inc. and Paul C. Zamecnik.
10.12* Registration Rights Agreement dated as of June 25, 1990
between the Registrant and Nigel L. Webb.
10.13* Registration Rights Agreement dated as of February 6, 1992
between the Registrant and E. Andrews Grinstead, III.
10.14* Registration Rights Agreement dated as of February 6, 1992
between the Registrant and Anthony J. Payne.
++10.15* 1990 Stock Option Plan, as amended.
++10.16* 1995 Stock Option Plan.
++10.17* 1995 Director Stock Plan.
++10.18* 1995 Employee Stock Purchase Plan.
10.19* Form of Warrant to purchase shares of Series C Convertible
Preferred Stock originally issued to Pillar Investment Limited
(formerly known as Ash Properties Limited), as amended.
10.20* Form of Warrant to purchase shares of Common Stock issued in
connection with the issuance of the Registrant's series of
notes known as its 10% Convertible Subordinated Notes due
September 16, 1993 and the Registrant's 10% Convertible
Subordinated Note Due March 19, 1993, as amended.
10.21* Warrant issued to Pillar S.A. to purchase up to 175,000 shares
of Common Stock dated as of December 1, 1992, as amended.
111
10.22* Form of Warrant originally issued to Pillar Investment Limited
to purchase 427,126 shares of Common Stock dated as of
February 15, 1993, as amended.
10.23* Form of Warrant originally issued to Pillar Investment Limited
to purchase 350,000 shares of Common Stock dated as of
February 15, 1993, as amended.
10.24* Warrant issued to Pillar Investment Limited to purchase
500,000 shares of Common Stock dated as of February 4, 1994,
as amended.
10.25* Form of Warrant issued to Pillar Investment Limited to
purchase shares of Common Stock issued as placement
commissions in connection with the sale of shares of Series F
Convertible Preferred Stock and in consideration of financial
advisory services, as amended.
10.26* Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1994, as amended.
10.27* Form of Warrant to purchase shares of Common Stock issued as
part of the Units (as defined in the Series G Agreement)
issued and sold to investors pursuant to the Series G
Agreement on or prior to March 31, 1995, as amended.
10.28* Form of Warrant to purchase shares of Common Stock issued as
part of the Units issued and sold to investors pursuant to the
Series G; Agreement after March 31, 1995.
10.29* Warrant issued to Pillar S.A. to purchase 100,000 shares of
Common Stock dated as of March 1, 1995.
10.30* Form of Warrant issued to Pillar Investment Limited to
purchase shares of Common Stock issued as placement
commissions in connection with the sale of Units pursuant to
the Series G Agreement.
++10.31*** Employment Agreement dated as of March 1, 1997 between the
Registrant and E. Andrews Grinstead, III.
10.32* Indemnification Agreement dated as of February 6, 1992 between
the Registrant and E. Andrews Grinstead, III.
++10.33** Employment Agreement dated March 1, 1997 between the
Registrant and Dr. Sudhir Agrawal.
112
++10.34* Consulting Agreement dated as of February 21, 1990 between the
Registrant and Dr. Paul C. Zamecnik.
10.35* Consulting Agreement dated as of March 1, 1994 between the
Registrant and Pillar S.A.
10.36* Consulting Agreement dated as of July 8, 1995 between the
Registrant and Pillar S.A., as amended.
10.37* Master Lease Agreement dated as of March 1, 1994 between the
Registrant and General Electric Capital Corporation.
10.38* First Amendment to Lease dated as of November 30, 1995 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
+10.39** Research, Development and License Agreement dated as of
January 24, 1996 between the Registrant and G.D. Searle & Co.
+10.40** Manufacturing and Supply Agreement dated as of January 24,
1996 between the Registrant and G.D. Searle & Co.
10.41** Registration Rights Agreement dated as of January 24, 1996
between the Registrant and G.D. Sear1e & Co.
10.42** Second Amendment to Lease dated as of February 23, 1996
between the Registrant and Charles River Building Limited
Partnership for space located at 620 Memorial Drive,
Cambridge, Massachusetts.
10.43** Third Amendment to Lease dated as of February 28, 1996 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.44*** Fourth Amendment to Lease dated as of July 25, 1996 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.45*** Fifth Amendment to Lease dated as of March 14, 1997 between
the Registrant and Charles River Building Limited Partnership
for space located at 620 Memorial Drive, Cambridge,
Massachusetts.
10.46*** Loan and Security Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank (the "Silicon
Agreement").
113
10.47*** Warrant issued to Silicon Valley Bank to purchase 65,000
shares of Common Stock dated as of December 31, 1996.
10.48*** Registration Rights Agreement dated as of December 31, 1996
between the Registrant and Silicon Valley Bank.
10.49*** Master Equipment Lease Agreement dated as of October 25, 1996
between the Registrant and Finova Technology Finance, Inc.
