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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSTION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File No. 0-19731
Shaman Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-3095806
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
213 East Grand Avenue, South San Francisco, California 94080
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 415-952-7070
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sales price of the Common Stock on the Nasdaq
National Market on February 10, 1997 was $76,598,295.
The number of shares of the Registrant's Common Stock outstanding was 15,921,417
as of February 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the Commission
pursuant to Regulation 14A in connection with the 1997 Annual Meeting are
incorporated herein by reference into Part III of this Report.
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*Excludes 601,758 shares of the Registrant's Common Stock held by
executive officers, directors and affiliated parties at February 10, 1997.
Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.
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PART I
ITEM 1. BUSINESS
In addition to historical information, this report contains
predictions, estimates and other forward-looking statements that involve a
number of risks and uncertainties which are described more fully in "Item 1 -
Risk Factors." While this outlook represents our current judgment on the future
direction of the business, these risks and uncertainties are only some of the
factors that may ultimately affect the success of Shaman Pharmaceuticals, Inc.
Actual results may differ materially from any future performance suggested in
this report.
THE COMPANY
Shaman is a leader in the identification and development of novel
pharmaceutical products for the treatment of human diseases through the
isolation and optimization of active compounds found in tropical plants. The
Company believes that by focusing on drugs extracted from plants with a long
history of medicinal use, its drug discovery efforts will be quicker and more
likely to lead to safe and effective pharmaceuticals. Shaman has human clinical
trials under way for its three lead product candidates: Provir, Virend and
nikkomycin Z. Shaman has completed Phase II trials showing preliminary efficacy
for Provir for the treatment of watery diarrhea and Virend for the treatment of
recurrent genital herpes. An additional dose-optimizing Phase II trial for
Provir and an additional trial using Virend in combination with oral acyclovir,
commenced in the first quarter of 1997. Provir is an oral drug which acts as a
specific inhibitor of fluid loss via an antisecretory mechanism, and Virend is a
topical agent which acts by an antiviral mechanism of action; both products
incorporate the same active drug substance, SP-303. In addition, nikkomycin Z,
an orally-active, in-licensed product for the treatment of endemic mycoses and
other systemic fungal infections, is currently in Phase I trials in the U.K. and
the Company expects to file an IND in the United States with respect thereto in
1997. Shaman's research and preclinical development is principally focused on
the identification and optimization of compounds to treat Type II (adult onset
or non-insulin dependent) diabetes, an effort that has led to the identification
of 13 chemically distinct, orally-active compounds which have demonstrated
glucose lowering effects in preclinical testing. Significant funding, as well as
milestone payments for this program, are provided through collaborations with
Lipha, Lyonnaise Industrielle Pharmaceutique s.a., a wholly-owned subsidiary of
Merck KGaA, Darmstadt, Germany ("Lipha/Merck"), and Ono Pharmaceutical Co., Ltd.
("Ono").
Watery diarrhea is usually caused by an insult to the small intestine
(as a consequence of bacterial or viral infection) which results in fluid
accumulation in the small intestine, leading to dehydration and sometimes fatal
diarrhea. According to the International Marketing Service ("IMS"), worldwide,
26 million prescriptions are written annually for the treatment of watery
diarrhea. Moreover, approximately 67 million over-the-counter units are sold
annually worldwide. Current treatment for watery diarrhea includes antibiotics,
which can result in the creation or propagation of antibiotic-resistant strains
of bacteria, or antimotility agents, which inhibit the natural muscular
contractions of the intestinal tract, allowing the invading agent to remain in
the intestine for a prolonged period. No current primary treatment for
infectious diarrhea addresses dehydration or can reverse water accumulation.
Based on preclinical mechanistic studies, Provir appears to treat watery
diarrhea by inhibiting chloride ion secretion and thus preventing the
electrolyte imbalance that causes excess water accumulation into the lumen of
the small intestine resulting in diarrhea.
Genital herpes, for which there is currently no cure, is caused by the
herpes simplex virus which infects the ganglions of the nerve cells and results
in painful lesions that can last for 4 to 15 days. After an initial outbreak of
lesions, the virus typically remains dormant but may resurface when the immune
system becomes stressed or compromised. Genital herpes afflicts over 30 million
people in the United States alone, with up to 500,000 new cases diagnosed each
year. Current treatment for recurrent genital herpes consists of nucleoside
analogs, including oral formulations of acyclovir and famciclovir which
generally provide effective treatment of herpes lesions by
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interfering with viral replication. Virend reduces the duration of herpes lesion
outbreaks by preventing the herpesvirus from crossing the cell membrane and
becoming absorbed into healthy tissue.
Endemic mycoses are caused by coccidiomycosis (valley fever),
histoplasmosis and blastomycosis ("cocci," "histo" and "blasto") found in the
soil of certain regions of the United States. When the soil is disturbed (such
as during crop planting or harvesting), the fungi become airborne and may be
inhaled into the lungs. Once infected, otherwise healthy individuals will
experience mild flu-like symptoms but may never be diagnosed with the disease.
In more severe cases, the fungus spreads systemically and results in
disseminated fungal infections. Currently, two classes of drugs are commonly
prescribed for the treatment of endemic mycoses: azoles, which are fungistatic
(inhibit the growth of the fungus, but do not kill it) and polyenes (including
amphotericin B), which are fungicidal (kill the fungus), but often cannot be
tolerated in high enough doses to kill the fungi. Nikkomycin Z treats endemic
mycoses by interfering with the synthesis of chitin, a key element of the cell
wall of these fungi, which ultimately destroys the fungi. Based on synergistic
activity with azoles, in 1997 the Company plans to supply nikkomycin Z to Pfizer
Corporation ("Pfizer") to conduct a combination nikkomycin Z plus fluconazole
human clinical study in azole-resistant esophageal candidiasis patients.
Type II diabetes is a chronic disease in which the tissues of the body
are resistant to the actions of insulin and the pancreas cannot secrete enough
insulin to overcome this resistance. This disease is the result of multiple
causes, many of which are undefined at the molecular level. In the U.S.
alone, approximately 625,000 new cases of Type II diabetes are diagnosed each
year, and it is estimated that there will be over 18 million cases by the year
2002 (over five percent of the population). To date, the Company has identified
13 proprietary, orally-active, chemically distinct compounds to be evaluated for
the treatment of Type II diabetes.
BACKGROUND
Shaman builds on the knowledge and expertise of ethnobotanist and
physician teams who work with traditional healers to identify effective
treatments for the therapeutic areas targeted by the Company. These teams gather
comparative data on traditional medicinal uses of plants from geographically
diverse tropical areas and prioritize plant drug candidates based on common use
among cultures, as well as a number of other factors. These factors include a
cross-check of field-derived information against the results of literature
searches as to chemical constituents, previously discovered biological activity
and other reported medicinal uses. Shaman isolates and identifies the active
compounds from plant extracts by testing for activity in whole animal models at
each step of its purification process. The Company's natural product chemists
use chromatography, spectroscopy, nuclear magnetic resonance ("NMR") and other
proven technologies to identify and isolate compounds and structures. Because
these compounds reflect the previously untapped plant diversity of the rain
forests they have, to date, also exhibited significant diversity of chemical
structure. In addition, the Company's whole animal screening approach provides
the opportunity to discover novel methods of treatment for diseases in which the
underlying mechanism of action of a disease is not well understood.
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THE SHAMAN STRATEGY
Shaman's strategy is to employ a drug discovery process focused on
diseases which:
- appear to be the result of multiple and, in many cases,
unknown causes and therefore may not be amenable to a targeted
in vitro drug discovery process;
- occur in the rain forests and are readily recognized and
treated by traditional healers (e.g., foot ulcers, sweet
urine, poor eyesight and fungal infections are often
predictive of Type II diabetes); and
- allow the plant extract treatment to be confirmed in a whole
animal model and then purified to isolate the active compound.
Shaman believes this drug discovery process provides it with the
opportunity to:
- identify novel methods of treating diseases with therapeutic
relevance;
- discover new chemical entities or new classes of compounds to
treat disease; and
- provide early confirmation of efficacy and safety.
Shaman intends to commercialize its products through out-licensing when
safety and efficacy have been demonstrated in humans. Shaman will out-license
broad applications worldwide while retaining the opportunity to directly access
markets through niche applications and/or co-promotion.
CLINICAL AND RESEARCH PROGRAMS
Shaman has established and is continuing to build a portfolio of
product candidates. The table below describes the major therapeutic areas in
which the Company is conducting its product development and research:
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS COMMERCIAL RIGHTS
- ------- ---------- ------ -----------------
<S> <C> <C>
Provir Watery diarrhea Initial Phase II efficacy study completed; Shaman
Phase II dosing trial commenced in Q1
1997
Provir AIDS diarrhea Phase II (studying preliminary Shaman
efficacy) will commence in Q1 1997
Provir Pediatric diarrhea Formulation Development Shaman
Virend Genital herpes Initial Phase II completed; Shaman
combination study commenced in Q1
1997
Nikkomycin Z Endemic mycoses Phase I under U.K. law; IND to be Shaman
filed in the United States
Nikkomycin Z and azoles Azole-resistant Candida Initiation pending completion of Shaman
Phase I above (1)
Oral antihyperglycemic Diabetes Preclinical Ono (Japan, Taiwan,
compounds (in development) South Korea) Lipha/Merck
and Shaman
(co-promotion and
equal profit sharing
on U.S. sales)
Shaman receives
royalties on sales
outside the United
States
</TABLE>
(1) Initiation of this combination clinical trial is dependent upon the
successful completion of the Phase I study of nikkomycin Z.
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The Shaman-patented compound, SP-303, is the active ingredient in both
Provir and Virend. SP-303 is extracted from the latex of the Croton tree, which
grows abundantly in Latin America. This latex is used by many native cultures
throughout Latin America for a variety of medicinal purposes, including
respiratory infections and gastrointestinal problems. It is also used topically
for wound healing. Shaman's initial drug development efforts for SP-303 were
focused on respiratory syncytial virus ("RSV") while it explored other
traditional uses of the latex. In Phase II trials, the Company determined that
Provir was not effective for the treatment of RSV because it was not
systemically absorbed. Shaman's continuing exploration of other traditional uses
of the latex from the Croton tree resulted in both Virend, the Company's topical
product in Phase II clinical testing for genital herpes, and in Provir, a
patent-pending reformulation of SP-303 in Phase II testing for the treatment of
watery diarrhea (which benefits from the nonabsorptive characteristics of the
drug).
Provir
Watery diarrhea is often caused by infectious agents such as V.
cholerae and E. coli. These agents secrete toxins which adhere to the intestinal
wall and cause increased secretion of chloride ions from intestinal cells,
resulting in fluid accumulation in the small intestine. This in turn leads to
severe and, in some cases, life-threatening diarrhea. According to the IMS, over
26 million prescriptions are written annually for watery diarrhea. Moreover,
approximately 67 million over-the-counter product units are sold worldwide.
Current primary treatments for watery diarrhea do not address the
dehydration or fluid accumulation caused by the illness. Watery diarrhea is
typically treated with one of two treatment regimens: antibiotics or
antimotility agents. Antibiotics kill the bacteria, while antimotility agents
reduce diarrhea frequency by inhibiting peristaltic action (natural muscular
contraction of the intestinal tract). For mild to moderate cases of watery
diarrhea, the use of antibiotics is discouraged by the World Health Organization
and the Centers for Disease Control ("CDC"). The CDC continues to report their
concern on worldwide safety issues relating to adverse side effects and issues
related to emerging resistance by bacteria to antibiotics. Furthermore,
antibiotics reduce the body's ability to build natural immunities to disease and
increase the likelihood of reinfection.
While antimotility agents are effective in reducing the severity of
watery diarrhea, they often cause severe constipation. In addition, because of
reduced motility in the intestine, the bacteria are often not eliminated and
remain in the gut. When the treatment is stopped, the patient often experiences
rebound diarrhea. Moreover, these agents are not recommended in children and the
elderly because of the risk of prolonging the illness.
Provir has demonstrated safety in Phase I trials and preliminary
evidence of efficacy for the treatment of watery diarrhea in a Phase II trial.
In vitro and in vivo preclinical studies indicate that Provir treats watery
diarrhea by inhibiting the secretion of chloride ions from intestinal cells,
specifically countering the mechanism causing diarrhea. Based on its mechanism
of action and results of initial clinical testing, the Company believes that
Provir does not affect the normal motility of the intestine and that its
nonabsorption from the intestine contributes to its safety and specificity of
site of action.
[Diagram illustrating Provir mechanism of action]
The Company has conducted Phase I clinical trials for Provir in more
than 150 adults, children and infants as young as three months of age, in both
single and multiple doses. These trials demonstrated that Provir is safe and can
be easily tolerated in doses up to two grams per day for two days. The results
also indicated no significant adverse effects of the drug. In November 1996, the
Company completed a Phase II trial in 75 patients to determine the efficacy of
Provir in the treatment of traveler's and non-specific diarrheas. This
open-label Phase II study was conducted by Dr. Herbert DuPont, a world
recognized expert in travel medicine, of the University of Texas at Houston and
Baylor College of Medicine. It included American subjects traveling to Mexico as
well as native Mexicans suffering from diarrhea of unknown cause.
Eighty-nine percent of the 75 patients treated with Provir responded
favorably (returned to normal bowel function) after 48 hours of treatment, with
over 60% of those patients returning to normal after just 24 hours.
