UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
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
Number of shares of Common Stock, $.001 par value, outstanding
as of July 31, 1998: 18,982,978
1
SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
June 30, 1998
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Condensed Statements of Operations for the
three and six months ended June 30, 1998 and
June 30, 1997 (unaudited) 4
Condensed Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997
(unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosure About
Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults in Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 950,375 $ 11,340,702
Short-term investments 4,254,174 10,079,943
Amounts due from related parties 466,348 192,551
Prepaid expenses and other current assets 680,513 553,507
------------ -------------
Total current assets 6,351,410 22,166,703
Property and equipment, net 3,459,314 3,972,140
Other assets 646,179 613,657
------------ ------------
Total assets $ 10,456,903 $ 26,752,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and other accrued
expenses $ 1,437,052 $ 925,701
Accrued clinical trial costs 2,757,390 1,689,659
Accrued professional fees 1,014,113 718,625
Accrued compensation 424,396 368,272
Advances - contract research 343,750 1,133,605
Current installments of long-term 2,598,243 2,783,976
obligations ------------ ------------
Total current liabilities 8,574,944 7,619,838
Long-term obligations, excluding current
installments 3,694,056 4,017,979
Senior convertible notes 7,868,349 9,967,044
Stockholders' equity:
Series A preferred stock 400 400
Common stock 18,471 17,796
Additional paid-in capital 120,957,665 117,164,524
Deferred compensation and other
adjustments (1,094,296) (124,910)
Accumulated deficit (129,562,686) (111,910,171)
------------- -------------
Total stockholders' equity (net capital
deficiency) (9,680,446) 5,147,639
------------ ------------
Total liabilities and stockholders' equity
(net capital deficiency) $ 10,456,903 $ 26,752,500
============ ============
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to condensed financial statements.
3
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
Revenue from
collaborative
agreements $ 849,855 $ 875,000 $ 1,724,855 $ 1,750,000
Operating expenses:
Research and
development 8,226,889 5,537,830 15,739,987 11,553,198
General and
administrative 1,407,509 1,718,247 2,683,620 2,709,346
----------- ----------- ----------- -----------
Total operating expenses 9,634,398 7,256,077 18,423,607 14,262,544
----------- ----------- ----------- -----------
Loss from operations (8,784,543) (6,381,077) (16,698,752) (12,512,544)
Other income (expense):
Interest income 124,510 303,628 356,878 554,740
Interest expense (503,745) (178,989) (1,310,641) (280,383)
----------- ----------- ----------- -----------
Net loss $(9,163,778) $(6,256,438) $(17,652,515) $(12,238,187)
=========== =========== =========== ===========
Net loss per share $ (0.50) $ (0.36) $ (0.98) $ (0.75)
=========== =========== =========== ===========
Shares used in calculation of
net loss per share 18,153,000 17,263,000 17,994,000 16,359,000
=========== =========== =========== ===========
See Notes to condensed financial statements.
4
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Six Months Ended June 30,
--------------------------------
1998 1997
------------- -------------
Operating activities:
Net loss $ (17,652,515) $ (12,238,190)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 714,488 904,104
Amortization of warrants and deferred
equity costs 349,237 114,227
Loss on disposal of fixed assets 19,834 -
Payment of interest in Common Stock 455,959 -
Changes in operating assets and liabilities:
Prepaid expenses, other current assets
and other assets (433,325) 408,302
Accounts payable, accrued expenses and
contract research advances 1,124,668 (314,910)
------------- -------------
Net cash used in operating activities (15,421,654) (11,126,467)
------------- -------------
Investing activities:
Purchases of available-for-sale investments (1,999,049) (5,051,129)
Maturities of available-for-sale
investments 5,048,516 986,097
Sales of available-for-sale investments 2,805,510 -
Capital expenditures (221,496) (543,908)
------------- -------------
Net cash provided by (used in) investing
activities 5,633,481 (4,608,940)
------------- -------------
Financing activities:
Proceeds from issuance of Common Stock 14,545 15,898,557
Principal payments on long-term
obligations (1,127,822) (2,100,348)
Proceeds from issuance of long-term
obligations - 5,000,000
Proceeds from asset financing
arrangements 511,123 -
------------ -------------
Net cash provided by (used in) financing
activities (602,154) 18,798,209
------------- -------------
Net increase (decrease) in cash and cash
equivalents (10,390,327) 3,062,802
Cash and cash equivalents at beginning of
period 11,340,702 16,051,251
------------- -------------
Cash and cash equivalents at end of period $ 950,375 $ 19,114,053
============= =============
See Notes to condensed financial statements.
5
SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Basis of Presentation
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for the treatment of human diseases and
their symptoms through the isolation and optimization of active compounds found
in tropical plants with a history of medicinal use. The Company has three
product candidates in clinical development: SP-303/Provir, an oral product for
the treatment of diarrhea in people with AIDS and other watery diarrhea
indications; nikkomycin Z, an oral antifungal for the treatment of systemic
fungal infections; and SP-134101, an oral product for the treatment of Type II
diabetes. Shaman maintains an active Type II diabetes research program which
serves as the basis for its collaboration with Lipha S.A., a wholly-owned
subsidiary of Merck KGaA, Darmstadt, Germany ("Lipha/Merck").
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year.
This unaudited financial data should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997, filed with
the Securities and Exchange Commission on May 28, 1998.
2. Series B Convertible Preferred Stock Financing
In June 1998, the Company entered into Stock Purchase Agreements (the
"Stock Agreements") with certain of its stockholders (the "Buyers") pursuant to
which the Company acquired the right to sell to the Buyers, subject to certain
conditions and in one or two tranches closing no later than February 28, 1999,
up to an aggregate of 7,000 shares of the Company's Series B Custom Convertible
Preferred Stock (the "Series B Preferred Stock") for an aggregate purchase price
of $7,000,000. The Stock Agreements became effective on June 22, 1998 (the
"Effective Date") but will be terminated upon the closing of the Series C
Convertible Preferred Stock Financing. See Note 5 - Subsequent Event.