+++10.50*** Supply and Sales Agreement dated as of September 1, 1996
between the Registrant and P.E. Applied Biosystems.
10.51# Registration Rights Agreement dated as of March 26, 1997
between Forum Capital Markets L.P. and the Registrant.
10.52# Warrant Agreement dated as of March 26, 1997 between Forum
Capital Markets L.P. and the Registrant.
+++10.53## 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
Registrant, dated as of November 26, 1996.
10.54## Letter Agreement dated May 12, 1997 between the Registrant and
Pillar S.A. amending the Consulting Agreement dated as of
March 1, 1994 between the Registrant and Pillar S.A.
10.55## Amendment dated July 15, 1997 to the Series G Convertible
Preferred Stock and Warrant Purchase Agreement dated as of
September 9, 1994 among the Registrant and certain purchasers,
as amended.
10.56## Sixth Amendment to Lease dated April 1997 between the
Registrant and Charles River Building Limited Partnership for
space located at 620 Memorial Drive, Cambridge, Massachusetts.
10.57 Consent Agreement dated January 15, 1998 between Silicon
Valley Bank and the Registrant relating to the Silicon
Agreement.
10.58### Form of Unit Purchase Agreement (the "Unit Purchase
Agreement") in connection with the sale of Notes due 2007 by
and among the Registrant and certain purchasers.
10.59### Form of Notes due 2007 of the Registrant issued to or issuable
pursuant to the Unit Purchase Agreement.
114
10.60### Form of Warrants of the Registrant issued or issuable purusant
to the Unit Purchase Agreement.
21.* Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McDonnell Boehnen Hulbert & Berghoff.
27.1 Financial Data Schedule [EDGAR] - Year Ended December 31, 1997
27.2 Financial Data Schedule [EDGAR] - Year Ended December 31, 1996
- ----------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-99024).
** Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
*** Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
# Incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated April 2, 1997.
## Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
### Incorporated by reference to Exhibit 9(a)(1) to the Registrant's
Schedule 13E-4 dated February 6, 1998.
+ Confidential treatment granted as to certain portions, which portions
are omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
+++ Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
1
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
HYBRIDON, INC.
Hybridon, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware, does hereby certify as
follows:
1. The Corporation filed its original Certificate of Incorporation with the
Secretary of State of Delaware on May 25, 1989, which Certificate of
Incorporation was amended by a Certificate of Amendment of Certificate of
Incorporation filed on February 21, 1990, and amended and restated by a Restated
Certificate of Incorporation filed on June 5, 1990. A Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
November 20, 1990, which Restated Certificate of Incorporation was amended by a
Certificate of Amendment of Restated Certificate of Incorporation filed on
October 16, 1991, a Certificate of Amendment of Restated Certificate of
Incorporation filed on March 3, 1992, a Certificate of Amendment of Restated
Certificate of Incorporation filed on March 23, 1992, a Certificate of Amendment
of Restated Certificate of Incorporation filed on October 23, 1992, a
Certificate of Amendment of Restated Certificate of Incorporation
2
filed on February 12, 1993, a Certificate of Amendment of Restated Certificate
of Incorporation filed on June 17, 1993, a Certificate of Amendment of Restated
Certificate of Incorporation filed on July 13, 1993, a Certificate of Amendment
of Restated Certificate of Incorporation filed on September 9, 1994, a
Certificate of Amendment of Restated Certificate of Incorporation filed on July
7, 1995, a Certificate of Amendment of Restated Certificate of Incorporation
filed on December 19, 1995, and a Certificate of Retirement of Stock filed on
even date herewith.
2. At a meeting of the Board of Directors of the Corporation, a resolution
was duly adopted, pursuant to Sections 141(f) and 245 of the General Corporation
Law of the State of Delaware, setting forth a Restated Certificate of
Incorporation of the Corporation and declaring said Restated Certificate of
Incorporation advisable. The resolution setting forth the Restated Certificate
of Incorporation is as follows:
RESOLVED: That the Restated Certificate of Incorporation of the
Corporation, as amended, be and hereby is amended and restated in its entirety
so that the same shall read as follows:
FIRST. The name of the Corporation is:
Hybridon, Inc.
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is
The Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
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To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issues is One Hundred Million (100,000,000)
shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii)
Five Million ($5,000,000)shares of Preferred Stock, $.01 par value per share
("Preferred Stock"), which may be issued from time to time in one or more series
as set forth in Part B of this Articles FOURTH.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
1. GENERAL. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock from
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders,
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subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Direc tors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise specifically provided in this Certificate
of Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the issuance of any shares of any series of the
Preferred Stock authorized by and complying with the conditions of the
Certificate of Incorporation, the right to have such vote being expressly waived
by all present and future holders of the capital stock of the Corporation.