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Moreover, of the 71 patients available for follow up, none of the patients
experienced worsening of the diarrhea illness once resolution of the disease
began. In addition, no significant adverse reactions were reported. Of 25
patients with traveler's diarrhea receiving one or two grams of Provir per day,
effectiveness (measured as a combination of stool frequency, stool consistency
and gastrointestinal symptoms) was demonstrated in 72% of patients over the
course of the study. Within this patient group, the mean time to last unformed
stool, the most significant indicator of therapeutic effect, was 58% less than
historical controls would indicate. Traveler's diarrhea left untreated usually
lasts five to seven days. The patients experiencing non-specific diarrhea of
unknown etiology received either a one or two gram dose per day for two days. In
the group of 15 patients receiving the one gram dose, all patients responded to
therapy, and 87% returned to normal stool frequency after 24 hours of treatment.
In the group of 35 patients receiving the two gram dose, 34 patients responded
to therapy, and 80% returned to normal stool frequency after 24 hours of
treatment. The mean time to last unformed stool was reduced by 50% in the one
gram dose group and 32% in the two gram dose group compared to the historical
control in a cure study. Non-specific diarrhea usually lasts three to four days.
In February 1997, Shaman initiated double-blind, randomized, placebo
controlled Phase IIb studies of Provir and will attempt to determine the optimal
effective dose level of Provir for the treatment of watery diarrhea. In
addition, Shaman plans to initiate a Phase II study in the first quarter of 1997
to test Provir as a treatment for diarrhea in patients with AIDS.
Thirty to sixty percent of patients with AIDS in North America and
Europe suffer from diarrhea and 90% of patients with AIDS suffer from diarrhea
in developing countries. Diarrhea is a significant factor contributing to
malnutrition and mortality in AIDS patients, even when such patients are treated
with protease inhibitors. Many of these patients do not respond to standard
therapy for the treatment of their diarrheal symptoms and, therefore, an
effective alternative treatment could prove beneficial to this patient
population.
According to the Journal of Pediatrics, in the United States alone,
between 21 and 37 million episodes of diarrhea occur annually in children under
five years of age. In addition, there are over one billion episodes of pediatric
diarrhea worldwide annually and four million deaths per year among children less
than five years old in developing countries. Current recommended therapies for
pediatric diarrhea are designed to replace water and electrolytes. Antimotility
agents are contraindicated in children less than two years of age and not
recommended for treatment of diarrhea in children of any age. In the vast
majority of diarrheal illnesses in the United States, particularly those in
children, the use of antimicrobials is not indicated. Shaman is currently
engaged in formulation development of Provir as a potential treatment for
pediatric diarrhea.
Shaman has initiated discussions with potential corporate partners for
the development and commercialization of Provir for the traveler's and
non-specific diarrhea indications. As part of setting its overall strategy for
commercialization of Provir, the Company intends to assess the market
opportunities for additional indications such as diarrhea in patients with AIDS
and pediatric diarrhea.
Virend
Genital herpes is caused by herpes simplex virus which affects nerve
cell ganglia and results in painful lesions that typically last from 4 to 15
days. According to the CDC, genital herpes afflicts approximately 30 million
people in the United States with up to 500,000 new cases diagnosed each year.
Immunocompromised patients, such as patients with AIDS, or those undergoing
chemotherapy or transplantation, generally experience more severe herpes lesions
and outbreaks of greater duration than immunocompetent patients.
Current treatment for recurrent genital herpes consists of nucleoside
analogs, including oral formulations of acyclovir and famciclovir that generally
provide effective treatment of herpes lesions by interfering with viral
replication. In 1994, worldwide sales of the oral formulation of acyclovir were
$836 million. While acyclovir
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accounts for the majority of sales for the treatment of genital herpes, other
oral nucleoside analogs with mechanisms of action similar to that of acyclovir
have recently been approved for the treatment of genital herpes.
Virend, a topical agent, has demonstrated preliminary evidence of
safety and efficacy against genital herpes in clinical studies in patients with
AIDS. It is a topical agent that inhibits attachment of herpes simplex virus to
healthy cells, thus reducing the time to complete lesion healing. Because
Virend's antiviral mechanism of action differs from that of acyclovir, this drug
was initially tested in patients resistant to acyclovir treatment.
[Diagram illustrating Virend mechanism of action]
In September 1995, the Company completed a randomized double-blind,
placebo-controlled Phase II study involving 45 patients with AIDS. Complete
healing of lesions was achieved in 38% (9 of 24) of patients receiving Virend
versus 14% (3 of 21) of patients in the placebo-controlled group (p=0.077). In
addition, the study results indicate that Virend may be effective in reducing
the spread of herpesvirus. Of the Virend treated group, 50% tested culture
negative for herpesvirus at the end of the treatment period versus 19% of the
placebo treated group (p=0.06). Although not statistically significant, the
Company believes that these results indicate that Virend may be efficacious in
healing herpes lesions. Although the Company originally intended to conduct a
Phase III study with Virend alone in 1996, in the course of corporate partnering
discussions, the Company concluded that a study of Virend in combination with
oral acyclovir would create greater value in out-licensing the product. In the
first quarter of 1997, the Company initiated a study to determine treatment
outcome of combination therapy, Virend plus oral acyclovir, compared with a
placebo gel and oral acyclovir. The study is a U.S. multicenter, randomized
double-blind, placebo-controlled trial to treat recurrent genital herpes in
patients with AIDS. Shaman believes that, because of the differing mechanisms of
action, a combination trial that tests Virend plus acyclovir in patients with
AIDS could result in more effective treatment of herpes lesion outbreaks. Shaman
intends to seek a corporate partner to enable testing of Virend in the broader
immunocompetent patient population.
Nikkomycin Z
Endemic mycoses are systemic fungal infections concentrated in the
southwest, central and northeast regions of the United States. There are three
basic forms of endemic mycoses: coccidiomycosis (valley fever), histoplasmosis
and blastomycosis ("cocci," "histo" and "blasto"). It is estimated that
approximately 240,000 persons per year in the United States show clinical
symptoms of endemic mycoses. The Company believes that the annual market for
treatment of endemic mycoses in the United States is approximately $150 million.
Currently, two classes of drugs are commonly prescribed for the
treatment for endemic mycoses: azoles, which are fungistatic (inhibit the growth
of the fungus, but do not kill it) and polyenes (including amphotericin B),
which are fungicidal (kill the fungus), but often cannot be tolerated in high
enough doses to kill the fungi.
Nikkomycin Z was licensed in 1995 from Bayer AG. See
"Business-Collaborative Relationships and Licenses." Nikkomycin Z is an
orally-administered product designed for the treatment of endemic mycoses.
Nikkomycin Z is novel in its mechanism of action against endemic mycoses.
Preclinical studies of nikkomycin Z indicate that it is fungicidal and could
prove superior to current treatments. By inhibiting chitin synthetase, which is
found in the cell walls of most fungi, but not in mammalian cells, nikkomycin Z
inhibits cell wall synthesis, ultimately causing fungal cells to expand and
burst. The lack of chitin in mammalian cells should prevent similar damage to
normal cells in tissues affected by these fungal infections.
[Diagram illustrating a Fungal Cell]
Candidiasis is a fungal infection that can result in serious systemic
disease. Approximately 265,000 patients worldwide are treated annually for
systemic candidiasis. Nikkomycin Z has also been shown to be capable of
interacting in a synergistic fashion with a number of known antifungal
compounds, including fluconazole (Diflucan) and itraconazole (Sporonox), the two
largest selling antifungals in the world. Based on this synergistic activity,
the Company plans to supply nikkomycin Z to Pfizer Corporation for a combination
study that tests nikkomycin Z in
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combination with fluconazole in treating azole-resistant esophageal candidiasis.
The estimated annual total market of antifungal agent sales for systemic fungal
infections is approximately $2.0 billion.
Shaman initiated Phase I human clinical trials in the U.K. in December
1996. Following this Phase I safety trial under U.K. law, the Company plans to
submit an IND and conduct multidose Phase I and Phase II studies in the United
States in patients suffering from endemic mycoses.
DRUG DISCOVERY RESEARCH
Diabetes
Type II diabetes is a chronic disease in which the tissues of the body
are resistant to the actions of insulin (a hormone produced by the pancreas),
and the pancreas cannot secrete enough insulin to overcome this resistance. When
this happens, the ability of insulin to carry out its normal action on the
liver, muscle and adipose tissues is lost and the consequence is an abnormal
increase in circulating blood glucose. Because the function of insulin is
different in each of these tissues, there are many potential therapeutic targets
for the treatment of Type II diabetes.
Shaman is focused on the development of oral antihyperglycemic (blood
glucose lowering) agents for the treatment of Type II diabetes. The program
involves in vivo screening of plants by oral administration in animal models,
followed by the fractionation of active extracts, the isolation and
identification of active compounds, and the capability to profile and prioritize
promising candidates for clinical development. In just over 24 months of this
program, the Company has identified 13 orally-active compounds for which, to
date, 11 original U.S. patent applications and a number of international patent
applications have been filed. These compounds represent new classes and,
potentially, new methods for treating Type II diabetes.
The Company currently plans to file its first IND for diabetes in 1997.
Significant funding, as well as milestone payments for this program, are
provided through collaborations with Lipha/Merck and Ono. See
"Business-Collaborative Relationships and License Agreements."
COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS
In September 1996, the Company entered into a five-year collaborative
agreement with Lipha/Merck to develop jointly Shaman's antihyperglycemic drugs.
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. Of the $4.5 million received on signing the agreement,
$1.5 million was an up-front research payment and $3.0 million was an equity
investment. Complete research funding under the collaboration is dependent upon
the initiation of human clinical trials of at least one compound by September
23, 1998. 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. To date, Shaman has
identified 13 proprietary, orally-active compounds which show preclinical
activity as treatments for Type II diabetes. Lipha/Merck will bear all
pre-clinical, clinical, 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.
In May 1995, the Company entered into a collaborative agreement with
Ono providing for, among other things, three years of funding for the research
and development of compounds for the treatment of Type II diabetes.
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Under the terms of the agreement, Shaman will screen 100 diabetes-specific
plants per year in vivo, isolate and identify active compounds, and participate
in any medicinal chemistry modification. In turn, Ono will provide Shaman with
access to Ono's preclinical and clinical development capabilities through
proprietary in vitro assays and medicinal chemistry efforts. Ono's development
and commercialization rights are for the countries of Japan, South Korea and
Taiwan. Under the terms of the Agreement, Ono will provide $7.0 million in
collaborative research funding and will pay preclinical and clinical milestone
payments of $4.0 million per compound for each antidiabetic drug that is
commercialized. Of the $3.0 million received on signing the agreement, $1.0
million was an up-front research payment. Shaman received an additional $1.0
million payment (beyond the $7.0 million commitment) in December 1996 for
enhanced access rights to these compounds.
In June 1995, the Company licensed several patents from Bayer AG
relating to the use of nikkomycin Z and the composition and use of nikkomycin Z
in combination with other antifungal compounds for the development of antifungal
agents. Under the terms of the agreement, the Company has paid Bayer AG an
initial milestone payment and may be required, upon the occurrence of certain
events, to make additional milestone payments and to pay royalties on any
commercialized products derived from the agreement.
Under the terms of an agreement signed in September 1991, the Company
has granted non-exclusive co-marketing rights to sell SP-303 products in Italy
to Synthelabo, a French company. Under the agreement, Synthelabo is obligated to
pay Shaman royalties on SP-303 product sales, including Provir and Virend.
In February 1990, the Company entered into a license agreement with Dr.
Michael Tempesta. There currently exists a dispute with Dr. Tempesta over the
scope and coverage, if any, of the license. The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain antiviral agent. A demand for
arbitration was filed by the Company to address a claim made by Dr. Tempesta
that the royalty will be payable with respect to either or both of Provir and
Virend. See "Legal Proceedings."
As the Company continues its product development and commercialization,
it intends to enter into additional corporate alliances which may include
licenses and/or marketing rights to selected products and markets.
MANUFACTURING
Shaman intends to conduct both pilot-scale and commercial manufacturing
of its future products either in-house, with collaborative partners, or through
contract manufacturing facilities. The Company has created an in-house facility
which operates under Good Manufacturing Practices ("GMP") and has conducted
pilot-scale manufacturing of SP-303. The Company has a sufficient quantity of
raw material for SP-303 and SP-303 manufacturing capacity to complete currently
planned clinical trials. In addition, Shaman also expects to establish a second
source manufacturing facility to produce clinical and early commercial lots in
1997.
In September 1991, the Company entered into a long-term manufacturing
agreement with Indena SpA ("Indena"). If Indena achieves certain price targets,
then Shaman has agreed to purchase at least 40% of its commercial requirements
of SP-303 bulk drug from Indena for five years after Shaman receives NDA
approvals from the FDA for Provir and Virend.
In January 1996, the Company entered into an agreement with Abbott
Laboratories ("Abbott") for the development of a manufacturing process for the
production of nikkomycin Z. Abbott has developed processes and initiated the
manufacture of nikkomycin Z in compliance with GMP guidelines for the Company's
clinical trial programs.
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MARKETING
At the present time, Shaman has no marketing or sales staff. The
Company's general strategy is to develop corporate alliances with large
pharmaceutical companies for some of its programs in order to take advantage of
such companies' abilities to reach broad-based markets. Shaman intends to
recruit a senior staff to direct marketing and sales activities. Shaman is also
evaluating the opportunity to retain certain marketing rights. See "Business-
Collaborative Relationships and License Agreements."
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's product candidates, processes
and know-how is important to the Company's business. The Company's policy is to
file patent applications to protect technology, inventions and improvements that
are considered commercially important to the development of its business. The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company plans
to aggressively prosecute and defend its patents and proprietary technology.