As consideration for entering into the Stock Agreements, the Company
issued to the Buyers on the Effective Date warrants (the "June Warrants") to
purchase an
6
aggregate of 350,000 shares of Common Stock. The June Warrants are exercisable
for a period of five years after the Effective Date at an exercise price per
share equal to 115% of the average trading price of the Common Stock during the
specified measurement periods. The June Warrants provide for adjustment of the
number of shares of Common Stock issuable upon exercise thereof, including upon
the distribution of certain dividends, or upon the division or combination of
the Company's Common Stock. The Company filed a registration statement with the
Securities and Exchange Commission (the "SEC") for the resale of shares issued
upon exercise of the June Warrants, which registration statement was declared
effective on July 10, 1998. The Company has attributed a value of $1.0 million
to these June Warrants. This amount has been recorded as a deferred interest
expense and is being amortized monthly over five years.
3. Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. At June 30, 1998 and 1997, outstanding stock
options and other stock equivalents are antidilutive.
4. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components including unrealized gains or losses on
available-for-sale securities; however, adoption in the quarter and six months
ended June 30, 1998 did not have a material impact on the Company's net income
or stockholders' equity.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for the
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments and disclosures.
5. Subsequent Event
Series C Convertible Preferred Stock Financing
In August 1998, the Company filed a registration statement with the SEC for
a public offering of a minimum of 140,000 ("the Minimum") and a maximum of
200,000 (the "Maximum") shares of Series C Convertible Preferred Stock for gross
proceeds of a minimum of $14.0 million and a maximum of $20.0 million (the "1998
Public Offering"). Each share of Series C Preferred Stock shall be entitled to
receive
7
cumulative dividends paid semi-annually each year to the holders of record of
such shares as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid
in arrears, in shares of Common Stock (valued at 85% of the average closing
price of the Common Stock for the 10 trading day period ending three trading
days prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea (equivalent to a 7% royalty for the Minimum and a 10% royalty for
the Maximum of the aggregate shares of Series C Preferred Stock) less $5.00 (the
value of the semi-annual stock dividend). If, under Delaware law, the Company is
unable to pay the cash amount of the Dividends, then the cash portion of the
Dividends shall be payable in shares of Common Stock (valued at 85% of the
average closing price of the Common Stock for the 10 day trading period ending
three trading days prior to the date on which the dividend is paid). Each share
shall be convertible at any time commencing on the date on which any shares of
Series C Preferred Stock were first issued and continuing for a period of 30
days thereafter, and again commencing 12 months after such initial issuance date
at the election of each holder, and automatically on the sixth anniversary of
the initial issuance date into greater of (i) 16.6667 shares of Common Stock or
(ii) such number of shares of Common Stock as equals $100 divided by 85% of the
average closing price of the Common Stock reported by the Nasdaq Stock Market
for the 10 trading day period ending three trading days prior to the date of
conversion. The registration statement was declared effective by the Securities
and Exchange Commission on August 14, 1998.
8
SHAMAN PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company") discovers and
develops novel pharmaceutical products for the treatment of human diseases and
their symptoms through the isolation and optimization of active compounds found
in tropical plants with a history of medicinal use. The Company has three
product candidates in clinical development: SP-303/Provir, an oral product for
the treatment of diarrhea in people with AIDS and other watery diarrhea
indications; nikkomycin Z, an oral antifungal for the treatment of systemic
fungal infections; and SP-134101, an oral product for the treatment of Type II
diabetes. Shaman maintains an active Type II diabetes research program which
serves as the basis for its collaboration with Lipha/Merck.
The Company began operations in March 1990. To date, Shaman has not sold
any products. However, the Company's lead compound, SP-303/Provir is currently
in a Phase III human clinical trial for the treatment of diarrhea in people with
AIDS. If the results of this trial (which is currently over 85% enrolled) are
positive, the Company expects to file an NDA for commercial approval of
SP-303/Provir in early 1999. With a fast track designation from the FDA for the
indication of diarrhea in people with AIDS, the Company is preparing for
potential product launch in the second half of 1999 and intends to retain U.S.
marketing rights to this product. The Company's accumulated deficit at June 30,
1998, was approximately $129.6 million. Since its inception, Shaman has financed
it research, development and administrative activities through various private
and public equity financings, loan and debt financings, and collaborative
agreements with pharmaceutical companies and, to a lesser extent, through
equipment and leasehold improvement lease financings.
Results of Operations for the Six Months Ended June 30, 1998 and 1997
The Company recorded collaborative revenues of $850,000 and $875,000 for
the quarters ended June 30, 1998 and 1997, respectively, and $1,725,000 and
$1,750,000 for the six months ended June 30, 1998 and 1997, respectively.
Revenues for the quarter and six months ended June 30, 1998 resulted from the
Company's on-going research funding from Shaman's collaboration with Lipha/Merck
and research funding from Ono Pharmaceutical Co., Ltd. of Osaka, Japan ("Ono")
through May 1998. Revenues for the quarter and six months ended June 30, 1997
resulted from the Company's on-going research funding from Shaman's
collaborations with Lipha/Merck and Ono. The Company expects that revenues from
collaborative agreements will continue to fluctuate in the future as development
of its various compounds proceeds and new product candidates are partnered for
development and commercialization. In May 1998, the Company's collaborative
agreement with Ono (the "Agreement"), and the ongoing research and development
funding received pursuant thereto, expired under the original terms thereof and
was not renewed. Under the Agreement, Ono will continue to provide milestone
payments and royalties to Shaman on any resulting
9
products they develop from compounds identified during the three-year term of
the Agreement.