FIFTH. The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
David P. Johst 60 State Street
Boston, MA 02109
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SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any promise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
EIGHTH. Except to the extent that the General Corporation Law of the State
of Delaware prohibits the elimination or limitation of liability of directors
for breaches of fiduciary duty, no director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
NINTH. 1. ACTION, SUITS AND PROCEEDINGS OTHER THAN BY
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OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was, or has agreed to become,
a director or officer of the Corporation, or is or was serving, or has agreed to
serve, at the request of the Corporation, as a director, officer or trustee of,
or in a similar capacity with, another corporation, partnership, joint venture,
trust or other enterprise (including any employee benefit plan) (all such
persons being referred to hereafter as an "Indemnitee"), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) judgment, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of NOLO CONTENDERE or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 6 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation.
2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall indemnify any Indemnitee who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees) and
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amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses (including attorneys' fees) which the Court of
Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his right
to be indemnified, the Indemnitee must notify the Corporation in writing as soon
as practicable of any action, suit, proceeding or investigation involving him
for which indemnity will or could be sought. With respect to any action, suit,
proceeding or investigation of which the Corporation is so notified, the
Corporation will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its
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own expense, with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to assume such
defense, the Corporation shall not be liable to the Indemnitee for any legal or
other expenses subsequently incurred by the Indemnitee in connection with such
claim, other than as provided below in this Section 4. The Indemnitee shall have
the right to employ his own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below, in
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter, PROVIDED,
HOWEVER, that the payment of such expense incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking may be accepted without reference to the financial ability of
such person to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and
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to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless with respect to requests under
Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence,
within such 60-day period that the Indemnitee did not meet the applicable
standard of conduct set forth in Section 1 or 2, as the case may be. Such
determination shall be made in each instance by (a) a majority vote of a quorum
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors'), (b) if no such quorum is obtainable, a majority vote of a committee
of two or more disinterested directors, (c) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (d)
independent legal counsel (who may be regular legal counsel to the Corporation),
or (e) a court of competent jurisdiction.
7. REMEDIES. The right to indemnification or advances as granted by this
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advanced of expenses under this
Article shall be on the Corporation. Neither the failure of the Corporation to
have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee
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to indemnification under the provisions hereof with respect to any action, suit,
proceeding or investigation arising out of or relating to any actions,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
9. OTHER RIGHTS. The indemnification and advancement of expenses provided
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in any other capacity while holding office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee. Nothing contained in this Article shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal,
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) against any expense, liability
or loss incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the General Corporation law
of Delaware.
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12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of Delaware is
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ELEVENTH. This Article is inserted for the management of the business and
for the conduct of the affairs of the Corporation and shall not become effective
until the closing of the sale of shares of Common Stock in an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, resulting in at least $10,000,000 of gross
proceeds to the Corporation (a "Public Offering").
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1. NUMBER OF DIRECTORS. The number of directors of the Corporation shall
not be less than three. The exact number of directors within the limitations
specified in the preceding sentence shall be fixed from time to time by, or in
the manner provided in, the Corporation's By-Laws.
2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the designated number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class II, and if such fraction is two-thirds, one of the extra directors shall
be a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided from time to time by resolution adopted by the
Board of Directors.
3. ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot except as and to the extent provided in the By-Laws of the Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such director
was elected; PROVIDED, that each initial director in Class I shall serve for a
term ending on the date of the annual meeting in 1996; each initial director in
Class II shall serve for a term ending on the date of the annual meeting in
1997; and each initial director in Class III shall serve for a term ending on
the date of the annual meeting in 1998; and PROVIDED FURTHER, that the term of
each director shall be subject to the election and qualification of his
successor and to his earlier death, resignation or removal.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated
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directorships shall be subtracted from those classes whose terms of offices are
to expire at the earliest dates following such allocation, unless otherwise
provided from time to time by resolution adopted by the Board of Directors.
6. QUORUM; ACTION AT MEETING. A majority of the directors at any time in
office shall constitute a quorum for the transaction of business. In the event
one or more of the directors shall be disqualified to vote at any meeting, then
the required quorum shall be reduced by one for each director so disqualified,
provided that in no case shall less than one-third of the number of directors
fixed pursuant to Section 1 above constitute a quorum. If at any meeting of the
Board of Directors there shall be less than such a quorum, a majority of those
present may adjourn the meeting from time to time. Every act or decision done or
made by a majority of the directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the Board of Directors unless
a greater number is required by law, by the By-Laws of the Corporation or by
this Restated Certificate of Incorporation.
7. REMOVAL. Directors of the Corporation may be removed only for cause by
the affirmative vote of the holders of at least two-thirds of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote.
8. VACANCIES. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the board, shall be filled
only by a vote of a majority of the directors then in office, although less than
a quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.
9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
10. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law,
this Restated Certificate of Incorporation or the By-Laws of the Corporation,
and notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote
-13-
14
of the holders of at least seventy-five percent (75%) of the shares of capital
stock of the Corporation issued and outstanding and entitled to vote shall be
required to amend or repeal, or to adopt any provision inconsistent with, this
Article ELEVENTH.