The Company has been issued two U.S. patents related to its specific
proanthocyanidin polymer compositions designated SP-303: one patent contains
composition of matter claims related to SP-303 contained in the Company's Provir
and Virend products and the other contains claims directed to methods of use of
the composition as an anti-viral agent in Virend.
The Company has also filed foreign applications corresponding to its
issued U.S. patents relating to its proanthocyanidin polymer composition. The
Company has been granted patents in Australia, Mexico and New Zealand and has
patent applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore. The Company is aware of certain foreign patents and at least one
pending patent application, granted or pending, owned by Leon Cariel and the
Institut des Substances Vegetales with broad claims directed to proanthocyanidin
polymer compositions and methods of use. In particular, patents have been
granted to Leon Cariel and the Institut des Substances Vegetales in Australia,
Europe, France, Germany and an application is pending in Japan. The effective
filing date of these patents is prior to the effective filing date of the
Company's foreign filed pending patent applications in Europe. The Company has
instituted an Opposition in the European Patent Office against the granted
European Patent No. 472531 owned by Leon Cariel and Institut des Substances
Vegetales. Based on opinions of foreign counsel, 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
cover potentially the Company's proanthocyanidin polymer compositions and
methods of use.
The Patent and Trademark Office has very recently declared an
Interference between the Company's issued patent covering its specific
proanthocyanidin polymer composition and a U.S. application corresponding to a
granted European patent of Leon Cariel and the Institut des Substances Vegetales
by Daniel Jean and Leon Cariel. The declaration of the Interference indicates
that, at present, the U.S. Patent and Trademark Office believes that one claim
of the Company's patent and one claim of the pending third party patent
application claim the same subject matter. The Interference will seek to
determine who is the first inventor of such subject matter under the U.S. patent
laws. Based on the opinion of U.S. counsel and on analysis of the claims and
file history of the U.S. patent application of Daniel Jean and Leon Cariel, the
Company believes that the Daniel Jean and Leon Cariel application is not
entitled to claims directed to the Company's specific proanthocyanidin polymer
composition, which is the subject matter of the Company's patent. There can be
no assurance, however, that the Company will prevail. 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 otherwise kept confidential. One
broad claim, in particular, of the Daniel Jean and Leon Cariel patent
application which is not involved in the Interference proceeding and which has
been indicated to be allowable, covers a large variety of proanthocyanidin
polymers. Based on opinion of Counsel, the Company believes that this broad
claim
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is subject to attack as invalid in view of prior art. Based on knowledge of the
Company's 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 is issued.
The Company has also recently filed a U.S. patent application directed
to new formulations and methods of using its specific proanthocyanidin polymer
composition for treatment of watery diarrhea. These formulations are contained
in the Company's Provir product.
The Company has also filed 11 U.S. patent applications relating to
compositions and methods for treating Type II diabetes as well as reducing
hyperglycemia associated with other etiologies. Six of the U.S. patent
applications have been indicated to be allowed by the U.S. Patent and Trademark
Office. The Company has filed five foreign applications, i.e., international
applications under the Patent Cooperation Treaty designating a number of foreign
countries, as well as applications in Taiwan, corresponding to a number of the
U.S. applications and plans to file additional corresponding foreign
applications within the relevant convention periods.
The Company has also filed two U.S. patent applications and a
corresponding international patent application designating a number of foreign
countries relating to methods for administering and sustained release
formulations for anti-fungal agents like nikkomycins, including in particular
nikkomycin Z. The methods and compositions are useful for treatment of fungal
infections, particularly candidiasis, the most frequently encountered
life-threatening mycoses. The Company has licensed several patents from Bayer
AG relating to the use of nikkomycin Z and the composition and use of
nikkomycin Z in combination with other antifungal compounds for the
development of antifungal agents.
There can be no assurance that the Company's pending patent
applications will result in patents being issued or that, if issued, patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that the Company
would need to license or circumvent. See "Risks- Uncertainty Regarding Patents
and Proprietary Rights."
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 prosecuting its patent applications with the U.S. Patent
and Trademark Office but the Company does not know whether any of its
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, nonobviousness and enablement. The U.S. Patent and Trademark Office 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, nonobvious 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 U.S. Patent and
Trademark Office or such a proceeding may be declared by the U.S. Patent and
Trademark Office. In general, in an interference proceeding, the Patent and
Trademark Office would review the competing patents and/or patent applications
to determine the validity of the competing claims, including but not limited to
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 issued patents will provide a substantial protection or be
of commercial benefit to the Company. The issuance of a patent is not
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<PAGE> 12
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 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 is participating in one
declared Interference proceeding and may participate in interference proceedings
that may in the future be declared by the U.S. Patent and Trademark Office,
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.
The patent position of pharmaceutical and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claim allowed
in pharmaceutical and biopharmaceutical patents. Accordingly, there can be no
assurance that patents will afford protection against competitors with similar
technology. See "Risks-Uncertainty Regarding Patents and Proprietary Rights."
In addition to seeking the protection of patents and licenses, the
Company also relies on trade secrets to maintain its competitive position. The
Company has adopted and adheres to procedures for maintaining the proprietary
aspects of its trade secret and know-how information. No assurance can be given,
however, that these measures will prevent the unauthorized disclosure or use of
such information.
RAW MATERIAL SUPPLY
The Company imports all of the plant material it screens from foreign
countries, particularly from countries in Latin and South America, Southeast
Asia and Africa. Shaman's relationships with botanical organizations in tropical
regions have enabled the Company to set up large-scale supply arrangements for
the raw material from which some of its lead products are derived. For example,
the plant material required for SP-303 is found in at least seven Latin and
South American countries and can be harvested in a sustainable manner where work
forces already exist. Presently, Shaman is harvesting approximately 8,000
kilograms of the SP-303 source plant per year in Ecuador and Peru pursuant to
supply agreements with corporations in those countries. The SP-303 source plant
occurs naturally in these areas and, after harvesting, can be regenerated to
maturity in seven years.
Shaman requires that all large-scale plant collections be conducted in
a sustainable manner, which could include replanting in areas of intensive wild
harvesting. In the case of SP-303, the source plant can be sustainably harvested
because it grows spontaneously with minimal management. Shaman works with
communities and cooperatives in South and Latin America to harvest the SP-303
source plant and other source plants in a regenerable manner. These communities
and cooperatives, many of which receive support from national and international
government agencies, are experienced in the sustainable harvest of other
tropical forest products, including natural rubber, nuts and fruits. Company
policy also requires that each source plant targeted for large-scale compound
isolation must have multi-country sources of supply or be economically
synthesizable. This policy reduces the risks associated with using foreign
suppliers, such as political or economic instability.
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Shaman has entered into supply agreements with companies in both Peru
and Ecuador pursuant to which they will supply certain quantities of Shaman's
commercial requirements of the raw material used to produce SP-303 from their
countries. These companies work with cooperatives of indigenous peoples to
supply source plants to Shaman, to transfer material information to Shaman
relating to improvements in the collection and harvesting of the raw material,
and to improve sustainable harvesting techniques in order to create a model of
sustainable production in tropical forests. Although the Company has developed
multi-country sources of supply for its key plant materials and has entered into
long-term supply agreements for the source material for SP-303, there can be no
assurance of a continual source of supply of these materials. See "Risk
Factors-Dependence on Sources of Supply."
When it is economically advantageous and technically feasible to
synthesize a compound rather than extract it from raw plant material, the
Company will utilize large-scale chemical synthesis to obtain a sufficient
supply of such compound in order to satisfy its commercial requirements.
However, there can be no assurance that the Company will be successful in
synthesizing any such products.
COMPETITION
Competition in the pharmaceutical industry is extremely intense. The
principal factors upon which such competition is based include therapeutic
efficacy, side-effect profile, ease of use, safety, physician acceptance,
patient compliance, marketing, distribution and price. Many treatments for
infectious and metabolic diseases exist and additional therapeutics are under
development, including other naturally-sourced pharmaceuticals. To the extent
these therapeutics address the disease indications on which the Company has
focused, they may represent significant competition. Many pharmaceutical
companies have significantly greater research and development capabilities, as
well as substantially greater marketing, financial and human resources than the
Company. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals of such products. These companies may represent significant long-term
competition for the Company.
There can be no assurance that developments by other pharmaceutical
companies will not render Shaman's products or technologies obsolete or
noncompetitive, or that the Company will be able to keep pace with technological
developments of its competitors. Many of the Company's 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 being developed by the Company. These competing
products may be more effective and less costly than the products developed by
Shaman.
GOVERNMENT REGULATION
The research and development, manufacture and marketing of Shaman's
products are subject to substantial regulation by the FDA in the United States
and by comparable authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.
The process required by the FDA before the Company's products may be
marketed in the United States generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an IND, which must
become effective before human clinical testing may commence; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the proposed drug for its intended indications; (iv) the submission to the FDA
of an NDA; (v) satisfactory completion of an FDA inspection of the manufacturing
facilities at which the product is made to assess compliance with GMP. The
testing and approval process requires substantial time, effort and financial
resources, and there can be no assurance that an approval will be granted on a
timely basis, if at all.
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Preclinical tests include laboratory evaluation of the product as well
as animal studies to assess the potential safety and efficacy of the product.
The results of the preclinical tests, together with manufacturing information
and analytical data, are submitted to the FDA as part of the IND, which must
become effective before human clinical trials may commence. The IND will
automatically become effective 30 days after receipt by the FDA, unless the FDA
before that time raises concerns or questions about the conduct of the trials as
outlined in the IND. In such cases the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. 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
products to healthy volunteers or patients under the supervision of a qualified
principal investigator. Further, each clinical study must be reviewed and
approved by an independent Institutional Review Board ("IRB") at each
institution at which the study will be conducted. 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
which may overlap. Phase I usually involves the initial introduction of the drug
into healthy human subjects where the product is tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion. Phase II involves
studies in a limited patient population to (i) determine the efficacy of the
product for specific targeted indications, (ii) determine dose tolerance and
optimal dose and (iii) identify possible adverse effects and safety risks. When
Phase II evaluations demonstrate that the product is effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety in an expanded patient
population at geographically-dispersed clinical study sites. The FDA or the
sponsor may suspend clinical trials at any point in this process for a variety
of reasons, including either party's belief that clinical subjects are being
exposed to an unacceptable health risk.
Occasionally, the FDA will require a Phase IV "Post-Marketing Trial"
which is conducted after FDA clearance to gain additional experience from the
treatment of patients in the intended therapeutic area.
After completion of the required testing, generally an NDA is
submitted. FDA approval of the NDA is required before marketing may begin in the
United States. The NDA must include the results of extensive clinical and other
testing and the compilation of data relating to the product's chemistry,
pharmacology and manufacture, the cost of all of which is substantial. The FDA
reviews all NDAs submitted before it accepts them for filing and may request
additional information rather than accept an NDA for filing. In such an event,
the NDA must be resubmitted with the additional information and, again, is
subject to review before filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the NDA. Under the Federal Food, Drug and
Cosmetic Act, the FDA has 180 days in which to review the NDA and respond to the
applicant. The review is often significantly extended by FDA requests for
additional information or clarification regarding information already provided
in the submission. The FDA may refer the application to the appropriate advisory
committee (typically a panel of clinicians) for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee, but generally follows the
committee's recommendation. If evaluations of the NDA and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of an NDA. When and if those conditions
have been met to the FDA's satisfaction, the FDA will issue an approval letter,
authorizing commercial marketing of the drug for certain indications. If the
FDA's evaluation of the NDA submission or manufacturing facilities is not
favorable, the FDA may refuse to approve the NDA or issue a not approvable
letter. Notwithstanding the submission of any requested additional data or
information in response to an approvable or not approvable letter, the FDA may
decide that the application does not meet the regulatory criteria for approval.
Each drug product manufacturing establishment that supplies drugs to
the U.S. market must be registered with, and be approved by, the FDA prior to
commencing commercial production, and is subject to biennial
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inspections by the FDA for GMP compliance after an NDA has been approved. In
addition, drug product manufacturing establishments located in California also
must be licensed by the State of California.
The Company will also be subject to a variety of foreign regulations
governing clinical trials, registrations and sales of its products. Whether or
not FDA approval has been 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.
THE HEALING FOREST CONSERVANCY
In January 1992, Shaman formed The Healing Forest Conservancy, a
California not-for-profit public benefit corporation (the "Conservancy"), which
is dedicated to maintaining global plant biodiversity. The Conservancy focuses
on conserving plants which have been used traditionally for medicinal purposes.
Shaman has donated 13,333 shares of Common Stock to the Conservancy's endowment
fund. The Company also plans to donate additional funds when it has achieved
profits from product sales, if any, to provide benefits to indigenous peoples in
the countries where Shaman's source plants are obtained. The Conservancy is also
soliciting private donations to fund its operations and conservation efforts.
RISK FACTORS
This Form 10-K contains, in additional to historical information,
forward-looking statements that involve risks and uncertainties. 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" as well as those discussed
elsewhere in this Form 10-K.
Early Stage of Development; Technological Uncertainty. Shaman has not
yet completed the development of any products. The Company's products will
require significant additional clinical testing and investment prior to
commercialization. Products for therapeutic use in human healthcare 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 Provir, Virend and nikkomycin Z 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. The Company's diabetes compounds
have not entered clinical trials. 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, 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 December 31, 1996, the Company's accumulated deficit was approximately
$82.6 million. The Company has not generated any product revenues and expects to
incur substantial operating losses over the next several years. All of Shaman's
products and compounds are in research and development, which require
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
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obtained, or that the products, if developed and introduced, will be
successfully marketed or will achieve market acceptance.