The Company incurred research and development expenses of $8.2 million and
$5.5 million for the quarters ended June 30, 1998 and 1997, respectively and
$15.7 million and $11.6 million for the six months ended June 30, 1998 and 1997,
respectively. These increases were primarily attributable to the Company's
increased clinical development activities with respect to SP-303/Provir.
Research and development expenses are expected to increase in 1998 as the
Company continues its clinical development activities with respect to
SP-303/Provir and other product candidates and the Company maintains its
diabetes research program.
General and administrative expenses were $1.4 million and $1.7 million for
the quarters ended June 30, 1998 and 1997, respectively, and $2.7 million for
each six month period ending June 30, 1998 and 1997. The decrease in the quarter
ended June 30, 1998 compared to the quarter ended June 30, 1997 was primarily
attributable to lower legal dispute costs. The Company's expanded research and
clinical activities are not expected to require commensurate increases in
general and administrative support and expense.
Interest income was $125,000 and $304,000 for the quarters ended June 30,
1998 and 1997, respectively, and $357,000 and $555,000 for the six months ended
June 30, 1998 and 1997, respectively. Interest income decreased for the quarter
and six months ended June 30, 1998, compared with the quarter and six months
ended June 30, 1997, due to lower average cash and investment balances as the
Company continues to fund its operations.
Interest expense was $504,000 and $179,000 for the quarters ended June 30,
1998 and 1997, respectively and $1,311,000 and $280,000 for the six months ended
June 30, 1998 and 1997, respectively. Interest expense increased for the quarter
and six months ended June 30, 1998, compared with the quarter and six months
ended June 30, 1997 due to higher average debt balance and amortization of the
non-cash interest expense of $266,000 and $320,000, respectively, in connection
with certain debt financing.
Liquidity and Capital Resources
As of June 30, 1998, the Company's cash, cash equivalents, and investments
totaled approximately $5.2 million, compared with $21.4 million at December 31,
1997. This cash balance does not include expected proceeds from the 1998 Public
Offering of an approximate minimum of $12.8 million and an approximate maximum
of $18.5 million. The Company invests excess cash according to its investment
policy that provides guidelines with regard to liquidity, type of investment,
credit ratings and concentration limits.
In June 1998, the Company entered into Stock Purchase Agreements (the
"Stock Agreements") with certain of its stockholders (the "Buyers") pursuant to
which the Company acquired the right to sell to the Buyers, subject to certain
conditions and in one or two tranches closing no later than February 28, 1999,
up to an aggregate of 7,000 shares of the Company's Series B Custom Convertible
Preferred Stock (the "Series B Preferred Stock") for an aggregate purchase price
of $7,000,000. The Stock Agreements
10
became effective on June 22, 1998 (the "Effective Date") but will be terminated
upon the closing of the 1998 Public Offering.
In June 1997, the Company issued $10.4 million of senior convertible notes
(the "1997 Private Placement"). The notes mature in August 2000 and bear
interest at a rate of 5.5% per annum. Interest on the notes may be paid in
Common Stock or cash at the Company's option. The notes are convertible into
Common Stock of the Company at a 10% discount from the low trading price during
a designated time period prior to the conversion. The Company filed a
registration statement with the SEC for the resale of shares issued upon
conversion of these notes, which registration statement was declared effective
on August 29, 1997. As of August 10, 1998, a total principal amount of $4.0
million of the notes had been converted into an aggregate of 1,151,168 shares of
Common Stock.
In March 1998, the Company and the purchasers of the notes entered into an
Amendment Agreement (the "Amendment Agreement"), in order to avoid conversion of
the notes at a price that would be unduly dilutive to the Company's existing
stockholders. As consideration for entering into the Amendment Agreement, the
Company issued to the purchasers of the notes warrants to purchase an aggregate
of 137,500 shares of Common Stock (the "March Warrants"). The March Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. The
Company filed a registration statement with the SEC for the resale of shares
issued upon exercise of the March Warrants, which registration statement was
declared effective on July 10, 1998.
In May 1997, the Company obtained a $5.0 million loan, which amortizes
over 36 months, to pay off pre-existing debt, finance capital asset acquisitions
and finance continued research and clinical development of the Company's
existing product candidates. The loan carries an annual interest rate of 14.58%
and is payable in equal monthly installments over the term of the loan. The
lender was granted 10-year warrants to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $6.25 per share. The Company has attributed
a value of $648,000 to these warrants. This amount has been recorded as a
discount on the related debt and is being amortized as interest expense over the
term of the loan.
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs.
Upon signing the collaboration, the Company received an annual research fee of
$1.5 million which was amortized to revenue over 12 months, as work was
performed. The Company also received approximately $3.0 million for 388,918
shares of Common Stock priced at $7.71 per share, representing a 20% premium to
the weighted average price of the Company's Common Stock at the time of
purchase. In exchange for development and marketing rights in all countries
except Japan, South Korea, and Taiwan (which are covered under an earlier
agreement between Shaman and Ono), Lipha/Merck will provide up to $9.0 million
in research payments and up to $10.5 million in equity investments priced at a
20% premium to a multi-day volume weighted average price of the Company's Common
Stock at the time of purchase. The agreement also provides for additional
preclinical and clinical milestone payments to the Company in excess of $10.0
million per compound for each antihyperglycemic drug developed and
commercialized. Lipha/Merck will bear all pre-clinical, clinical,
11
regulatory and other development expenses associated with the compounds selected
under the agreement. In addition, as products are commercialized, Shaman will
receive royalties on all product sales outside the United States and up to 50%
of the profits (if the Company exercises its co-promotion rights) or royalties
on all product sales in the United States. Certain of the milestone payments
will be credited against future royalty payments, if any, due to the Company
from sales of products developed pursuant to the agreement. As of August 10,
1998, the Company has received an aggregate of $7.5 million under the agreement.