TWELFTH. Until the closing of a Public Offering, any action which is
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote on such action were present
and voted. Effective upon the closing of a Public Offering, stockholders of the
Corporation may not take any action by written consent in lieu of a meeting.
Notwithstanding any other provisions of law, the Restated Certificate of
Incorporation or the By-Laws of the Corporation, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least seventy-five percent (75%) of the shares of capital stock of
the Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TWELFTH.
THIRTEENTH. Effective upon the closing of a Public Offering, special
meetings of stockholders may be called at any time by only the Chief Executive
Officer (or if there is no Chief Executive Officer, the President) or the Board
of Directors. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting. Notwithstanding any other provision of law, this Restated
Certificate of Incorporation or the By-Laws of the Corporation, as amended, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with this Article THIRTEENTH.
-14-
15
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its Chairman this 28TH March, 1996.
HYBRIDON, INC.
By: /s/ E. Andrews Grinstead, III
----------------------------------
Chairman
[Corporate Seal]
-15-
16
CERTIFICATE OF AMENDMENT
OF
RESTATED
CERTIFICATE OF INCORPORATION
OF HYBRIDON, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
--------------------------------------------------------------
HYBRIDON, INC. (the "Corporation"), organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
By written action of the Board of Directors of the Corporation, dated
October 20, 1997, the Board of Directors duly adopted resolutions pursuant to
Sections 141(f) and 242 of the General Corporation Law of the State of Delaware
setting forth an amendment to the Restated Certificate of Incorporation of the
Corporation, as amended, and declaring said amendment to be advisable. The
stockholders of the Corporation duly approved, pursuant to said Section 242,
said proposed amendment at a Special Meeting of Stockholders held on November
18, 1997. The resolution setting forth the amendment to the Restated Certificate
of Incorporation is as follows:
RESOLVED: That, subject to stockholder approval, the following paragraph be
inserted prior to the first paragraph of Article FOURTH of the
Certificate of Incorporation:
"That upon the filing date of the Certificate of Amendment
of Restated Certificate of Incorporation of the Corporation (the
"Effective Date"), a one-for-five reverse split of the
Corporation's Common Stock (as defined below) shall become
effective, such that each five shares of Common Stock outstanding
and held of record by each stockholder of the Corporation
(including treasury shares)
17
immediately prior to the Effective Date shall represent one share
of Common Stock from and after the Effective Date."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its Chairman of the Board of Directors, President
and Chief Executive Officer this 10th day of December, 1997.
HYBRIDON, INC.
By: /s/ E. Andrews Grinstead, III
--------------------------------------
E. Andrews Grinstead, III
Chairman of the Board of Directors,
President and Chief Executive Officer
-2-
1
EXHIBIT 10.57
January 15, 1998
Hybridon, Inc.
620 Memorial Drive
Cambridge, Massachusetts
Attention: E. Andrews Grinstead
Re: Consent to Issuance of Notes due 2007 in the principal amount of
up to $68,750,000 and Waiver of Covenants and Defaults under Loan
Agreement
Dear Sir/Madam:
Reference is hereby made to that certain Loan and Security Agreement by
and between HYBRIDON, INC. (the "BORROWER") and SILICON VALLEY BANK (the
"BANK"), originally dated December 31, 1996 (the "LOAN AGREEMENT"). You have
indicated that the Borrower contemplates entering into and performing its
obligations under a UNIT PURCHASE AGREEMENT (as defined below) pursuant to which
the Borrower intends to commence an offering (the "OFFERING") of units (the
"UNITS") consisting of Notes due 2007 (the "NOTES") and warrants to purchase
common stock (the "WARRANTS") as more particularly described in the
Restructuring Proposal Term Sheet attached hereto as EXHIBIT A (the "TERM
SHEET"). The Notes and Warrants shall be issued on substantially the terms and
conditions set forth in the form of Unit Purchase Agreement by and among the
Borrower and each Purchaser of Units party thereto (the "UNIT PURCHASE
AGREEMENT") attached hereto as EXHIBIT B, and the form of Note and of
Certificate of Designation for the Series B Preferred Stock of the Borrower
attached hereto as EXHIBIT C, (collectively, the "NOTE DOCUMENTS"). Upon the
satisfaction of certain conditions more particularly set forth in the Notes, the
Notes and any accrued but unpaid interest thereon will convert into preferred
stock of the Borrower (the "CONVERSION SECURITIES") having substantially the
terms set forth in Certificate of Designation for the Series B Preferred Stock
hereto. The placement agents for the Offering, or their designees, shall also
receive placement and advisory warrants (the "PLACEMENT AND ADVISORY WARRANTS")
to purchase Units equal, in the aggregate up to 25% of the Units issued to
purchasers in the Offering. As contemplated by the Term Sheet, the Borrower may
also issue the Exchange Preferred Stock and Exchange Warrants referenced therein
and may, in certain instances, issue the Conversion Securities directly.