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 its diabetes
product candidates into clinical testing, and there can be no assurance that any
of the Company's research and development efforts on these or other potential
products, including Provir, Virend and nikkomycin Z, 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 or eliminated at
any time. 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 or in the acquisition of sufficient supplies of
clinical trial materials 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 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. See
"Business-Government Regulation."
Future Capital Needs; Uncertainty of Additional Funding. 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. The Company will need to raise substantial additional capital to fund
its operations. The Company intends to seek such additional funding through
public or private financings, collaborative arrangements or from other sources.
If additional funds are raised by issuing equity securities, significant
dilution to existing stockholders may result. There can be no assurance that
additional financing will be available on acceptable terms or at all. If
adequate funds are not available, the Company may be required to 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. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertainties Associated with Clinical Trials. Shaman has conducted,
and plans to continue to conduct, 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
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of patient population, proximity of patients to clinical sites and eligibility
criteria for the study. Delays in patient enrollment will result in increased
costs and delays, which could have a material adverse effect on the Company's
ability to timely complete clinical trials. 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 U.S. Food and Drug Administration ("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.
One of the Company's clinical trials for nikkomycin Z is being conducted in the
United Kingdom not pursuant to an Investigational New Drug application ("IND")
filed with the FDA. Accordingly, the data collected from such trial may not be
accepted by the FDA, and for this or other reasons, the Company may need to
conduct additional Phase I trials pursuant to an IND filed with the FDA. 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
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, is dependent upon its arrangements with Lipha/Merck and Ono and
the compliance of such partners with the terms and conditions of such
collaborative agreements including, without limitation, providing funding for
research and development efforts and the achievement of milestones and assisting
the Company in its research and development efforts. These partners may develop
products that may compete with those of the Company. The amount and timing of
resources they allocate to these programs is not within the Company's control.
There can be no assurance that these partners will perform their obligations as
expected or that any significant revenues will ultimately be derived from such
agreements. The Company's agreement with Ono may be terminated in the event Ono
determines further development of compounds is not warranted, provided certain
other conditions are met, and the Lipha/Merck agreement may be terminated in
September 1998 if no compound discovered under the collaboration has entered
human clinical trials. Termination of either agreement is subject to certain
surviving obligations. If one or more such partners elected to terminate their
relationships with the Company, or if the Company or its partners fail to
achieve targeted milestones, it could have a material adverse effect on the
Company's ability to fund such programs, or to develop any products on a
collaborative basis with such partners. See "Business-Collaborative
Relationships and License Agreements."
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 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. See "Business-Competition."
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, and comparable agencies in state and local jurisdictions and in foreign
countries. These authorities impose substantial requirements upon the
preclinical and clinical testing, manufacturing and marketing of pharmaceutical
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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 a New Drug Application
("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.
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's own or a
third-party manufacturer) quality control and manufacturing procedures conform
to current GMP, which must be followed at all times. The FDA strictly enforces
GMP requirements through 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 will conform to GMP requirements. Additionally, the Company or
its third-party manufacturer must pass a preapproval inspection of its
manufacturing facilities by the FDA before obtaining 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
healthcare costs in the United States could result in new government regulations
which could have a material adverse effect on the Company's business. The
Company is unable to predict the likelihood of adverse governmental regulation
which might arise from future legislative or administrative action, either in
the United States or abroad. See "Business-Government Regulation."
Dependence on Sources of Supply. The Company currently imports all of
the plant materials from which its products are derived from countries in South
and Latin 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.
18.
<PAGE> 19
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, which may not be
available on commercially acceptable terms adequate for Shaman's long-term
needs. If the Company should encounter delays or difficulties in establishing
relationships with qualified manufacturers to produce, package and distribute
its finished products, clinical trials, regulatory filings, market introduction
and subsequent sales of such products could be adversely affected.
Contract manufacturers must adhere 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 plant inspection
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 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 marketing or sales staff. To the extent
that the Company does not or is unable to enter into co-promotion agreements or
to arrange for third party distribution of its products, significant additional
resources will be required to develop a marketing and sales force. There can be
no assurance that the Company will be able to enter into collaborative
agreements or establish a marketing and sales force.
Uncertainty 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, competitors 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 firms 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 or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
pharmaceutical patents. 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.
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, 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. Based on
opinions of foreign counsel, the Company believes that the granted claims are
invalid and intends to vigorously prosecute the Opposition. There can be no
assurance that the Company
19.
<PAGE> 20
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 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 Patent and Trademark Office
has very recently declared an Interference between the Company's issued patent
covering its specific proanthocyanidin polymer composition and a U.S.
application corresponding to the granted European patent of Leon Cariel and the
Institut des Substances Vegetales by Daniel Jean and Leon Cariel. The
declaration of the Interference indicates that, at present, the U.S. Patent and
Trademark Office believes that one claim of the Company's patent and one claim
of the pending third party patent application claim the same subject matter. The
Interference will seek to determine who is the first inventor of such subject
matter under the U.S. patent laws. Based on an analysis of claims and file
history of the U.S. patent application of Daniel Jean and Leon Cariel, the
Company believes that the Daniel Jean and Leon Cariel application is not
entitled to claims directed to the Company's specific proanthocyanidin polymer
composition, which is the subject matter of the Company's patent. There can be
no assurance, however, that the Company will prevail. 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 is not involved in the Interference proceeding and which has been
indicated to be allowable, covers a large variety of proanthocyanidin polymers.
Based on opinion of counsel, 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 be no assurance that the Company would be able to obtain
licenses to these patents at a 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 necessary to determine issues of invention; such litigation
and/or interference proceedings could result in substantial cost to and
diversion of effort by, and may have a material adverse effect on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
The Company's competitive position is also dependent upon unpatented
trade secrets. There can be no assurance that others will not independently
develop substantially equivalent proprietary 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. See "Business-Patents and Proprietary
Rights."
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 payors to contain or reduce the costs of
healthcare through various means. For example, in certain foreign markets, the
pricing or profitability of healthcare 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
20.
<PAGE> 21
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
healthcare products are dependent in part on the availability of reimbursement
from third party payors, such as government and private insurance plans.
Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products, and third party payors 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 payors 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. 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. See "Price Range of Common
Stock."
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 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 such liability could exceed the resources of the
Company.
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 Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 600,000 shares of
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 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, 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. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to 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. See "Description of Capital Stock-Preferred Stock," "Certain Provisions
of the Certificate of Incorporation and Bylaws" and "Certain Provisions of
Delaware Law."
21.
<PAGE> 22
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 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.
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 and directors and may indemnify its employees and
other agents to the fullest extent permitted by law. 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. 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.
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.
EMPLOYEES
As of March 7, 1997, the Company had 86 employees. Of these employees,
67 are dedicated to research, development, quality assurance and quality
control, regulatory affairs and preclinical testing. Twenty-five of the
Company's full-time employees hold a Ph.D. or M.D. In addition, the Company
currently fills 13 positions through the use of temporary staff and consultants.
SCIENTIFIC STRATEGY TEAM
Shaman's Scientific Strategy Team ("SST") consists of an
interdisciplinary group of ethnobotanists, scientists, pharmacologists,
physicians, pharmacists and Company personnel. Several members of the SST who
are actively working in the field have agreed to exclusively advise the Company
in connection with medical and ethnobotanical matters and to refrain from
consulting with other pharmaceutical companies on all ethnobotanical matters.
Some members may have collaborative relationships with other pharmaceutical
firms for random collection of plants on a contract basis.
22.
<PAGE> 23
The principal criteria used in selecting members of the SST are breadth
of the scientific discipline, recognized scientific excellence in their fields,
and ability to contribute to the team evaluation process. The Company relies on
the SST to identify plant candidates for Shaman's botanical screening process
and to evaluate the information obtained about these candidates, both in the
field and in literature. SST members who are not employees of the Company are
compensated with stock options for their general contributions throughout the
year, and are paid $1,000 per day for participation at the SST meetings, which
occur approximately every 12 months. Shaman also pays SST members for any
additional consulting services and field expeditions conducted on behalf of the
Company.
The SST includes the following members:
EDWARD F. ANDERSON, PH.D. is a Senior Research Botanist at the Desert
Botanical Gardens in Phoenix, Arizona. Formerly, he was a Professor of Biology
at the Whitman College in Walla Walla, Washington. Dr. Anderson received a B.A.
in Biology from Pomona College in California and an M.A. and a Ph.D. in Botany
from Claremont Graduate School and Rancho Santa Ana Botanic Garden,
respectively.
PAUL S. AUERBACH, M.D. is Chief Operating Officer of The Sterling
Healthcare Group in Coral Gables, Florida. Dr. Auerbach was formerly Chief,
Division of Emergency Medicine at Stanford University Hospital in Stanford,
California. Dr. Auerbach earned an A.B. in Religion from Duke University, an
M.D. from Duke University School of Medicine, and was a Sloan fellow, M.S.M. at
Stanford University Graduate School of Business.
MICHAEL J. BALICK, PH.D. is Director of the Institute of Economic
Botany at The New York Botanical Garden. Dr. Balick holds a B.S. in Agriculture
and Plant Science from the University of Delaware and both an A.M. and a Ph.D.
in Biology from Harvard University.
BARUCH S. BLUMBERG, M.D., PH.D. is Associate Director of Clinical
Research at the Fox Chase Cancer Center in Philadelphia and the first American
dean of a college at Oxford University. Dr. Blumberg became a Nobel laureate in
1976 for his discovery of the hepatitis B antigen. He received a B.S. from Union
College in New York, an M.D. from the College of Physicians and Surgeons at
Columbia University and a Ph.D. in Biochemistry from Oxford University.
ANTHONY CONTE is a retired pharmacist and former proprietor of the
Gilliar Drug Company, Inc. Mr. Conte has 30 years of experience in
commercializing pharmaceuticals. He received a B.S. in Pharmacy from Long Island
University, Brooklyn College of Pharmacy and an M.S. in Pharmaceutical Chemistry
from Columbia University. Mr. Conte is the father of Ms. Conte, President, Chief
Executive Officer and a director of Shaman.
JAMES A. DUKE, PH.D. is a recently retired research scientist at the
Agricultural Research Service of the United States Department of Agriculture.
Dr. Duke earned his A.B., B.S. and Ph.D. in Botany from the University of North
Carolina.
ELAINE ELISABETSKY, PH.D. is a research fellow of the Brazilian
Research Council, Associate Professor at the Universidade Federal do Rio Grande
do Sul and a board member of the International Society of Ethnopharmacology. Dr.
Elisabetsky holds a B.S. in Biomedical Sciences from the Escola de Medicina in
Sao Paulo, Brazil, a Ph.D. in Pharmacology from the Departmento de Farmacologia
e Bioquimica, Escola Paulista de Medicina in Brazil, and has received
post-doctorate training in ethnobotany and ethnopharmacology from The New York
Botanical Garden.
NORMAN R. FARNSWORTH, PH.D. is Research Professor of Pharmacognosy and
Director of the Program for Collaborative Research in the Pharmaceutical
Sciences at the College of Pharmacy, University of Illinois at Chicago.
23.
<PAGE> 24
Dr. Farnsworth received a B.S. and an M.S. in Pharmacy from the Massachusetts
College of Pharmacy and a Ph.D. in Pharmacognosy from the University of
Pittsburgh.
MAURICE M. IWU, PH.D. is founder and director of BioResources
Development Conservation Programme and Professor of Pharmacognosy and Medicinal
Chemistry at the University of Nigeria, Nsukka. Dr. Iwu earned a Ph.D. in
Pharmacognosy from the University of Bradford, England.
CHARLES F. LIMBACH, M.D. is a practitioner of family medicine in
Salinas, California. Dr. Limbach earned a B.A. in Biology from the University of
Michigan and an M.D. from Michigan State University.
KOJI NAKANISHI, PH.D. is Centennial Professor of Chemistry at Columbia
University and formerly Director of the Suntory Institute for Bioorganic
Research in Osaka, Japan. Dr. Nakanishi was the recipient of the 1990 Japan
Academy Prize and the Imperial Prize, the highest Japanese honor a scholar can
receive. He received a B.S. and a Ph.D. in Chemistry from Nagoya University in
Japan.
MARK J. PLOTKIN, PH.D. is Executive Director of Ethnobiology and
Conservation Team and previously served as Director of Plant Conservation at the
World Wildlife Fund. He also serves as a Research Associate of Ethnobotanical
Conservation at the Botanical Museum at Harvard University and Secretary of the
Ethnobotany Specialist Group, Species Survival for the International Union for
the Conservation of Nature. Dr. Plotkin received an A.B. from Harvard University
Extension, an M.F.S. in Wildlife Ecology from Yale School of Forestry and
Environmental Studies, and a Ph.D. in Biological Conservation from Tufts
University.
NATHANIEL QUANSAH, PH.D. is employed by the World Wildlife
Fund-Madagascar Protected Areas Program to conduct a four-year ethnobotanical
collection and conservation project in northern Madagascar. Dr. Quansah obtained
a B.S. from the University of Cape Coast, Ghana and a Ph.D. in Botany from
Goldsmith's College, University of London.
ROBERT F. RAFFAUF, PH.D. is Professor Emeritus at Northeastern
University's College of Pharmacy. He holds a B.S. in Chemistry/Biology from the
College of the City of New York, an M.A. in Chemistry from Columbia University
and a Ph.D. in Organic/Analytical Chemistry from the University of Minnesota.
RICHARD E. SCHULTES, PH.D. is Professor Emeritus at Harvard University.
Dr. Schultes has spent 40 years studying the traditional uses of the higher
plants and fungi of the Colombian Amazon. He has been the recipient of numerous
awards, including the Gold Medal of the World Wildlife Fund. Dr. Schultes holds
an A.B., an A.M. and a Ph.D. from Harvard University.