A balance of $12 million in committed capital remains under the agreement.
In July 1996, the Company closed a private placement (the "1996 Private
Placement") pursuant to Regulation S under the Securities Act of 1933, as
amended, with one investor in which it received gross proceeds of $3.3 million
for the sale of 400,000 shares of Series A Preferred Stock and for the issuance
of a six-year warrant to purchase 550,000 shares of the Company's Common Stock
at an exercise price of $10.18 per share. The Series A Preferred Stock does not
carry a dividend obligation and will convert into Common Stock no later than
July 23, 1999 at a price per share between $6.00 and $8.15, depending on the
market value of the Company's Common Stock during the period prior to
conversion. Holders of Series A Preferred Stock are entitled to a liquidation
preference of $8.15 per share. In addition to the sale of Series A Preferred
Stock and the warrant, the Company has the right, from time to time during the
period beginning January 1997 and ending July 2000, subject to certain
conditions, including continued listing of the Common Stock on any national
exchange, to sell up to 1,200,000 additional shares of Common Stock to the
investor at a formula price of 100% or 101% of a multi-day average of the
Company's Common Stock price at the time of sale. If the Company exercises this
right, the investor has the option to increase the number of shares it purchases
by up to an aggregate of 527,500 shares.
Over the next year and potentially longer depending on clinical results and
regulatory reviews, the Company expects to incur substantial additional costs
relating to the continued preclinical and clinical testing of its products,
regulatory activities and research and development programs. The Company
anticipates that its cash, cash equivalents and investment balances, the
collaborative revenue committed by Lipha/Merck, Lipha/Merck's commitment to
purchase additional equity and either (i) the proceeds of the 1998 Public
Offering or (ii) Shaman's additional rights to sell Common Stock under the 1996
Private Placement and Series B Preferred Stock under the Stock Agreements will
be adequate to fund operations through the filing of an NDA on SP-303/Provir for
the fast track indication of diarrhea in people with AIDS, at least through the
first quarter of 1999. Milestone payments which may be received by the Company
from Ono and Lipha/Merck would extend the Company's capacity to finance its
operations beyond that time. However, there can be no assurance that these
milestones will be achieved, nor that additional funding, if needed, will be
available on reasonable terms, or at all.
Future Outlook
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a relatively young company and has not yet completed a full cycle of
development,
12
regulatory approval and commercialization for any of its product candidates. The
clinical and regulatory processes through which the Company's products must
proceed are complex, uncertain and costly, and no assurance can be given
regarding the timing of clinical or regulatory progress or that the Company will
be successful in commercializing any of its product candidates. These
development processes require substantial amounts of funding, and the Company is
dependent on corporate partners and the equity markets to finance such efforts.
Where access to funding is difficult, the Company's stockholders may face
significant dilution, and the ability of the Company to proceed with its
programs and plans may be significantly and adversely affected. Actions and
advances by competitors may also significantly affect the Company's prospects,
as may the existence of patents held by such competitors or potential
competitors. In addition, there can be no assurance that any plants required by
the Company will be indefinitely available or that any compounds derived from
the plant material will result in protected proprietary rights for the Company.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements.
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and concluded
that they are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems experienced by the
Company, its suppliers, its clinical research organizations, or its
collaborative partners could have a material adverse effect on the Company's
business, financial condition and results of operations.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Not Applicable.
13
Risk Factors
This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties such as statements of the
Company's plans, objectives, expectations and intentions. The Company's actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere in
Form 10-K/A for fiscal year ended December 31, 1997, filed with the Securities
and Exchange Commission on May 28, 1998.
Risk Regarding Failure to Meet Continued Listing Requirements. On June 10,
1998, the Company received correspondence from The Nasdaq National Market
("Nasdaq") stating that they had found that the Company no longer met the
$4,000,000 net tangible asset requirement for continued listing on The Nasdaq
National Market. As of June 30, 1998, the Company had a net capital deficiency
of ($9,680,446). On July 15, 1998, the Company requested a formal hearing to
determine the Company's compliance with the Nasdaq listing requirements. The
hearing date has been scheduled for September 3, 1998. The Company believes it
is in compliance with all other listing requirements. However, absent additional
financing, the receipt of license fees or milestone payments from corporate
partnerships or the conversion of outstanding convertible notes, there can be no
assurance that the Company will satisfy the Nasdaq National Market listing
requirements at or after the time of such hearing. If the Company fails to
satisfy The Nasdaq National Market that it meets such requirements, the Common
Stock will no longer be traded on The Nasdaq National Market, and the Company
would need to seek listing on the American Stock Exchange, however, there can be
no assurance that it could be listed on the American Stock Exchange. If traded
on the American Stock Exchange, the Company's Common Stock may be subject to
reduced liquidity and reduced analyst coverage, the Company's ability to raise
capital in the future may be inhibited and the Company's business, financial
condition and results of operations could be materially adversely affected.
Early Stage of Development; Technological Uncertainty. Shaman has not yet
completed the development of any products. Many of the Company's products will
require significant additional clinical testing and investment of capital prior
to commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company's SP-303/Provir, nikkomycin Z and SP-134101 products are each in
clinical development. Positive results for any of these products in a clinical
trial do not necessarily assure that positive results will be obtained in future
clinical trials or that government approval to commercialize the products will
be obtained.
Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. There can be no assurance that any of the
Company's products will be successfully developed, enter into human clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards,
14
obtain required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed or that the Company
will not encounter problems in clinical trials that will cause the Company to
delay or suspend product development. Failure of any of the Company's products
to be commercialized could have a material adverse effect on the Company's
business, financial condition and results of operations.