You have also indicated that the Borrower has had discussions with
representatives of certain holders of its 9% Convertible Subordinated Notes due
2004 (the "CONVERTIBLE NOTES") contemplating the exchange (the "EXCHANGE") of
Convertible Notes and accrued interest
1
2
thereonfor shares of Series A Preferred Stock of the Borrower having
substantially the terms set forth on EXHIBIT D annexed hereto (the "EXCHANGE
PREFERRED") and warrants to purchase common stock as set forth on the Term Sheet
and contemplating waivers of certain provisions of the Indenture pursuant to
which the Convertible Notes were issued, as described on EXHIBIT E annexed
hereto (the "INDENTURE WAIVERS"). You have requested that the Bank amend or
waive certain provisions of the Loan Agreement, the Negative Pledge Agreement
entered into in connection with the Loan Agreement (the "Negative Pledge
Agreement") consent to the issuance of, and performance by the Borrower of its
obligations under, the Unit Purchase Agreement, the Notes, the Conversion
Securities and the Exchange Preferred and other related transactions.
1. The Bank hereby consents to the issuance of the Notes, the
Conversion Securities and the Exchange Preferred and to the
performance by the Borrower of its obligations thereunder,
including without limitation the payment of interest and
dividends thereunder, and to the Exchange, and such consent
constitutes the prior written consent required by Sections 7.4
and 7.6 of the Loan Agreement. The Bank further agrees that the
Notes constitute "Subordinated Debt" as that term is defined in
Section 1.1 of the Loan Agreement, and consents to the Indenture
Waivers. This consent and agreement is conditioned upon the
execution among the Bank and the Secured Party referenced in the
Unit Purchase Agreement of an intercreditor agreement limiting
the Bank's contractual right of offset contained in the Loan
Documents in certain instances until the earliest of: i) the date
on which at least $35,000,000 in net proceeds has been received
in the Offering, ii) the Termination Date, as defined in the Unit
Purchase Agreement, or iii) the termination of the Offering by
the Borrower or Pillar Investments, Ltd..
2. The Bank's consent to the issuance of the Notes is expressly
subject to the provisions of Section 7.10 of the Loan Agreement
which prohibits any amendment of the Notes without the Bank's
express written consent.
3. The Bank hereby waives compliance by the Borrower with the
Minimum Liquidity covenant contained in Section 6.9 of the Loan
Agreement for the months ended November 30, 1997, December 31,
1997, January 31, 1998 and February 28, 1998 (ie. the first
possible date on which the Borrower would be required to pledge
amounts pursuant to Section 6.9 would be April 15, 1998). The
Bank will require compliance with all of the financial covenants
contained in the Loan Agreement commencing March 1, 1998, and
first tested as of March 31, 1998 based upon a compliance
certificate to be provided to the Bank on or before April 15,
1998. In addition, the Borrower will provide the Bank with a
projected Compliance Certificate for March 31, 1998, as set forth
in paragraph 9 hereof. The Loan Agreement is hereby modified to
provide that the Compliance Certificate required to be provided
pursuant to Section 6.3 of the Loan Agreement will be provided by
the fifteenth of each month for the period ended on the last
business day of the previous month; provided, however, that the
due date of the
2
3
pledge referred to in Section 6.9 shall be the last business day
of such month with respect to any Minimum Liquidity compliance
level for which Borrower is no more than $250,000 short of
achieving compliance with such Minimum Liquidity level, and on
the next business day in the event that the Borrower is more than
$250,000 short of achieving compliance of such Minimum Liquidity
level. The Bank requires as a condition to the waivers contained
in this paragraph that at least fifty (50%) of the net proceeds
of the Offering will be deposited in the Borrower's demand
deposit or other deposit accounts with the Bank, and that at
least fifty (50%) of the Borrower's present unencumbered cash
will be maintained with the Bank, all such funds to be used in
the Borrower's discretion subject to the covenants in the Loan
Agreement. The Bank will continue to hold all of the cash
presently pledged to it as of the date of this letter as security
for the Borrower's obligations to the Bank under the Loan
Documents.
4. The Bank's consent to the issuance of the Notes and waiver of the
covenant breaches and defaults referenced in this letter is
expressly subject to the Borrower's agreement to execute and
deliver to the Bank i) an Intellectual Property Security
Agreement in form attached hereto and ii) a pledge agreement in
the form attached hereto respecting all stock of all subsidiaries
of the Borrower and all of the Borrower's ownership interests in
any limited partnerships or other business entities. Such
executed agreements shall be provided to the Bank in recordable
form acceptable to the Bank within two business days of delivery
of this letter. The Borrower will provide the Bank with a
quarterly update of all intellectual property owned by the
Borrower and will cooperate with the Bank in amending the
Intellectual Property Security Agreement to include any new
patents, pending applications and amendments thereto owned by the
Borrower. The Borrower will cooperate with the Bank in executing
and delivering such other documents, instruments and agreements
and taking such other actions as may be necessary to perfect the
Bank's security interests granted in the Intellectual Property
Security Agreement and the pledge agreement. The Bank agrees to
release its security interest in the Borrower's interest in
Charles River Limited Partnership ("CRLP") to permit a sale of
CRLP in accordance with paragraph 10.