CHARLES G. SMITH, PH.D. has been a consultant to start-up businesses,
major pharmaceutical companies and venture capital firms since 1986. Most
recently, he served as Vice President of Research and Development at Revlon
Healthcare Group. Dr. Smith received a B.S. in Chemistry from Illinois Institute
of Technology, an M.S. in Biochemistry from Purdue University, and a Ph.D. in
Biochemistry from the University of Wisconsin.
D. DOEL SOEJARTO, PH.D. is Professor of Pharmacognosy for the
Department of Medicinal Chemistry and Pharmacognosy and for the Program for
Collaborative Research in the Pharmaceutical Sciences at the University of
Illinois at Chicago. Dr. Soejarto holds a B.S. in Biology from the College of
Tjiawi, Java, an A.M. in Biology/Botany from Harvard University and a Ph.D. in
Biology from Harvard University.
HILDEBERT K.M. WAGNER, PH.D. is Professor of Pharmacognosy in the
Institut Fur Pharmazeutische Biologie at the Ludwig Maximilians University in
Munich, Germany. Dr. Wagner also serves as co-director of the Institute of
Pharmaceutical Biology at the University of Munich. He earned his Ph.D. in
Pharmacognosy at the University of Munich.
24.
<PAGE> 25
ITEM 2. PROPERTIES
Shaman's headquarters are located in South San Francisco, California.
The Company leases approximately 73,000 square feet for offices, laboratories,
pilot manufacturing and preclinical testing in three adjacent buildings. An
additional building with approximately 43,000 square feet becomes available to
the Company late in 1999. The lease on these spaces expires February 28, 2003,
and the Company has an option to renew the lease for two additional five-year
periods. The South San Francisco facility serves as the principal site for
preclinical research, clinical trial management, process development, quality
assurance and quality control, regulatory and other affairs. The Company
believes that its current facilities are suitable and adequate to meet its needs
for the foreseeable future. Shaman anticipates it will be able to expand its
facilities to nearby locations as the need develops. There can be no assurance
however, that such space will be available on favorable terms, if at all.
ITEM 3. LEGAL PROCEEDINGS
The Company has recently initiated arbitration against Dr. Michael
Tempesta with respect to a February 1990 license agreement. See
"Business--Collaborative Relationships and License Agreements." With the
exception of the patent opposition proceeding in Europe and the Interference
proceeding in the U.S. Patent and Trademark Office, the Company is not party to
any other material legal proceedings. See "Risk Factors--Uncertainty Regarding
Patents and Proprietary Rights."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 1996.
25.
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol SHMN. Stock shares started trading on
January 26, 1993.
Set forth below is the range of high and low closing sale prices for
the Company's common stock for each quarter in the two most recent fiscal years,
as regularly quoted in the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Q1 FY 95 $4.25 $3.19
Q2 FY 95 6.19 3.25
Q3 FY 95 7.00 4.63
Q4 FY 95 7.88 5.00
Q1 FY 96 7.32 5.13
Q2 FY 96 9.00 6.13
Q3 FY 96 8.63 5.75
Q4 FY 96 7.38 5.38
</TABLE>
As of March 7, 1997, there were approximately 762 holders of record of
the Company's common stock. No dividends have been paid on the common stock
since the Company's inception, and the Company does not anticipate paying any
dividends in the foreseeable future.
26.
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue from collaborative
agreements $ 3,406 $ 2,210 $ 1,360 $ 2,050 $ 425
Operating expenses (1):
Research and development 19,138 17,635 18,643 13,646 5,449
General and administrative 3,537 3,705 3,545 2,659 1,016
-------- -------- -------- -------- --------
Total operating expenses 22,675 21,340 22,188 16,305 6,465
-------- -------- -------- -------- --------
Loss from operations (19,269) (19,130) (20,828) (14,255) (6,040)
Interest income 1,082 1,695 2,045 1,543 224
Interest expense (603) (569) (698) (315) (156)
-------- -------- -------- -------- --------
Net loss $(18,790) $(18,004) $(19,481) $(13,027) $ (5,972)
======== ======== ======== ======== ========
Net loss per share (2) $ (1.39) $ (1.37) $ (1.50) $ (1.30) $ (0.85)
======== ======== ======== ======== ========
Shares used in calculation of
net loss per share (2) 13,496 13,161 12,986 10,036 7,060
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 1995 1994 1993 1992
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and investments $ 16,533(3) $ 26,665 $ 39,843 $ 57,333 $ 14,258
Working capital 9,641 22,850 33,422 36,711 13,025
Total assets 22,377 33,810 49,673 67,229 15,964
Long-term obligations, excluding
current installments 2,569 4,930 3,932 3,261 473
Accumulated deficit (82,622) (63,832) (45,828) (26,348) (13,320)
Stockholders' equity 11,977 24,205 41,300 60,436 13,747
</TABLE>
(1) Certain expenses have been reclassified to conform to 1996
presentation.
(2) Net loss per share is based on the weighted average number of common
shares outstanding during the period and, for periods prior to the
Company's initial public offering in January 1993, certain common
equivalent shares. The net loss per share for 1992 also gives effect to
the conversion of all outstanding shares of convertible preferred stock
into common stock as if converted on the original date of issuance.
The Company has not paid dividends since its inception.
(3) Does not include net proceeds of $8.17 million received in January 1997
in connection with the Company's registered direct public offering of
Common Stock (see Note 9 to Notes to Financial Statements).
27.
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain of the risk
factors set forth below and elsewhere in this Prospectus. See "Risk Factors."
The following discussion should be read in conjunction with the
financial statements and notes thereto incorporated herein by reference.
OVERVIEW
Shaman is a leader in the identification and development of novel
pharmaceutical products for the treatment of human diseases through the
isolation and optimization of active compounds found in tropical plants. The
Company has three compounds in clinical development: Provir, an oral product for
the treatment of secretory diarrhea; Virend, a topical antiviral for the
treatment of herpes; and nikkomycin Z, an oral antifungal for the treatment of
endemic mycoses. Shaman has an active Type II diabetes research program which
served as the basis for its collaborations with Lipha, Lyonnaise Industrielle
Pharmaceutique s.a., a wholly owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.
The Company began operations in March 1990. To date, Shaman has not
sold any products and does not anticipate receiving product revenue in the near
future. The Company's accumulated deficit at December 31, 1996, was
approximately $82.6 million. Shaman expects to continue to incur substantial
losses over the next several years, due primarily to the expense of preclinical
studies, clinical trials and its on-going research program. The Company expects
that losses will fluctuate from quarter to quarter and that such fluctuations
could be substantial. Shaman has financed its research, development and
administrative activities through various private placements of its equity
securities, an initial public offering of Common Stock in January 1993, a
follow-on offering in December 1993, a registered direct public offering in
January 1997, collaborative agreements with pharmaceutical companies and, to a
lesser extent, through equipment and leasehold improvement financings.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company recorded collaborative revenues of $3.4 million, $2.2
million and $1.4 million for 1996, 1995 and 1994, respectively. Revenues for
1996 resulted from the Company's on-going research funding from Ono, an
additional $1.0 million payment from Ono for enhanced rights to Shaman's
antidiabetic compounds, and research payments and access fees from Shaman's
collaboration with Lipha/Merck. Revenues in 1995 resulted solely from the
Company's relationship with Ono, and included a one-time access fee associated
with the May 1995 commencement of the collaboration. Revenues in 1994 resulted
from the Company's antifungal joint research and development agreement with Eli
Lilly ("Lilly"). The agreement, signed in October 1992, had a four-year term,
subject to renewal after two years. Lilly committed to fund the Company's
research efforts with respect to certain antifungal agents at agreed upon levels
through October 1994. In October 1994, Lilly decided not to renew the
collaboration. Shaman incurred no costs upon termination of the agreement and
retains worldwide rights to the compounds that were subject to the alliance. The
Company expects that revenues from collaborative agreements will continue to
fluctuate in the future as development of its various compounds proceeds and new
products are partnered for development and commercialization.
The Company incurred research and development expenses of $19.1
million, $17.6 million and $18.6 million for 1996, 1995, and 1994, respectively.
These expenses include salaries for scientific personnel, clinical development
costs, laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities
28.
<PAGE> 29
expenses and other expenditures relating to research and product development.
Research and development expenses increased $1.5 million in 1996 compared with
1995, and decreased $1.0 million in 1995 compared with 1994. The increase in
1996 was primarily attributable to the Company's clinical trials and development
activities for Provir, as well as additional research and development activities
with respect to nikkomycin Z, partially offset by reduced expenses for clinical
trials and development activities for Virend. The decrease in 1995 compared with
1994 was primarily attributable to the Company's restructuring late in 1994, its
specific focus on diabetes as its primary basic research program and its reduced
efforts in infectious disease research. Research and development expenses are
likely to increase in 1997 as products enter clinical trials and the Company
continues research and development activities for various product candidates.
General and administrative expenses were $3.5 million, $3.7 million and
$3.5 million for 1996, 1995 and 1994, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
The Company's expanded research and clinical activities are not expected to
require commensurate increases in general and administrative support.
Interest income was $1.1 million, $1.7 million and $2.0 million for
1996, 1995 and 1994, respectively. Interest income decreased $600,000 in 1996
compared with 1995 and decreased $300,000 in 1995 compared with 1994. Interest
income fluctuations were consistent with changes in average cash and investment
balances which reflected the proceeds of two public offerings in 1993 from which
the Company substantially funded its operations in 1994, 1995 and 1996. The
balances of cash, cash equivalents and investments were $16.5, $26.7 and $39.8
million at December 31, 1996, 1995 and 1994, respectively.
Interest expense was $603,000, $569,000 and $698,000 in the years ended
December 31, 1996, 1995 and 1994, respectively. Interest expense increased in
1996 compared with 1995 as the Company absorbed a full year's expense on its
unsecured term loan. Interest expense decreased in 1995 compared with 1994 as
various leases terminated during the year, and the Company did not close its
term debt until the fourth quarter of 1995. The Company's general policy is to
finance capital equipment and tenant improvements on a long-term basis, and
interest expense in the future will be dependent on the Company's capacity to
finance its future equipment needs.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $76.9 million. The federal net operating loss
carryforwards will expire at various dates beginning in 2004 through 2011, if
not sooner utilized. Utilization of the net operating losses and credits is
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company sold 2,000,000 shares of Common Stock in a
registered direct public offering for gross proceeds of $9.0 million, the
proceeds of which are not reflected in the December 31, 1996 cash balance. The
proceeds of the offering will be used for the continued research and clinical
development of the Company's existing product candidates.
As of December 31, 1996, the Company's cash, cash equivalents, and
investments totaled approximately $16.5 million, compared with $26.7 million at
December 31, 1995. The net decrease is attributable to sales and maturities in
the Company's investment portfolio used to fund operations, partially offset by
funds received from the Lipha/Merck collaboration in September 1996, a private
placement of preferred stock in July 1996, and Ono's annual research funding.
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 will be amortized to revenue over twelve months, as work is
performed. Shaman
29.
<PAGE> 30
recognized $406,250 in revenue from the Lipha/Merck collaboration during the
year ended December 31, 1996. 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 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. Complete research funding under
the collaboration is dependent upon the initiation of human clinical trials of
at least one compound by September 23, 1998. 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, 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.
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, in which it received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Convertible 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 $10.184 per share. The 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 $8.147, depending on the market
value of the Company's Common Stock during the period prior to conversion.
Holders of preferred shares are entitled to a liquidation preference of $8.147
per share. In addition to the sale of Preferred Stock and warrant, the Company
has the right, from time to time during the period beginning January 1997 and
ending July 2000, 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 shares purchased by up to
an aggregate of 527,500 shares.
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 of approximately $16.5
million at December 31, 1996, the collaborative revenue committed by Lipha/Merck
and Ono, Lipha/Merck's commitment to purchase additional equity, Shaman's
additional rights to sell Common Stock under the 1996 Private Placement, and
proceeds from the registered direct public offering in January 1997 (see Note 9
to Notes to Financial Statements -- Subsequent Event) will be adequate to fund
operations, including payments due under long-term obligations, through the
first quarter of 1998. 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 assurances that these
milestones will be achieved, nor that additional funding, if needed, will be
available on reasonable terms, or at all.
Long-term obligations decreased $2.4 million in 1996 compared with
1995 due to the acceleration of the principal payments on its term loan to 24
months from 30 months, with the first monthly payment due May 15, 1996 instead
of April 30, 1997, and reclassified $1.25 million of its term debt to current
liabilities as of December 31, 1996.
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, regulatory
30.
<PAGE> 31
approval and commercialization for any of its products. 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 the 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.
31.