History of Operating Losses; Products Still in Development; Future
Profitability Uncertain. Shaman was incorporated in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
As of June 30, 1998, the Company's accumulated deficit was approximately $129.6
million. The Company has not generated any product revenues to date. All of
Shaman's products and compounds are still in research and development stage,
which requires substantial expenditures of funds. In order to generate revenues
or profits, the Company, alone or with others, must successfully develop, test,
obtain regulatory approval for and market its potential products. No assurance
can be given that Shaman's product development efforts will be successful, that
required regulatory approvals will be obtained, or that the products, if
developed and introduced, will be successfully marketed or will achieve market
acceptance.
Future Capital Needs; Uncertainty of Additional Funding. As of June 30,
1998, the Company had cash, cash equivalents and investment balances of
approximately $5.2 million. The Company will require substantial additional
funds to conduct the development and testing of its potential products and to
manufacture and market any products that may be developed. The Company's future
capital requirements will depend on numerous factors, including the progress of
its research and development programs, the progress of preclinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in the Company's existing collaborative and licensing relationships, the
ability of the Company to establish additional collaborative relationships for
the manufacture and marketing of its potential products, and the purchase of
additional capital equipment. In addition, senior convertible notes purchase
agreements entered into by the Company in connection with a private placement
completed in 1997, provide that under certain circumstances the Company would be
required to redeem all or some portion of the principal balance remaining ($6.4
million at August 10, 1998), which redemption could significantly accelerate the
Company's cash expenditures and capital requirements beyond the levels currently
anticipated and would materially and adversely affect the Company's ability to
conduct its business.
The Company will need to seek additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources. If
additional funds are raised by issuing equity securities, significant dilution
to existing stockholders may result. In the event that additional funds are
obtained through collaborative agreements, such agreements may require the
Company to relinquish rights to certain of its technologies, product candidates,
products or marketing territories that the Company would otherwise seek to
develop or commercialize itself. There can be no assurance that additional
financing sources will be available on acceptable terms or at all. If adequate
funds are not available, the Company will need to
15
delay, scale back or eliminate one or more of its research, discovery or
development programs, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
No Assurance of Successful Product Development. The Company's research and
development programs are at various stages of development, ranging from the
research stage to clinical trials. Substantial additional research and
development will be necessary in order for the Company to move additional
product candidates into clinical testing or to complete clinical testing of
current product candidates, and there can be no assurance that any of the
Company's research and development efforts on these or other potential products,
including SP-303/Provir, nikkomycin Z, and SP-134101 will lead to development of
products that are shown to be safe and effective in clinical trials.
In addition, there can be no assurance that any such products will meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. Further, the Company's products may prove to have undesirable or
unintended side effects that may prevent or limit their commercial use. The
Company may find, at any stage of this complex product development process, that
products that appeared promising in preclinical studies or Phase I and Phase II
clinical trials do not demonstrate efficacy in larger-scale, Phase III clinical
trials and do not receive regulatory approvals. Accordingly, any product
development program undertaken by the Company may be curtailed, redirected,
suspended or eliminated at any time.
Uncertainties Associated with Clinical Trials. Shaman has conducted, and
plans to continue conducting, extensive and costly clinical trials to assess the
safety and efficacy of its potential products. The rate of completion of the
Company's clinical trials is dependent upon, among other factors, the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of patient enrollment. Patient enrollment is a function of many
factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Any delay in
patient enrollment will result in increased costs and delays, which could have a
material adverse effect on the Company's ability to complete clinical trials in
a timely fashion.
In addition, there can be no assurance that the Company's testing and
development schedules will be met. Any failure to meet such schedules could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's clinical trials may be delayed by many
factors, including, but not limited to: slower than anticipated patient
enrollment; difficulty in finding a sufficient number of patients fitting the
appropriate trial profile; difficulties in the acquisition of sufficient
supplies of clinical trial materials; or failure to show efficacy in clinical
trials or adverse events occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
varies substantially with the type, complexity, novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. Delays or
16
rejections may be encountered based upon many factors, including changes in
regulatory policy during the period of product development and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company cannot assure that patients enrolled in its clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the FDA regulations
applicable to such testing can result in delay, suspension or cancellation of
such testing, and/or refusal by the FDA to accept the results of such testing.
In addition, the FDA or the Company may suspend clinical trials at any time if
either of them concludes that any patients participating in any such trial are
being exposed to unacceptable health risks. Further, there can be no assurance
that human clinical testing will demonstrate that any current or future product
candidate is safe or effective or that data derived from any such study will be
suitable for submission to the FDA or other regulatory authorities. Failure of
the Company's clinical trials to demonstrate safety or efficacy in humans could
cause the delay, suspension, or termination of any product program, including
SP-303/Provir, nikkomycin Z and SP-134101, and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Collaborative Relationships. The Company's research and
development efforts in its diabetes program and, to a lesser extent, in its
other programs, have been dependent upon its arrangements with Lipha/Merck and
Ono and their funding for research and development efforts thereunder. Because
research and development funding from Ono has ended, the Company must in the
future rely on continued funding from Lipha/Merck or milestone payments from
products developed by either Ono or Lipha/Merck, if any, or must seek new
collaborations to provide further funding for its diabetes program. There can be
no assurance that such further funding will be obtained or that any significant
revenues will ultimately be derived from any of the Company's collaborations.
The Company expects to seek additional collaborative agreements to
commercialize its other product candidates and will, in particular, need to rely
on such third party arrangements to commercialize its products, including
SP-303/Provir, outside the United States. No assurance can be given that the
Company will be successful in negotiating or entering into such agreements on
terms favorable to the Company or at all, or that any such agreement, if entered
into by the Company, will be successful. A failure to successfully enter into
such agreements and sell products thereunder would have a material adverse
effect on the Company's business, financial condition and results of operations.
Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies and universities is
intense. Many of these entities have significantly greater research and
development capabilities, as well as substantial marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. There can be no assurance that developments by others will not
render the Company's products or technologies noncompetitive or that the Company
will be able to keep pace with
17
technological developments. Competitors have developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely different
approach or means of accomplishing the desired therapeutic effect than products
developed by the Company. These competing products may be more effective and
less costly than the products developed by the Company. In addition, other forms
of medical treatment may offer competition to the Company's products. The
development of competing compounds could have a material adverse effect on the
Company's business, financial condition or results of operations.
Government Regulation; No Assurance of Regulatory Approvals. All new
drugs, including the Company's products under development, are subject to
extensive and rigorous regulation by the federal government, principally the
FDA, as well as comparable agencies in state and local jurisdictions and in
foreign countries. These authorities, in particular the FDA, impose substantial
requirements upon the preclinical and clinical testing, manufacturing and
marketing of pharmaceutical products. The steps required before a drug may be
approved for marketing in the United States generally include (i) preclinical
laboratory and animal tests, (ii) the submission to the FDA of an IND for human
clinical testing, (iii) adequate and well controlled human clinical trials to
establish the safety and efficacy of the drug, (iv) submission to the FDA of an
NDA, and (v) satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is made to assess compliance with Good
Manufacturing Practices ("GMP").
Lengthy and detailed preclinical and clinical testing, validation of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required for approval of a new drug. Satisfaction of these
requirements typically takes several years and the time needed to satisfy them
may vary substantially, based on the type, complexity and novelty of the
pharmaceutical product. The effect of government regulation may be to delay or
to prevent marketing of potential products for a considerable period of time and
to impose costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant approval for
any products developed by the Company on a timely basis, or at all. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even if regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product, including
withdrawal of the product from the market. Any delay or failure in obtaining
regulatory approvals would have a material adverse effect on the Company's
business, financial condition and results of operation.
Among the conditions for FDA approval of a pharmaceutical product is the
requirement that the manufacturer's (either the Company itself or any
third-party manufacturer) quality controls and manufacturing procedures conform
to GMP, which must be followed at all times. The FDA strictly enforces GMP
requirements through
18
periodic unannounced inspections. There can be no assurance that the FDA will
determine that the facilities and manufacturing procedures of the Company or any
third-party manufacturer of the Company's planned products conform to GMP
requirements. Additionally, the Company or its third-party manufacturers must
pass a pre-approval inspection of their manufacturing facilities by the FDA
before the Company can obtain marketing approval. Failure to comply with
applicable regulatory requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States could result in new government regulations that
could have a material adverse effect on the Company's business. The Company is
unable to predict the likelihood of adverse governmental regulation that might
arise from future legislative or administrative action, either in the United
States or abroad.
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registration and sales of its products. Regardless of
whether FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Sources of Supply. The Company currently imports all of the
plant materials from which its products are derived from countries in Latin and
South America, Africa and Southeast Asia. To the extent that its products cannot
be economically synthesized or otherwise produced, the Company will continue to
be dependent upon a supply of raw plant material. The Company does not have
formal agreements in place with all of its suppliers. In addition, a continued
source of plant supply is subject to the risks inherent in international trade.
These risks include unexpected changes in regulatory requirements, exchange
rates, tariffs and barriers, difficulties in coordinating and managing foreign
operations, political instability and potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, tropical rain forests, and certain
irreplaceable plant resources therein, are currently threatened with
destruction. In the event portions of the rain forests are destroyed which
contain the source material from which Shaman's current or future products are
derived, such destruction could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Manufacturing and Marketing Experience and Capacity. The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or facilities necessary to manufacture products in
commercial quantities. As a result, the Company must rely on collaborative
partners or third-party manufacturing facilities. If the Company or its third
party manufacturers should
19
encounter delays or difficulties in producing, packaging and distributing the
Company's finished products, clinical trials, regulatory filings, market
introduction and subsequent sales of such products could be adversely affected.
Contract manufacturers must conform to GMP regulations strictly enforced
by the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must pass a pre-approval inspection of their
manufacturing facilities before the FDA will approve an NDA. Certain material
manufacturing changes that occur after approval are also subject to FDA review
and clearance or approval. There can be no assurance that the FDA or other
regulatory agencies will approve the process or the facilities by which any of
the Company's products may be manufactured. The Company's dependence on third
parties for the manufacture of products may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis.
Should the Company be required to manufacture products itself, the Company will
be required to build or purchase a manufacturing facility, will be subject to
the regulatory requirements described above, to similar risks regarding delays
or difficulties encountered in manufacturing any such products and will require
substantial additional capital. There can be no assurance that the Company will
be able to manufacture any such products successfully or in a cost-effective
manner.
The Company currently has no sales staff. There can be no assurance that
the Company will be able to successfully establish a marketing and sales force.
To the extent that the Company does not or is unable to successfully establish a
complete marketing and sales force, there can be no assurance that the Company
will achieve a successful product entry into the marketplace. Such failure would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty Regarding Patents and Proprietary Rights; Current Legal
Proceedings Regarding Patents and Proprietary Rights. The Company's success will
depend in large part on its ability to obtain and maintain patents, protect
trade secrets and operate without infringing upon the proprietary rights of
others. Moreover, others may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. There can be no
assurance that the Company's patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any issued patents will provide the Company with adequate protection for its
inventions or will not be challenged by others, or that the patents of others
will not impair the ability of the Company to commercialize its products. The
patent position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office ("PTO") or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose the Company to differing risks of commercialization in each foreign
country in which it may sell products. There can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
products or design around any patents of the Company.