5. The Borrower agrees, in consideration of the Bank's consents
herein that the effective rate of interest on the Borrower's
obligations to the Bank under the Loan Agreement, will increase
effective January 15, 1998 to the Prime Rate plus three (3%)
percent per annum. If the Borrower does not receive net proceeds
from the Offering of at least $5,000,000 on or before February
16, 1998, the effective interest rate on the Borrower's
obligations to the Bank under the Loan Agreement shall be
increased, effective January 15, 1998 to the Prime Rate plus five
(5%) percent per annum.
3
4
6. The Bank's consent to the issuance of the Notes and waiver of the
covenant breaches and defaults referenced in this letter is
expressly subject to, and not effective until, payment by the
Borrower to the Bank of a "Consent and Waiver Fee" in the amount
of Thirty-Five Thousand ($35,000) Dollars. If the Borrower does
not receive net proceeds from the Offering of at least $5,000,000
on or before February 16, 1998, the Borrower shall pay to the
Bank an additional "Consent and Waiver Fee" of Fifteen Thousand
($15,000) Dollars on February 17, 1998. If the Borrower does not
receive net proceeds from the Offering of at least $12,500,000 on
or before March 16, 1998, the Borrower shall pay to the Bank, in
addition to the amounts previously referenced in this paragraph,
the sum of Five Thousand ($5,000) Dollars on March 17, 1998 and a
like sum on the fifteenth day of each month thereafter until the
Borrower has received aggregate net proceeds from the Offering of
at least $35,000,000.
7. The Borrower and the Bank hereby also agree that the Loan
Agreement is hereby modified to delete any references to Anthony
Payne contained therein, to waive any existing default in respect
of his departure from the Borrower and to incorporate the
understanding of the parties that the term "unencumbered cash on
hand" contained in the definition of Minimum Liquidity in Section
6.9 of the Loan Agreement includes all cash of the Borrower,
including cash which is subject to an unperfected security
interest in favor of the purchasers of the Notes and the Secured
Party, except as provided in paragraphs 9 and 10 hereof.
8. The Bank hereby waives any breach of any covenant set forth in
the Loan Agreement (including, without limitation, Sections 7.4,
7.6, 7.7, 7.9 and 7.10) or the Negative Pledge Agreement which
would otherwise be breached solely on account of any of the
transactions described above, including, without limitation, the
compensation payable to Pillar Investments, Ltd., as placement
agent, in connection with the issuance of the Notes. The Bank
waives any Event of Default under Section 8.3 which may presently
exist as a result of the delisting of the Borrower's stock, and
agrees that the granting of a security interest in favor of the
purchasers of the Notes junior to the security interest in favor
of the Bank on the conditions set forth in the Unit Purchase
Agreement and herein, the Intercreditor Agreement and the
execution and delivery of the Negative Pledge Agreement shall not
constitute a "material impairment of the value or priority of the
Bank's security interest in the Collateral" under Section 8.3 of
the Loan Agreement. The Bank further acknowledges that the Unit
Purchase Agreement and Intercreditor Agreement and attached form
of Note are a "subordination agreement entered into with the
Bank" for purposes of Section 8.8 of the Loan Agreement, and that
the Exchange is not an Event of Default under the Loan Agreement.
4
5
9. Provided that the Borrower would have Minimum Liquidity of at
least $10,000,000, both before and after the payment (or
escrowing) of such interest payment and that the Borrower is
otherwise in compliance with the provisions of this letter, the
Bank also hereby consents to the deferral by the Borrower of
interest payments due April 1, 1998 (the "Deferred Payments") on
the Convertible Notes until October 1, 1998, at which time the
Deferred Payments may be paid in cash on Convertible Notes which
are then outstanding, notwithstanding the provisions of Article
11 of the Indenture governing the Notes. For purposes of
determining compliance with the Minimum Liquidity covenant, the
Borrower shall provide the Bank on or before March 25, 1998 with
a statement and evidence of cash balances as of such date,
together with projected cash disbursements through March 31,
1998, less the scheduled amount of the April 1, 1998 interest
payment on the Convertible Notes; such projected Minimum
Liquidity must be at least $10,000,000 as of March 31, 1998 for
the Borrower to be deemed in compliance with such covenant. The
Bank shall exclude the amount of the Deferred Payments from
unencumbered cash on hand in calculating Minimum Liquidity from
and after April 1, 1998, provided that no exclusion shall be
required with respect to Deferred Payments in respect of
Convertible Notes which are no longer outstanding.