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Shaman Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 Shaman Pharmaceuticals, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 20, 1997
32
<PAGE> 33
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,051,251 $ 9,210,123
Short-term investments 481,677 17,454,778
Prepaid expenses and other current assets 938,872 858,724
------------ ------------
Total current assets 17,471,800 27,523,625
------------ ------------
Property and equipment:
Equipment and furniture 6,683,261 6,142,955
Leasehold improvements 7,125,235 6,800,812
------------ ------------
13,808,496 12,943,767
Less: accumulated depreciation and amortization 9,031,571 6,785,711
------------ ------------
4,776,925 6,158,056
Other assets 128,080 128,080
------------ ------------
Total assets $ 22,376,805 $ 33,809,761
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,445,616 $ 668,078
Accrued clinical trial costs 1,233,014 1,016,573
Accrued professional fees 689,216 705,374
Accrued compensation 332,738 383,089
Advances - contract research 1,883,605 789,855
Current installments of long-term obligations 2,246,795 1,111,128
------------ ------------
Total current liabilities 7,830,984 4,674,097
Long-term obligations, excluding current installments 2,568,931 4,930,263
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in series; 1,000,000 shares
authorized; 400,000 convertible shares issued and outstanding at December
31, 1996; no shares issued and outstanding at December 31, 1995
(Liquidation preference at December 31, 1996 - $3,258,800) 400 --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 13,920,684 shares and
13,257,788 shares issued and outstanding at
December 31, 1996 and 1995, respectively 13,921 13,258
Additional paid-in capital 94,604,455 88,170,926
Deferred compensation and other adjustments (20,250) (146,956)
Accumulated deficit (82,621,636) (63,831,827)
------------ ------------
Total stockholders' equity 11,976,890 24,205,401
------------ ------------
Total liabilities and stockholders' equity $ 22,376,805 $ 33,809,761
============ ============
</TABLE>
See accompanying notes to financial statements.
33.
<PAGE> 34
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue from collaborative
agreements $ 3,406,250 $ 2,210,147 $ 1,359,835
Operating expenses:
Research and development 19,138,190 17,634,898 18,642,737
General and administrative 3,537,157 3,704,962 3,545,200
------------ ------------ ------------
Total operating expenses 22,675,347 21,339,860 22,187,937
------------ ------------ ------------
Loss from operations (19,269,097) (19,129,713) (20,828,102)
Interest income 1,082,618 1,695,192 2,045,466
Interest expense (603,330) (568,985) (698,010)
------------ ------------ ------------
Net loss $(18,789,809) $(18,003,506) $(19,480,646)
============ ============ ============
Net loss per share $ (1.39) $ (1.37) $ (1.50)
============ ============ ============
Shares used in calculation
of net loss per share 13,496,000 13,161,000 12,986,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
34.
<PAGE> 35
STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
----------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- $12,967 $88,828,046 $ (2,057,607) $(26,347,675) $ 60,435,731
Issuance of 52,458 shares of common
stock upon the exercise of
stock options -- 52 54,885 -- -- 54,937
Unrealized loss on available-for-sale
securities -- -- -- (345,051) -- (345,051)
Amortization and reversals of
deferred compensation -- -- (868,944) 1,503,921 -- 634,977
Net loss -- -- -- -- (19,480,646) (19,480,646)
------- ------- ------------ ------------ ------------ ------------
Balance at December 31, 1994 -- 13,019 88,013,987 (898,737) (45,828,321) 41,299,948
Issuance of 238,297 shares of common
stock upon the exercise of
stock options -- 239 406,176 -- -- 406,415
Unrealized gain on available-for-sale
securities -- -- -- 351,259 -- 351,259
Amortization and reversals of
deferred compensation -- -- (249,237) 400,522 -- 151,285
Net loss -- -- -- -- (18,003,506) (18,003,506)
------- ------- ------------ ------------ ------------ ------------
Balance at December 31, 1995 -- 13,258 88,170,926 (146,956) (63,831,827) 24,205,401
Issuance of 273,978 shares of common
stock upon the exercise of stock
options -- 274 439,806 -- -- 440,080
Issuance of 400,000 shares of series A
convertible preferred stock 400 -- 3,057,823 -- -- 3,058,223
Issuance of 388,918 shares of common
stock in connection with Lipha/Merck
collaboration -- 389 2,971,833 -- -- 2,972,222
Unrealized loss on available-for-sale
securities -- -- -- (26,458) -- (26,458)
Amortization and reversals of
deferred compensation -- -- (35,933) 153,164 -- 117,231
Net loss -- -- -- -- (18,789,809) (18,789,809)
------- ------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 400 $13,921 $94,604,455 $ (20,250) $(82,621,636) $11,976,890
====== ======= =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
35.
<PAGE> 36
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(18,789,809) $ (18,003,506) $(19,480,646)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,363,091 2,717,332 3,227,746
Changes in operating assets and liabilities:
Prepaid expenses, other
current assets and other assets (80,148) 531,303 (467,979)
Accounts payable, accrued professional fees,
accrued compensation, accrued clinical
trial costs and contract research advances 2,021,220 206,079 879,861
------------ ------------- ------------
Net cash used in operating activities (14,485,646) (14,548,792) (15,841,018)
------------ ------------- ------------
INVESTING ACTIVITIES:
Purchases of available-for-sale investments (10,872,811) (20,007,947) (31,470,363)
Maturities of available-for-sale investments 26,325,454 33,970,649 40,666,279
Sales of available-for-sale investments 1,494,000 -- --
Capital expenditures (864,729) (411,592) (2,059,625)
------------ ------------- ------------
Net cash provided by investing activities 16,081,914 13,551,110 7,136,291
------------ ------------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net 3,058,223 -- --
Proceeds from issuance of common stock, net 3,412,302 406,415 54,937
Proceeds from issuance of long-term obligations 600,000 1,900,000 1,753,469
Principal payments on long-term obligations (1,825,665) (875,192) (1,148,159)
Proceeds from asset financing arrangements -- -- 95,506
------------ ------------- ------------
Net cash provided by financing activities 5,244,860 1,431,223 755,753
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 6,841,128 433,541 (7,948,974)
Cash and cash equivalents at beginning of year 9,210,123 8,776,582 16,725,556
------------ ------------- ------------
Cash and cash equivalents at end of year $ 16,051,251 $ 9,210,123 $ 8,776,582
============ ============= ============
SUPPLEMENTAL INFORMATION
Interest paid $ 603,330 $ 634,131 $ 602,749
============ ============= ============
</TABLE>
See accompanying notes to financial statements.
36.
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Shaman is a leader in the identification and development of novel
pharmaceutical products for the treatment of human diseases through the
isolation and optimization of active compounds found in tropical plants. The
Company has three compounds in clinical development: Provir, an oral product
for the treatment of secretory diarrhea; Virend, a topical antiviral for the
treatment of herpes; and nikkomycin Z, an oral antifungal for the treatment of
endemic mycoses. Shaman has an active Type II diabetes research program which
served as the basis for its collaborations for with Lipha, Lyonnaise
Industrielle Pharmaceutique s.a., a wholly owned subsidiary of Merck KGaA,
Darmstadt, Germany ("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd.
("Ono") of Osaka, Japan.
REVENUE RECOGNITION
Revenue recognized under the Company's collaborative research
agreements is recorded as earned based upon the performance requirements of the
contract. Payments received in advance under these agreements are deferred until
earned.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
encourages, but does not require, companies to record compensation expense for
stock-based employee compensation plans at fair value. The Company has elected
the disclosure requirements of SFAS No. 123 for the year ended December 31,
1996 and will continue to measure stock-based compensation to employees in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, the disclosure requirements will have no effect on the Company's
financial position or results of operations. Note 7 contains a summary of the
pro forma effects to reported net loss and net loss per share for 1996 and 1995
as if the Company had elected to recognize compensation expense based on the
fair value of options granted as described by SFAS 123.
The Company grants stock options to employees and directors for a fixed
number of shares with an exercise price equal to the fair value of shares at the
date of grant. The Company accounts for stock option grants to employees and
directors in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees and, accordingly, recognizes no compensation expense for the stock
option grants to employees and directors.
PER SHARE DATA
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation as their effect is antidilutive.
CASH, CASH EQUIVALENTS, INVESTMENTS AND CONCENTRATION OF CREDIT RISK
The Company considers all highly liquid investments with remaining
maturities of three months or less at time of purchase to be cash equivalents.
Investments with maturities of less than one year from the balance sheet date
and with original maturities greater than 90 days are considered short-term
investments. Investments with maturities greater than one year from the balance
sheet date are considered long-term investments. Investments consist primarily
of commercial paper, investments in government securities, corporate bonds and
asset-backed
37.
<PAGE> 38
securities. These investments typically bear minimal risk. This diversification
of risk is consistent with the Company's policy to maintain high liquidity and
ensure safety of principal. The Company maintains its cash, cash equivalents and
investments in accounts with several United States banks and brokerage houses.
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such determination as of each balance
sheet date. As of December 31, 1996 and 1995, the Company has classified its
entire investment portfolio as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
included in stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other-than- temporary on
available-for-sale securities are included in interest income or expense. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of equipment
and furniture is provided on a straight-line basis over the estimated useful
lives of the respective assets, which range from three to five years. Equipment
held under capital leases is amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset. Leasehold
improvements are amortized on a straight-line basis over the remaining life of
the lease.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. COLLABORATIVE RELATIONSHIPS
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 will be amortized to revenue over twelve months as work is
performed. Shaman recognized $406,250 (12% of total revenues in 1996) in revenue
from the Lipha/Merck collaboration during the year ended December 31, 1996. The
Company also received approximately $3 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 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.
Complete research funding under the collaboration is dependent upon the
initiation of human clinical trials of at least one compound by September 23,
1998. 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, 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.
38.
<PAGE> 39
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.
In May 1995, the Company entered into a collaborative agreement with
Ono providing for, among other things, three years of funding for the research
and development of compounds for the treatment of Type II diabetes. Under the
agreement, Shaman will screen 100 diabetes-specific plants per year in vivo,
isolate and identify active compounds, and participate in any medicinal
chemistry modification. In turn, Ono will provide Shaman with access to Ono's
preclinical and clinical development capabilities through proprietary in vitro
assays and medicinal chemistry effort. Ono's development and commercialization
rights are for the countries of Japan, South Korea and Taiwan. Under the terms
of the agreement, Ono will provide up to $7.0 million in collaborative research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per compound for each antidiabetic drug that is commercialized. Of the $3.0
million received on signing the agreement, $1.0 million was an access and
license fee recognized as revenue in 1995, and the remaining $2.0 million was
the annual research and development funding recognized as revenue over the
subsequent year. Shaman received an additional $1.0 million payment (beyond the
$7.0 million commitment) in December 1996 for enhanced access rights to these
compounds. Revenues from Ono accounted for 88% and 100% of total revenues earned
in 1996 and 1995, respectively.
In October 1992, the Company entered into a joint research and
development agreement with Eli Lilly and Company ("Lilly"). Lilly agreed to fund
the Company's research efforts with respect to certain antifungal agents at
agreed-upon levels through October 1994. In October 1994, Lilly decided not to
renew this collaboration. The Company incurred no costs upon termination of the
agreement and retains worldwide rights to the compounds that were subject to the
alliance. All revenue from collaborative agreements reported in the 1994
statements of operations related to this agreement.
Costs associated with revenue from these collaborations totaled $10.5
million and $8.6 million for the year ended December 31, 1996 and 1995,
respectively, and are included in research and development expenses in the
accompanying financial statements.
3. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- ---------
December 31, 1996
-----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
government obligations $ 499 $ -- $ (17) $ 482
U.S. corporate bonds 2,218 -- -- 2,218
U.S. corporate commercial
paper and other 12,830 -- (3) 12,827
----------- ---------- ---------- -------
Total $ 15,547 $ -- $ (20) $15,527
=========== ========== ========== =======
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 15,048 $ -- $ (3) $15,045
Short-term investments 499 -- (17) 482
----------- ---------- ---------- -------
Total $ 15,547 $ -- $ (20) $15,527
=========== ========== ========== =======
</TABLE>
39.
<PAGE> 40
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
government obligations $ 5,997 $ 13 $ (8) $ 6,002
U.S. corporate bonds 7,497 8 (1) 7,504
U.S. corporate commercial
paper and other 12,740 -- (5) 12,735
-------- ---- ----- -------
Total $ 26,234 $ 21 $ (14) $26,241
======== ==== ===== =======
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 8,789 $ -- $ (2) $ 8,787
Short-term investments 17,445 21 (12) 17,454
------- ----- ----- -------
Total $26,234 $ 21 $ (14) $26,241
======= ===== ===== =======
</TABLE>
The average remaining maturity of the portfolio was approximately four
and a half months as of December 31, 1996 and 1995, respectively.
The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, judgment is required in interpreting market data to develop the
estimates of fair value.
FAIR VALUE OF LONG-TERM OBLIGATIONS
The fair values of the Company's long-term obligations are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements. The carrying amounts
and fair values of long-term obligations consisted of the following at December
31, 1996:
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Leasehold improvements financings $1,954,876 $2,152,918
Equipment borrowings 1,183,335 1,191,206
</TABLE>
The carrying value of the Company's term loan approximates its fair value
because the interest rates on the note takedowns are periodically reset.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of an unsecured term loan, secured
borrowings used to acquire property and equipment, capital lease arrangements
and a leasehold improvement financing obligation.
In October 1995, the Company closed a $2.5 million unsecured term loan
to finance capital asset acquisitions and potential facilities expansion. The
unsecured term loan provided for the acceleration of principal if the Company
did not achieve certain financing or collaborative objectives by May 15, 1996.
The Company did achieve the specified milestone in the third quarter rather than
by May 15, 1996, and the lender accelerated the amortization schedule. The
acceleration provisions require that principal amortization be shortened from 30
months to 24 months, with the first monthly payment due May 15, 1996 instead of
April 30, 1997. Accordingly, to date the Company has made nine principal
payments totaling $938,000 and reclassified $1,250,000 of its long-term debt to
current liabilities as of December 31, 1996. Interest on each advance is charged
at the London Interbank Offered Rate ("LIBOR") plus 1.5% or prime plus 0.5%. The
interest rate on the loan was approximately 7.13% at December 31, 1996 and
approximately 7.2% to 8.2% at December 31, 1995.
40.