20
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. The European Patent Office, the
French Patent Office, the German Patent Office and the Australian Patent Office,
have each granted a patent containing broad claims to proanthocyanidin polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition (which covers the active
pharmaceutical ingredient in SP-303/Provir), to Leon Cariel and the Institut des
Substances Vegetales. The effective filing date of these patents is prior to the
effective filing date of the Company's foreign pending patent application in
Europe. Certain of the foreign patents have been granted in jurisdictions where
examination is not rigorous. The Company has instituted an Opposition in the
European Patent Office against granted European Patent No. 472531 owned by Leon
Cariel and Institut des Substances Vegetales. The Company believes that the
granted claims are invalid and intends to vigorously prosecute the Opposition.
There can be no assurance that the Company will be successful in having
the granted European patent revoked or the claims sufficiently narrowed so as
not to potentially cover the Company's proanthocyanidin polymer composition and
methods of use. There can be no assurance that Daniel Jean, Leon Cariel and the
Institut des Substances Vegetales will not assert claims relating to this patent
against the Company. There can be no assurance that the Company would be able to
obtain a license to this patent at all, or at reasonable cost, or be able to
develop or obtain alternative technology to use in Europe or elsewhere. The
earlier effective filing date of this patent could limit the scope of the
patents, if any, that the Company may be able to obtain or result in the denial
of the Company's patent applications in Europe or elsewhere.
In the United States, the PTO has rendered judgment in an interference
(the "Interference") declared between the Company's issued patent covering its
specific proanthocyanidin polymer composition and certain claims of U.S.
application corresponding to the granted European patent of Leon Cariel and the
Institut des Substances Vegetales by Daniel Jean and Leon Cariel. Judgment was
awarded to the Company on July 14, 1997. Since the period for appeal has passed,
this judgment is now final.
Additionally, in connection with the Interference proceeding, the Company
has had an opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel patent application which, under U.S. patent law, are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent application, which was not involved in the Interference proceeding and
which has been indicated to be allowable, covers a large variety of
proanthocyanidin polymers. The Company believes that this broad claim is subject
to attack as invalid in view of prior art. Based on knowledge of the Company's
specific proanthocyanidin polymer composition, the Company believes that the
manufacture, use or sale of its specific proanthocyanidin polymer composition
would not constitute infringement of this broad claim, once it issues. There can
be no assurances however, that the Company would prevail should an action for
infringement of such claim be commenced. In addition, if patents that cover the
Company's activities have been or are issued to other companies, there can
21
be no assurance that the Company would be able to obtain licenses to these
patents ata reasonable cost, or at all, or be able to develop or obtain
alternative technology.
If the Company does not obtain such licenses, it could encounter delays or
be precluded from introducing products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company. Additional interference proceedings may be declared or become necessary
to determine issues of invention; such litigation and/or interference
proceedings could result in substantial cost to and diversion of effort by the
Company and may have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that such efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented trade
secrets. All employees of the Company have entered into confidentiality
agreements. However, there can be no assurance that others will not
independently develop substantially equivalent information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes also may arise as to the rights in related or
resulting know-how and inventions.
Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, Shaman cannot be certain that it was the first to discover
compositions covered by its pending patent applications or the first to file
patent applications on such compositions. There can be no assurance that the
Company's patent applications will result in issued patents or that any of its
issued patents will afford comprehensive protection against potential
infringement.
The Company is presently prosecuting 13 patent applications with the PTO,
but the Company does not know whether any of these applications will result in
the issuance of any patents or, if any patents are issued, whether any issued
patent will provide significant proprietary protection or will be circumvented
or invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an initially filed patent application be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in an interference proceeding, the PTO would review the
competing patents and/or patent applications to determine the validity of the
competing claims, including but not limited to
22
determining priority of invention. Any such determination would be subject to
appeal in the appropriate U.S. federal courts.
There can be no assurance that additional patents will be obtained by the
Company or that the 16 U.S. patents issued to date will provide substantial
protection or be of commercial benefit to the Company. The issuance of a patent
is not conclusive as to its validity or enforceability, nor does it provide the
patent holder with freedom to operate without infringing the patent rights of
others. A patent could be challenged by litigation and, if the outcome of such
litigation were adverse to the patent holder, competitors could be free to use
the subject matter covered by the patent, or the patent holder may license the
technology to others in settlement of such litigation. The invalidation of
patents owned by or licensed to the Company or non-approval of pending patent
applications could create increased competition, with potential adverse effects
on the Company and its business prospects. In addition, there can be no
assurance that any applications of the Company's technology will not infringe on
patents or proprietary rights of others or that licenses that might be required
as a result of such infringement for the Company's processes or products would
be available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may, on a voluntary or
involuntary basis, participate in interference proceedings that may in the
future be declared by the PTO, which could result in substantial cost to the
Company. There can be no assurance that the outcome of any such litigation or
interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements.
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and concluded
that they are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems experienced by the
Company, its suppliers, its clinical research organizations, or its
23
collaborative partners could have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's business may be materially adversely affected by the continuing
efforts of governmental and third party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets, the
pricing or profitability of health care products is subject to government
control. In the United States, there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. If the Company succeeds in bringing one or
more products to the market, there can be no assurance that reimbursement from
third party payers will be available or will be sufficient to allow the Company
to sell its products on a competitive or profitable basis.
Possible Volatility of Stock Price. From time to time, the stock market
has experienced significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies or industries. In
addition, the market price of the Company's Common Stock, like the stock prices
of many publicly traded biotechnology and smaller pharmaceutical companies, has
been and may continue to be highly volatile. The market price of the Series C
Preferred Stock may likewise be volatile. Announcements of technological
innovations, regulatory matters or new commercial products by the Company or its
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential medical results relating to products
under development by the Company or its competitors, regulatory developments in
both the United States and foreign countries, public concern as to the safety of
pharmaceutical products, and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of Shaman's Common Stock or Series C Preferred Stock.