10. The Borrower and the Bank agree that Fifty (50%) percent of the
net cash proceeds (excluding customary and reasonable selling
expenses and estimated taxes accrued or payable on such sales) of
all sales of assets of the Borrower permitted by the Bank (other
than sales of inventory in the ordinary course of business and
licensing of intellectual property in the ordinary course of
business and sales of assets with net cash proceeds less than
$5,000 per asset), shall be paid to the Bank as a prepayment of
the principal of the Borrower's obligations to the Bank under the
Loan Agreement, to be applied against payments due in the inverse
order of maturity of such payments. The Borrower shall not sell
or otherwise alienate any of its properties or assets (other than
sales of inventory and licensing of technology in the ordinary
course of its business) in an aggregate amount of more than
$10,000 in any thirty day period without the written consent of
the Bank. The Bank and the Borrower agree that Fifty (50%) of the
net proceeds of the expected sale by the Borrower of its interest
in CRLP (expected to be in the aggregate $3.4 Million and
expressly excluded from the limitation set forth above) shall be
made available to the Borrower for payment against outstanding
accounts payable of the Borrower and that the balance of such net
sales proceeds (the "CRLP Withold") shall be pledged to the Bank
unless or until net proceeds of at least $10,000,000 have been
received by the Borrower in the Offering (which must be, in all
events prior to the Termination Date). The CRLP Withold shall not
be considered unencumbered cash for purposes of calculating
compliance with the Minimum Liquidity covenant. If the Borrower
has raised net proceeds of at least $10,000,000 by such date, the
CRLP Withold shall be
5
6
promptly released to the Borrower. If the Borrower has not raised
net proceeds of at least $10,000,000 by such date, the CRLP
Withold shall be applied by the Bank against the outstanding
obligations of the Borrower to the Bank under the Loan Agreement,
in the inverse order of maturity. Upon the maturity of the
certificate of deposit pledged to the Bank pursuant to Section
6.9 of the Loan Agreement, the Bank will apply such funds (the
"Applied Funds") against the obligations of the Borrower to the
Bank under the Loan Agreement, in inverse order of maturity. In
computing compliance with the Minimum Liquidity covenant after
the date of application of the Applied Funds, the outstanding
loan balance on which the cash pledge under Section 6.9 is
calculated shall be the outstanding loan balance at the time of
calculation of the required pledge plus the Applied Funds, and in
computing the required pledge amount, the Borrower shall only be
required to pledge the required pledge amount (calculated as
provided in this sentence) minus the Applied Funds.
11. The Borrower shall not sublease, or otherwise alienate, all or
any portion of the Milford property leased by the Borrower
without the written consent of the Bank. The Borrower shall, as a
condition to the consents and waivers contained herein, provide
the Bank with evidence of current payment of amounts due under
the Milford lease and the note related thereto.
12. The Borrower agrees, in consideration of the foregoing, that the
Borrower shall not pay any cash interest payment on the Notes at
any time that there is an Event of Default under the Loan
Agreement.
13. The Borrower shall as a condition to this consent and waiver have
delivered to the Bank complete and up to date agings of its
accounts payable and accounts receivable, in form acceptable to
the Bank, and shall provide the Bank with evidence of the payment
status of the lease and related note with respect to the Milford
property. The Borrower shall also provide the Bank with a
complete listing of all of its leasehold interests in real and
personal property, the outstanding remaining payment obligations
on such leases, the amount and frequency of the periodic payments
under each lease, next payment due date for each lease and
description of the property subject to each lease on or before
January 22, 1998.
14. The Borrower hereby ratifies and affirms all of the
representations and warranties made by it in the Loan Agreement
as of the date of this letter, except as expressly disclosed to
the Bank.
15. The Borrower shall pay to the Bank, in addition to all other
amounts due under the Loan Agreement and hereunder, all of the
Bank's reasonable costs and expenses in connection with the
negotiation, documentation and implementation
6
7
of this letter and the documents, instruments and agreements
contemplated hereby and by the Unit Purchase Agreement, including
without limitation travel and other expenses reasonably incurred
by the Bank.