<PAGE> 41
Equipment borrowings totaled $1,183,335 and $1,884,348 at December 31,
1996 and 1995, respectively. The borrowings bear interest at rates ranging from
10.7% to 12.75% and from 10.7% to 16.3% at December 31, 1996 and 1995,
respectively, are secured by the equipment acquired, and are payable in monthly
installments of $74,000 through December 1998.
The Company has also acquired certain equipment and furniture pursuant
to capital lease arrangements. The gross amount of equipment and furniture and
the related accumulated amortization recorded under capital leases included in
property and equipment are as follows:
<TABLE>
<CAPTION>
At December 31, 1996 1995
---- ----
<S> <C> <C>
Equipment and furniture $ 1,461,141 $1,461,141
Less accumulated amortization (1,194,475) (993,985)
----------- ----------
$ 266,666 $ 467,156
=========== ==========
</TABLE>
Amortization of assets acquired under capital leases is included with
depreciation and amortization expense.
In connection with the facility lease described in Note 5, the Company
entered an agreement with the former tenant of the facility to acquire
approximately $1.5 million of tenant improvements by making annual payments to
the former tenant, including accrued interest, of $100,000 through 1997 and
$540,000 in 1998 through 2002.
At December 31, 1996, future payments on long-term obligations are as
follows:
<TABLE>
<CAPTION>
Leasehold
Equipment Capital Improvement
Term Loan Borrowings Leases Financing Total
--------- ---------- ------- ------------ -----
<S> <C> <C> <C> <C> <C>
1997 $ 1,250,000 $ 781,780 $ 118,631 $ 100,000 $ 2,250,411
1998 312,500 401,555 -- 540,000 1,254,055
1999 -- -- -- 540,000 540,000
2000 -- -- -- 540,000 540,000
2001 -- -- -- 540,000 540,000
Thereafter -- -- -- 540,000 540,000
------------ ----------- --------- ------------- -----------
Total minimum payments 1,562,500 1,183,335 118,631 2,800,000 5,664,466
Less amount representing interest
(at rates ranging from 10.7% to 12.2%) -- -- (3,616) (845,124) (848,740)
------------ ----------- --------- ------------- ------------
1,562,500 1,183,335 115,015 1,954,876 4,815,726
Less current installments (1,250,000) (781,780) (115,015) (100,000) (2,246,795)
------------ ----------- --------- --------- ------------
Long-term obligations, excluding
current installments $ 312,500 $ 401,555 $ -- $ 1,854,876 $ 2,568,931
=========== ========== ========= ============= ===========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
In January 1993, the Company entered a noncancelable lease for a new
research and office facility in South San Francisco, California. The lease, as
amended in April 1994, provides for future lease payments totaling approximately
$8.5 million through 2003 and options to renew for a total of ten years. The
Company is required to pay operating costs, including property taxes, utilities,
insurance and maintenance.
41.
<PAGE> 42
At December 31, 1996, the minimum noncancelable future rental payments
under the Company's operating leases are:
<TABLE>
<S> <C>
1997 $1,153,000
1998 1,187,000
1999 1,292,000
2000 1,497,000
2001 1,497,000
Thereafter 1,874,000
</TABLE>
Rent expense for each of the three years ended December 31, 1996, 1995
and 1994 was approximately $1,348,000, $1,004,000 and $1,059,000, respectively.
The Company is involved in litigation, arbitration and disputes which
are normal to its business. Management believes losses that might eventually be
sustained from such matters, if any, would not be material to future years'
financial position or results of operations. Further, product liability claims
may be asserted in the future relative to events not known to management at the
present time. The Company has insurance coverage which management believes is
adequate to protect against such product liability losses as could materially
affect the Company's financial position.
6. CONTRACTUAL AGREEMENTS
The Company has entered into license, clinical trial and supply
agreements with universities, research organizations and commercial companies.
Certain of these agreements require payments of royalties on future sales of
resulting products and may subject the Company to minimum annual payments to its
contract partners. In addition, the Company signed an agreement in 1995 which
could result in the payment of milestone installments if certain development
objectives are achieved. To date, payments under these agreements have not been
significant and, at December 31, 1996, related noncancelable commitments are
immaterial.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock.
The Company's Board of Directors may set the rights and privileges of any
preferred stock issued.
In July 1996, the Company closed a private placement pursuant to
Regulation S under the Securities Act of 1933, as amended, in which it received
gross proceeds of $3.3 million for 400,000 shares of Series A convertible
preferred stock ("preferred stock") and a six-year warrant to purchase 550,000
shares of the Company's common stock at an exercise price of $10.184 per share.
The 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 and
$8.147, depending on the market value of the Company's common stock during the
period prior to conversion. Holders of preferred shares are entitled to a
liquidation preference of $8.147 per share and have voting rights equivalent to
the number of common shares into which their preferred shares could then be
converted. In addition to the sale of Preferred Stock and warrant, the Company
has the right, from time to time during the period beginning January 1997 and
ending July 2000, 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 shares purchased by up to an
aggregate of 527,500 shares.
42.
<PAGE> 43
COMMON STOCK
In December 1992, the Company adopted the 1992 Stock Option Plan (the
Plan) as the successor plan to the Company's 1990 Stock Option Plan. The Plan
will terminate on the earlier of December 31, 2002 or the date on which all
shares available for issuance under the Plan have been issued or canceled. The
Plan provides for two separate components: the Discretionary Option Grant
Program and the Automatic Option Grant Program.
Under the Discretionary Option Grant Program, options granted may
either be incentive options or non-statutory options. Incentive options may be
granted to employees at a price not less than the fair market value of the
Company's common stock on the grant date. Non-statutory options may be granted
at a price determined by the plan administrator. Each option granted is
exercisable as determined by the plan administrator, with a term not to exceed
ten years. The Plan also allows for the granting of options with repurchase
rights and stock appreciation rights at the discretion of the plan
administrator.
Under the Automatic Option Grant Program, each individual who becomes a
non-employee board member on or after the effective date of the Plan is
automatically granted a non-statutory stock option to purchase 20,000 shares of
common stock. Further, each non-employee board member who has served as a member
for at least six months prior to the annual stockholders' meeting is
automatically granted an annual non-statutory stock option to purchase not more
than 7,500 nor less than 5,000 shares of common stock, depending on a
calculation based on the average selling price of the common stock. The exercise
price of each option granted is the fair value of the common stock on the date
of grant. These options have a ten-year term and vest over 24 months.
Both programs provide for automatic acceleration of the exercise period
in the event of certain corporate transactions, including a merger, asset sale
or change in control of the Company. The Plan was amended in 1996 to increase
the shares authorized for issuance by 450,000.
The 1990 Stock Option Plan provided for the granting of incentive and
non-statutory stock options. Both types of options were immediately exercisable
and expire ten years from the date of grant. Vesting of optioned shares was
determined by the board of directors and generally occurred over a two-to
four-year period from the date of grant. At December 31, 1996, all options to
purchase common stock issued under this plan were vested.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Weighted
Average Average
Number Price Per Exercise Fair Value
of Shares Share Price at a Grant Date
--------- --------- -------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1994 1,780,393 $ .06 - $13.25 $5.38 $ -
Granted at fair value 881,080 3.50 - 7.88 4.14 2.38
Exercised (238,297) .06 - 5.25 1.71 -
Forfeited (614,111) .24 - 13.25 7.96 -
-------------- ----------------
Balance at December 31, 1995 1,809,065 .06 - 13.25 4.40 -
Granted at fair value 847,928 5.88 - 8.13 6.75 3.85
Exercised (273,978) .06 - 7.86 1.61 -
Forfeited (281,039) .24 - 13.25 6.12 -
-------------- ----------------
Balance at December 31, 1996 2,101,976 $ .06 - $13.25 $5.48 $ -
============== ================
</TABLE>
At December 31, 1996, 968,235 shares under options were exercisable at
a weighted average exercise price of $5.10 per share (861,455 shares at $4.01
per share at December 31, 1995).
43.
<PAGE> 44
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Shares under Options Exercisable
Average Weighted at December 31, 1996
Option Shares Remaining Average --------------------------------
Range of Outstanding at Contractual Exercise Weighted Average
Exercise Prices December 31, 1996 Life (Years) Price Number Exercise Price
--------------- ----------------- ------------ -------- ------ ---------------
<S> <C> <C> <C> <C> <C>
$0.06 - $1.50 195,222 4.65 $ 0.49 195,207 $ 0.49
3.50 - 5.25 689,754 8.08 4.00 377,581 3.97
5.50 - 7.50 999,062 8.93 6.39 209,742 6.40
7.86 - 10.38 50,186 8.54 8.40 22,474 8.78
10.38 - 13.25 167,752 6.33 11.07 163,231 11.05
-------------- ------------ ---- ------ ------- -------
$0.06 -$13.25 2,101,976 8.04 $ 5.48 968,235 $ 5.10
============== ============ ==== ====== ======= ======
</TABLE>
For certain options issued during the year ended December 31, 1992, the
Company recorded deferred compensation for the difference between the exercise
price and the deemed value of the Company's common stock for financial reporting
purposes. For certain additional options issued during the years ended December
31, 1993 and 1994, the Company recorded deferred compensation for the difference
between the exercise price and the fair market value of the Company's common
stock at the date of grant. Deferred compensation is amortized to expense on a
straight-line basis over the vesting period of the options.
PRO FORMA INFORMATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
No. 123, "Accounting for Stock- Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair value method of SFAS 123. The fair value for these options was estimated at
the date of grant using the Black-Scholes option pricing model. The following
are the weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates of 6.94% and 5.73%; no dividends paid; volatility factors of the
expected market price of the Company's common stock of .75 and a
weighted-average expected life of the options of 3.91 and 3.85 years. The
effects of applying FAS 123 for recognizing compensation expense and providing
pro forma disclosures in 1996 and 1995 are not likely to be representative of
the effects on reported net income in future years.
The Black-Scholes option valuation 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 valuation models require the
input of highly subjective assumptions including the 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 the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro-forma net loss over the options' vesting periods.
The Company's pro forma information follows (in thousands except for net loss
per share information):
44.
<PAGE> 45
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss
Historical $ (18,790) $ (18,004)
Pro forma $ (20,280) $ (18,731)
Net loss per share
Historical $ (1.39) $ (1.37)
Pro forma $ (1.50) $ (1.42)
</TABLE>
RESERVED SHARES
At December 31, 1996, 3,542,255 shares of common stock were reserved
for conversion of outstanding preferred stock and for issuance upon exercise of
outstanding options, warrants and options available for future grant.
WARRANTS
At December 31, 1996, warrants to purchase a total of 641,705 shares of
common stock were outstanding, with exercise prices ranging from $2.40 to $10.83
per share. These warrants, which expire in 1999, were issued to creditors in
connection with certain lease financing arrangements and preferred stock
financing arrangements.
8. TAXES
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $76.9 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2004 through 2011, if
not sooner utilized.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities for federal and state
income taxes as of December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 26,600,000 $ 20,600,000 $ 14,700,000
Research credits (expiring in 2004 - 2011) 2,300,000 1,900,000 1,700,000
Capitalized research and development costs 3,700,000 2,900,000 2,000,000
Other 400,000 100,000 400,000
-------------- ------------- -------------
Total deferred tax assets 33,000,000 25,500,000 18,800,000
Valuation allowance for deferred tax assets (33,000,000) (25,500,000) (18,800,000)
-------------- ------------- -----------
Net deferred tax asset $ -- $ -- $ --
============== ============= =============
</TABLE>
The net valuation allowance increased by $7.4 million during the year
ended December 31, 1994.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
9. SUBSEQUENT EVENT
In January 1997, the Company sold 2,000,000 shares of common stock for
gross proceeds of $9.0 million, the proceeds of which are not reflected in the
December 31, 1996 cash balance.
45.
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
46.
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 concerning the directors and
executive officers of the Company is incorporated by reference from the
information under the captions "Proposal One - Election of Directors:
Information With Respect to Nominees" and "Executive Compensation and Other
Information - Directors and Executive Officers" in the Company's Definitive
Proxy Statement to be filed with the Commission pursuant to Regulation 14A in
connection with the Company's 1997 Annual Meeting of Stockholders (the Proxy
Statement).
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this Item 10 as to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the information under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
from the information under the caption "Executive Compensation and Other
Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
from the information under the caption "Security Ownership of Management and
Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference
from the information under the caption "Executive Compensation and Other
Information - Certain Relationships and Related Transactions" in the Proxy
Statement.
47.
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The following Financial Statements together with the Report of
Independent Auditors are filed as part of this Form 10-K under
Item 8 above:
Report of Independent Auditors
Balance Sheets at December 31, 1996 and 1995
Statements of Operations for each of the years ended December
31, 1996, 1995 and 1994
Statement of Stockholders' Equity for each of the years ended
December 31, 1994, 1995 and 1996
Statements of Cash Flows for each of the years ended December
31, 1996, 1995 and 1994
Notes to Financial Statements
(a) (2) Financial Statement Schedules
No financial statement schedules are included because they are
not required or the required information is included in the
financial statements or notes thereto.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1996.
(c) Exhibits
Exhibit No. Description
3.1(5) Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on October 1, 1993.
3.2(8) Amended and Restated By-Laws, as amended May 23,
1996.
4.1(8) Certificate of Designation of Preferences of Series
A Preferred Stock of the Registrant, as filed with
the Delaware Secretary of State on July 27, 1996.
10.1(1)(11) 1990 Stock Option Plan, as amended.
10.2(1)(11) 1992 Stock Option Plan.
10.3(1)(11) 401(k) Plan.
10.4(1)(11) Form of Stock Purchase Agreement.
10.5(1)(11) Form of Stock Option Agreement.