No Assurance of Public Trading Market for Preferred Stock. An application
for inclusion of the Series C Preferred Stock on the OTC Bulletin Board has been
filed by the Placement Agent in conjunction with the 1998 Public Offering. The
OTC Bulletin Board staff has informed the Placement Agent that the inclusion of
the Series C Preferred Stock on the OTC Bulletin Board may not be deemed
effective until the termination of the 1998 Public Offering. The OTC Bulletin
Board is an unorganized, inter-dealer, over-the-counter market which provides
significantly less liquidity than The Nasdaq Stock Market, and quotes for the
stocks included on the OTC Bulletin
24
Board are not typically listed in the financial sections of newspapers as are
those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain and purchasers of
the Series C Preferred Stock may be unable to resell the Series C Preferred
Stock at or near the original offering price or at any price. In the event the
Series C Preferred Stock is not included on the OTC Bulletin Board, quotes for
the Series C Preferred Stock may be included in the "pink sheets" for the
over-the-counter market. There can be no assurance that a regular trading market
for the Series C Preferred Stock will develop after completion of the 1998
Public Offering or that, if developed, it will be sustained.
Environmental Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied with these laws and regulations in all material
respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development activities
involve 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 state and federal regulators, 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. The Company has secured insurance to mitigate such expense,
however, any such liability could exceed the insurance coverage and resources of
the Company. Such liability could have a material adverse effect on the
Company's business, financial condition and results of operations.
Anti-Takeover Effect of Delaware Law and Certain Charter and Bylaws
Provisions. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock or Series C
Preferred Stock. At August 10, 1998, the Company's Board of Directors had the
authority to issue up to 400,000 additional shares of Preferred Stock (after
giving effect to the issuance of the maximum of 200,000 shares of Series C
Preferred Stock) and to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders.
The rights of the holders of Common Stock and Series C Preferred Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock with voting rights, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. Other than the Series C
Preferred Stock, the Company has no present plans to issue shares of Preferred
Stock with voting rights. Certain provisions of Delaware law applicable to
25
the Company could also delay or make more difficult a merger, tender offer or
proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met.
Product Liability Exposure; Limited Insurance Coverage. The Company's
business exposes it to potential product liability risks which are inherent in
the development, testing, manufacture, marketing and sale of pharmaceutical
products. Product liability insurance for the pharmaceutical industry generally
is expensive. There can be no assurance that the Company's present product
liability insurance coverage, which includes coverage for acts by third parties,
including manufacturers of the Company's product candidates, is adequate. Such
existing coverage will not be adequate as the Company further develops its
products, and no assurance can be given that adequate insurance coverage against
all potential claims will be available in sufficient amounts or at a reasonable
cost. Certain of the Company's development and manufacturing agreements contain
insurance and indemnification provisions pursuant to which the Company could be
held accountable for certain occurrences. Such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by Delaware Law, the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director. The Company's Bylaws provide that the Company
shall indemnify its officers, directors, employees and agents to the full extent
permitted by the general corporation law of Delaware. The Company has entered
into indemnification agreements with its officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company currently maintains directors' and officers' insurance.
Section 145 of the Delaware Law provides that a corporation may indemnify
a director, officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred in connection with such action
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. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
26
Dilution. The biopharmaceutical industry is capital intensive. In this
regard the Company has entered into a number of financings, many which have
included securities that are convertible into shares of Common Stock. Dilution
may occur upon the exercise of outstanding options and warrants and upon
conversion of senior convertible notes, the Series A Preferred Stock, the Series
C Preferred Stock and, if issued, the Series B Preferred Stock. Stockholders may
also suffer additional dilution if the Company exercises its right to put
additional shares of its Common Stock to Fletcher International Limited,
pursuant to its agreements with such investor.
Dependence on Key Personnel. The Company's ability to maintain its
competitive position depends in part upon the continued contributions of its key
senior management. The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management personnel in the future. The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
27
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Shaman Pharmaceuticals, Inc.
was held on May 15, 1998.
(b) The following Directors were elected to serve as Class I directors
for two years or until their successors are elected and qualified:
Name Position
------------------- ----------------
Lisa A. Conte Class I Director
Adrian D.P. Bellamy Class I Director
The following Directors continue to serve their two year terms as
elected at last year's Annual Meeting held on May 22, 1997:
Name Position
---------------------- ---------------------
G. Kirk Raab Chairman of the Board
Herbert H. McDade, Jr. Class II Director
M. David Titus Class II Director
(c) The matters voted upon at the meeting and voting of the stockholders
with respect thereto are as follows:
(i) The election of Class I directors to hold office for a term of
two years from the Annual Meeting.
Lisa A. Conte
For: 14,674,604 Withheld: 193,554
Adrian D.P. Bellamy
For: 14,666,004 Withheld: 202,154
28
(ii) Approval of an Amendment to the Company's 1992 Stock Option
Plan (the "Plan") to increase the maximum number of shares of
the Company's Common Stock authorized for issuance under the
Plan by an additional 500,000 shares,
For: 12,273,290 Against: 2,473,063
Abstain: 121,805
(iii) Ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31,
1998.
For: 14,719,410 Against: 95,783
Abstain: 52,965
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended June 30, 1998.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 1998
Shaman Pharmaceuticals, Inc.
(Registrant)
/s/ Lisa A. Conte
-------------------------------------
Lisa A. Conte
President and Chief Executive Officer
(principal executive officer)
/s/ Stephanie C. Diaz
--------------------------------------------
Stephanie C. Diaz
Chief Financial Officer
(principal financial and accounting officer)
30