16. The Borrower acknowledges and confirms that to the extent that
the Borrower may have any claims, offsets, counterclaims, or
defenses, asserted or unasserted, the Borrower, for itself, and
on behalf of its successors, assigns, parents, subsidiaries,
agents, affiliates, predecessors, employees, officers, directors,
executors and heirs, as applicable (collectively, the "Borrower
Affiliates") releases and forever discharges the Bank, its
subsidiaries, affiliates, employees, officers, directors, agents,
successors and assigns, both present and former (collectively,
the "Bank Affiliates") of and from any and all manner of claims,
offsets, counterclaims, defenses, action and actions, cause and
causes of action, suits, debts, controversies, damages,
judgments, executions, and demands whatsoever, asserted or
unasserted, in law or in equity, which against the Bank and/or
the Bank Affiliates, they or the Borrower Affiliates ever had to
and including the date hereof, upon or by reason of any matter,
cause, causes or thing whatsoever, in connection with the Loan
Agreement, the Note, this letter, the Intellectual Property
Security Agreement, Pledge Agreement, Intercreditor Agreement and
any other document, instrument or agreement given in connection
with the Loan Agreement or the transactions related to this
letter except for the obligations of the Bank in such documents,
instruments and agreements to be performed after the date of this
letter. The Borrower shall indemnify, defend and hold the Bank
harmless of and from any claim brought or threatened against the
Bank by the Borrower or any other person (as well as from
attorneys' fees and expenses in connection therewith) on account
of the Loan Agreement, the Note, this letter, the Intellectual
Property Security Agreement, Pledge Agreement, Intercreditor
Agreement and any other document, instrument or agreement given
in connection with the Loan Agreement or the transactions related
to this letter (each of which may be defended, compromised,
settled or pursued by the Bank with counsel of the Bank's
election reasonably acceptable to the Borrower, but at the
expense of the Borrower), except in the case of the Bank's
failure to comply with its obligations hereunder or thereunder,
its gross negligence or willful misconduct.
The foregoing consents and waivers are given by the Bank as of this 15th
day of January, 1998, for the express purpose of facilitating the transactions
described above, and are conditioned upon the undertakings of the Borrower set
forth herein. Except as expressly provided herein, this consent and waiver
letter shall not create a course of dealing or imply or create any course of
conduct or obligation upon the Bank to consent to any future like or unlike
transaction(s). The Bank expressly reserves all of its rights and remedies
except to the limited extent affected hereby, and the Borrower acknowledges and
agrees with the foregoing limited consent and waiver and hereby ratifies and
confirms the terms and provisions of the Loan Agreement and
7
8
ancillary documents, instruments and agreements between the Bank and the
Borrower, except as expressly modified hereby.
This letter, when executed by the Borrower and the Bank shall constitute
a contract under seal within the Commonwealth of Massachusetts, and shall be
construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts.
SILICON VALLEY BANK
By: /s/ Phillip S. Ernst
---------------------------
Name: Phillip S. Ernst, Vice President
AGREED AND ACKNOWLEDGED:
HYBRIDON, INC.
By: /s/ E. Andrews Grinstead III
-------------------------------
Name: E. Andrews Grinstead III
Chairman, Chief Executive Officer
and President
8
1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 18, 1998 (except with respect to the matters discussed in
Note 1 and Note 6(a), as to which the date is March 30, 1998) included in this
Form 10-K into the Company's previously filed Registration Statement File No's
33-3896, 33-3898, 33-3900 and 33-3902.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 30, 1998
1
EXHIBIT 23.2
[Letterhead of McDonnell, Boehnen, Hulbert & Berghoff Appears Here]
March 30, 1998
Hybridon, Inc.
629 Memorial Drive
Cambridge, Massachusetts 02139
Re: Hybridon, Inc. -- Annual Report on Form 10-K
Dear Sirs:
McDonnell, Boehnen, Hulbert & Berghoff hereby consents to the reference to our
firm under the section "Business -- Patents, Trade Secrets and Licenses" in
the Hybridon, Inc. Annual Report on Form 10-K for the year ended December 31,
1997.
Yours very truly,
/s/ Paul H. Berghoff
---------------------------------
Paul H. Berghoff
5
1
U.S. DOLLARS
12-MOS
DEC-31-1997
JAN-01-1997
DEC-31-1997
1
2,202,202
0
529,702
0
0
3,737,729
30,315,817
11,085,013
35,071,532
27,837,589
53,282,123
0
0
5,060
(46,053,240)
35,071,532
1,876,862
3,948,984
0
68,874,663
0
0
4,535,647
(69,461,326)
0
(69,461,326)
0
0
0
(69,461,326)
(13.76)
(13.76)
5
1
U.S. DOLLARS
12-MOS 12-MOS
DEC-31-1996 DEC-31-1995
JAN-01-1996 JAN-01-1995
DEC-31-1996 DEC-31-1995
1 1
12,633,742 5,284,262
3,785,146 0
573,896 0
0 0
0 0
18,538,108 6,235,788
22,237,062 13,334,073
6,596,294 4,202,543
41,536,602 19,617,559
9,649,946 6,025,526
9,031,852 1,145,480
0 0
0 31,695
5,029 369
22,849,775 12,446,553
41,536,602 19,617,559
1,080,175 0
4,008,647 1,404,873
0 0
50,737,195 35,778,792
0 0
0 0
124,052 172,757
(46,852,600) (34,546,676)
0 0
(46,852,600) (34,546,676)
0 0
0 0
0 0
(46,852,600) (34,546,676)
(10.24) (94.70)
(10.24) (94.70)
Basic and diluted EPS information has been prepared in accordance with SFAS
No. 128, and basic and diluted EPS have been entered in place of primary and
diluted EPS, respectively.