10.6(1) Form of Confidentiality Agreement-Employees &
Consultants.
10.7(1) Form of Confidentiality Agreement-Strategic Planning.
10.8(1) Form of Indemnification Agreement.
10.9(1)(11) Form of Employment Agreement.
10.10(1) Form of Agreement with Scientific Strategy Team
Members.
10.11(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.12(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
48.
<PAGE> 49
10.13(1) Letter Agreements dated December 8, 1989, May 30,
1990, June 21, 1990, August 24, 1990 and July 22,
1991, between Shaman and National Institute of
Allergy and Infectious Diseases.
10.14(1)(10) License Agreement dated February 8, 1990, between
Shaman and Dr. Michael Tempesta.
10.15(1)(11) Stock Purchase Agreement dated June 15, 1990, between
Shaman and Lisa A. Conte.
10.16(1) Master Equipment Lease Agreement dated September 28,
1990, between Shaman and MMC/GATX Partnership No. I,
with related schedules.
10.17(1) Series B Preferred Stock Warrants dated September 28,
1990 and June 28, 1991, issued to MMC/GATX
Partnership No. I.
10.18(1)(10) License Agreement dated December 5, 1990, as amended
January 19, 1992, between Shaman and the University
of British Columbia.
10.19(1) Master Equipment Lease Agreement dated December 26,
1990, between Shaman and Lease Management Services,
Inc.
10.20(1) Master Equipment Lease Agreement dated April 22,
1991, between Shaman and Industrial Way I Limited
Partnership.
10.21(1)(10) Contract Services Agreement dated May 23, 1991,
February 1, 1992, February 4, 1992, September 23,
1992 and October 30, 1992, between Shaman and New
Drug Services, Inc.
10.22(1)(10) License Agreement dated September 25, 1991, between
Shaman and Inverni della Beffa SpA.
10.23(1)(10) Manufacturing Agreement dated September 25, 1991
between Shaman and Indena SpA.
10.24(1)(10) Master Clinical Trial Agreement dated September 30,
1991 between Shaman and International Drug
Registration, Inc.
10.25(1) Series D Preferred Stock Warrant dated February 3,
1992, issued to MMC/GATX Partnership No. I.
10.26(1)(10) Supply Agreement dated June 1, 1992.
10.27(1)(10) Supply Agreement dated June 1, 1992.
10.28(2) Screening Agreement dated August 31, 1992, as amended
June 2, 1993, between Shaman and Merck Research
Laboratories.
10.29(1)(10) Agreement dated October 16, 1992, between Shaman and
International Medical Technical Consultants, Inc.
10.30(4)(10) Research Agreement dated October 21, 1992, as amended
April 27, 1994, between Shaman and Eli Lilly and
Company.
10.31(1) Registration Rights Agreement dated October 22, 1992,
as amended December 14, 1992, between Shaman and
certain holders of preferred stock of Shaman.
10.32(1) Industrial Lease Agreement dated January 1, 1993,
between Shaman and Grand/Roebling Investment Company.
10.33(1) Three Party Agreement dated as of January 1, 1993,
by and among Berlex Laboratories, Inc., Shaman and
Grand/Roebling Investment Company.
10.34(2)(10) Letter Agreement dated March 1, 1993, between Shaman
and Lederle-Praxis Biologicals, Division of American
Cynamide Corporation.
10.35(3) Contract Service Agreements dated May 10, 1993,
between Shaman and R.C. Benson & Sons, Inc.
10.36(3)(10) Clinical Trial Agreement dated July 21, 1993, between
Shaman and the University of Rochester.
10.37(3)(10) Letter Agreement dated August 24, 1993, between
Shaman and University of Michigan.
10.38(3)(10) Laboratory Services Agreement dated September 1,
1993, between Shaman and Hazelton Washington, Inc.
10.39(3) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of
California.
10.40(3) Master Equipment Lease Agreement dated September 30,
1993, between Shaman and MMC/GATX Partnership No. I,
with related schedules.
10.41(3) Common Stock Warrant dated September 30, 1993,
issued to MMC/GATX Partnership No. I.
49.
<PAGE> 50
10.42(3) Common Stock Warrant dated October 5, 1993, issued to
Meier Mitchell & Co.
10.43(5)(10) Joint Research and Product Development Agreement,
dated May 24, 1995, by and between Ono Pharmaceutical
Co., Ltd. and Registrant.
10.43(a)(9) Amendment Agreement, dated December 4, 1996, to the
Joint Research and Product Development Agreement by
and between Ono Pharmaceutical Co., Ltd. and
Registrant.
10.44(5)(10) License Agreement, dated June 8, 1995, by and between
Bayer AG and Registrant.
10.45(6)(10) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.46(6) Loan Agreement, dated October 20, 1995, by and
between The Daiwa Bank, Limited and Registrant.
10.47(6) Assignment and Assumption, dated February 2, 1996,
between The Daiwa Bank, Limited and The Sumitomo
Bank, Limited.
10.48(7) Letter dated March 29, 1996 from The Sumitomo Bank,
Limited to the Registrant amending the Loan Agreement
dated October 20, 1995.
10.49(8)(10) Subscription Agreement dated July 25, 1996 by and
between the Registrant and Fletcher International
Limited.
10.50(9)(10) Joint Research and Product Development and
Commercialization Agreement dated September 23, 1996,
by and between Lipha, Lyonnaise Industrielle
Pharmaceutique s.a. and the Registrant.
10.51(9)(10) Stock Purchase Agreement dated September 23, 1996,
by and between Lipha, Lyonnaise Industrielle
Pharmaceutique s.a. and the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included under the caption
"Signatures").
27 Financial Data Schedule.
- ----------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was
declared effective January 26, 1993.
(2) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
(3) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(4) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(5) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(6) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as
amended.
(10) Confidential treatment has been granted with respect to certain
portions of these agreements.
(11) Management contract or compensation plan.
50.
<PAGE> 51
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, as amended,
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 12, 1997
Shaman Pharmaceuticals, Inc.
By: /s/ Lisa A. Conte
------------------------------------------
Lisa A. Conte
President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report, as amended, has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lisa A. Conte President, Chief Executive Officer, March 12, 1997
- -------------------------------- Chief Financial Officer and Director
Lisa A. Conte (principal executive and financial officer)
* Director March 12, 1997
- --------------------------------
Herbert H. McDade, Jr.
* Chairman of the Board March 12, 1997
- --------------------------------
G. Kirk Raab
</TABLE>
51.
<PAGE> 52
<TABLE>
<S> <C> <C>
* Director March 12, 1997
- --------------------------------
M. David Titus
* Director March 12, 1997
- --------------------------------
John A. Young
*By: /s/ LISA A. CONTE
___________________________
Lisa A. Conte
as attorney-in-fact
</TABLE>
52.
<PAGE> 53
EXHIBIT INDEX
Exhibit No. Description
3.1(5) Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on October 1, 1993.
3.2(8) Amended and Restated By-Laws, as amended May 23,
1996.
4.1(8) Certificate of Designation of Preferences of Series
A Preferred Stock of the Registrant, as filed with
the Delaware Secretary of State on July 27, 1996.
10.1(1)(11) 1990 Stock Option Plan, as amended.
10.2(1)(11) 1992 Stock Option Plan.
10.3(1)(11) 401(k) Plan.
10.4(1)(11) Form of Stock Purchase Agreement.
10.5(1)(11) Form of Stock Option Agreement.
10.6(1) Form of Confidentiality Agreement-Employees &
Consultants.
10.7(1) Form of Confidentiality Agreement-Strategic Planning.
10.8(1) Form of Indemnification Agreement.
10.9(1)(11) Form of Employment Agreement.
10.10(1) Form of Agreement with Scientific Strategy Team
Members.
10.11(1) Form of Proprietary Information and Inventions
Agreement-Employees.
10.12(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
<PAGE> 54
10.13(1) Letter Agreements dated December 8, 1989, May 30,
1990, June 21, 1990, August 24, 1990 and July 22,
1991, between Shaman and National Institute of
Allergy and Infectious Diseases.
10.14(1)(10) License Agreement dated February 8, 1990, between
Shaman and Dr. Michael Tempesta.
10.15(1)(11) Stock Purchase Agreement dated June 15, 1990, between
Shaman and Lisa A. Conte.
10.16(1) Master Equipment Lease Agreement dated September 28,
1990, between Shaman and MMC/GATX Partnership No. I,
with related schedules.
10.17(1) Series B Preferred Stock Warrants dated September 28,
1990 and June 28, 1991, issued to MMC/GATX
Partnership No. I.
10.18(1)(10) License Agreement dated December 5, 1990, as amended
January 19, 1992, between Shaman and the University
of British Columbia.
10.19(1) Master Equipment Lease Agreement dated December 26,
1990, between Shaman and Lease Management Services,
Inc.
10.20(1) Master Equipment Lease Agreement dated April 22,
1991, between Shaman and Industrial Way I Limited
Partnership.
10.21(1)(10) Contract Services Agreement dated May 23, 1991,
February 1, 1992, February 4, 1992, September 23,
1992 and October 30, 1992, between Shaman and New
Drug Services, Inc.
10.22(1)(10) License Agreement dated September 25, 1991, between
Shaman and Inverni della Beffa SpA.
10.23(1)(10) Manufacturing Agreement dated September 25, 1991
between Shaman and Indena SpA.
10.24(1)(10) Master Clinical Trial Agreement dated September 30,
1991 between Shaman and International Drug
Registration, Inc.
10.25(1) Series D Preferred Stock Warrant dated February 3,
1992, issued to MMC/GATX Partnership No. I.
10.26(1)(10) Supply Agreement dated June 1, 1992.
10.27(1)(10) Supply Agreement dated June 1, 1992.
10.28(2) Screening Agreement dated August 31, 1992, as amended
June 2, 1993, between Shaman and Merck Research
Laboratories.
10.29(1)(10) Agreement dated October 16, 1992, between Shaman and
International Medical Technical Consultants, Inc.
10.30(4)(10) Research Agreement dated October 21, 1992, as amended
April 27, 1994, between Shaman and Eli Lilly and
Company.
10.31(1) Registration Rights Agreement dated October 22, 1992,
as amended December 14, 1992, between Shaman and
certain holders of preferred stock of Shaman.
10.32(1) Industrial Lease Agreement dated January 1, 1993,
between Shaman and Grand/Roebling Investment Company.
10.33(1) Three Party Agreement dated as of January 1, 1993,
by and among Berlex Laboratories, Inc., Shaman and
Grand/Roebling Investment Company.
10.34(2)(10) Letter Agreement dated March 1, 1993, between Shaman
and Lederle-Praxis Biologicals, Division of American
Cynamide Corporation.
10.35(3) Contract Service Agreements dated May 10, 1993,
between Shaman and R.C. Benson & Sons, Inc.
10.36(3)(10) Clinical Trial Agreement dated July 21, 1993, between
Shaman and the University of Rochester.
10.37(3)(10) Letter Agreement dated August 24, 1993, between
Shaman and University of Michigan.
10.38(3)(10) Laboratory Services Agreement dated September 1,
1993, between Shaman and Hazelton Washington, Inc.
10.39(3) Loan and Security Agreement dated September 27, 1993,
between Shaman and Household Commercial of
California.
10.40(3) Master Equipment Lease Agreement dated September 30,
1993, between Shaman and MMC/GATX Partnership No. I,
with related schedules.
10.41(3) Common Stock Warrant dated September 30, 1993,
issued to MMC/GATX Partnership No. I.
<PAGE> 55
10.42(3) Common Stock Warrant dated October 5, 1993, issued to
Meier Mitchell & Co.
10.43(5)(10) Joint Research and Product Development Agreement,
dated May 24, 1995, by and between Ono Pharmaceutical
Co., Ltd. and Registrant.
10.43(a)(9) Amendment Agreement, dated December 4, 1996, to the
Joint Research and Product Development Agreement by
and between Ono Pharmaceutical Co., Ltd. and
Registrant.
10.44(5)(10) License Agreement, dated June 8, 1995, by and between
Bayer AG and Registrant.
10.45(6)(10) Development Agreement, dated January 11, 1996, by and
between Abbott Laboratories and Registrant.
10.46(6) Loan Agreement, dated October 20, 1995, by and
between The Daiwa Bank, Limited and Registrant.
10.47(6) Assignment and Assumption, dated February 2, 1996,
between The Daiwa Bank, Limited and The Sumitomo
Bank, Limited.
10.48(7) Letter dated March 29, 1996 from The Sumitomo Bank,
Limited to the Registrant amending the Loan Agreement
dated October 20, 1995.
10.49(8)(10) Subscription Agreement dated July 25, 1996 by and
between the Registrant and Fletcher International
Limited.
10.50(9)(10) Joint Research and Product Development and
Commercialization Agreement dated September 23, 1996,
by and between Lipha, Lyonnaise Industrielle
Pharmaceutique s.a. and the Registrant.
10.51(9)(10) Stock Purchase Agreement dated September 23, 1996,
by and between Lipha, Lyonnaise Industrielle
Pharmaceutique s.a. and the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included under the caption
"Signatures").
27 Financial Data Schedule.
- ----------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was
declared effective January 26, 1993.
(2) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
(3) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(4) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(5) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(6) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(8) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as
amended.
(10) Confidential treatment has been granted with respect to certain
portions of these agreements.
(11) Management contract or compensation plan.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-66450, 33-93938 and No. 333-09169) pertaining to the 1992 Stock
Option Plan of Shaman Pharmaceuticals, Inc. of our report dated January 20,
1997, with respect to the financial statements of Shaman Pharmaceuticals, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 11, 1997
53
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