UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $.001 par value, outstanding as of October 31,
1997: 17,740,943
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SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
September 30, 1997
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PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1997 and 3
December 31, 1996
Condensed Statements of Operations for the three and 4
nine months ended September 30, 1997 and September
30, 1996
Condensed Statements of Cash Flows for the nine 5
months ended September 30, 1997 and September 30,
1996
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults in Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
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September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,084,671 $ 16,051,251
Short-term investments 6,537,678 481,677
Prepaid expenses and other current assets 839,106 938,872
----------- -----------
Total current assets 28,461,455 17,471,800
Property and equipment, net 4,163,093 ` 4,776,925
Other assets 708,067 128,080
----------- -----------
Total assets $ 33,332,615 $ 22,376,805
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,141,275 $ 1,445,616
Accrued clinical trial costs 458,355 1,233,014
Accrued professional fees 623,385 689,216
Accrued compensation 344,976 332,738
Advances - contract research 1,633,605 1,883,605
Current installments of long-term obligations 2,361,561 2,246,795
----------- -----------
Total current liabilities 6,563,157 7,830,984
Long-term obligations,
excluding current installments 4,941,878 2,568,931
Senior convertible notes 10,400,000 -
Stockholders' equity:
Preferred stock 400 400
Common stock 17,741 13,921
Additional paid-in capital 116,674,771 94,604,455
Deferred expenses and other adjustments (733,280) (20,250)
Accumulated deficit (104,532,052) (82,621,636)
------------ ------------
Total stockholders' equity 11,427,580 11,976,890
------------ ------------
Total liabilities and stockholders' equity $ 33,332,615 $ 22,376,805
============ ============
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NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
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Revenue from collaborative
agreements $ 875,000 $ 531,251 $ 2,625,000 $ 1,531,252
Operating expenses:
Research and development 5,525,369 4,754,440 17,078,567 14,225,376
General and administrative 1,207,184 862,477 3,916,530 2,634,951
---------- ---------- ---------- ----------
Total operating expenses 6,732,553 5,616,917 20,995,097 16,860,327
--------- --------- ---------- ----------
Loss from operations (5,857,553) (5,085,666) (18,370,097) (15,329,075)
Other income(expense):
Interest income 327,047 246,159 881,787 833,917
Interest expense (cash) (449,583) (145,876) (729,966) (471,884)
Interest expense(non-cash) (3,692,140) - (3,692,140) -
---------- ---------- ---------- ----------
Net loss $(9,672,229)$(4,985,383) $(21,910,416)$(14,967,042)
=========== =========== ============ ============
Net loss per share $ (0.55) $ (0.37) $ (1.31) $ (1.12)
=========== =========== ============ ===========
Shares used in calculation
of net loss per share 17,555,000 13,430,000 16,758,000 13,381,000
=========== =========== =========== ===========
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See notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
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Operating activities:
Net loss $(21,910,416) $(14,967,042)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,523,267 1,847,177
Interest expense on issuance of sr. convertible notes 3,692,140 -
Changes in operating assets and liabilities:
Prepaid expenses, other current assets and
other assets 388,766 (177,749)
Accounts payable, accrued expenses and
contract research advances (1,382,593) 1,950,989
------------ ------------
Net cash used in operating activities (17,688,836) (11,346,625)
------------ ------------
Investing activities:
Purchases of short and long-term investments (7,039,457) (10,951,386)
Sales of available-for-sale investments - 1,494,000
Maturities of available-for-sale investments 986,097 24,300,934
Capital expenditures (699,151) (684,468)
------------ ------------
Net cash provided (used in) by investing activities (6,752,511) 14,159,080
Financing activities:
Proceeds from issuance of preferred stock, net - 3,060,160
Proceeds from issuance of common stock, net 17,456,041 3,337,156
Proceeds from long-term obligations 5,000,000 600,000
Proceeds from issuance of sr. convertible notes, net 9,531,013 -
Principal payments on long-term obligations (2,512,287) (1,166,369)
------------ ------------
Net cash provided by (used in) financing activities 29,474,767 5,830,947
Net increase (decrease) in cash and cash equivalents 5,033,420 8,643,402
Cash and cash equivalents at beginning of period 16,051,251 9,210,123
------------ ------------
Cash and cash equivalents at end of period $21,084,671 $17,853,525
============ ============
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See notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Basis of Presentation
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company")
discovers and develops novel pharmaceutical products for major
human diseases by isolating active compounds from tropical
plants. The Company has four compounds in clinical
development: Provir, an oral product for the treatment of
watery diarrhea; Virend, a topical antiviral for the treatment
of herpes; nikkomycin Z, an oral antifungal for the treatment
of endemic mycoses; and SP-13401, an oral product for the
treatment of Type II diabetes. Shaman also has an active Type
II diabetes research program which serves 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 accompanying unaudited condensed financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and in
accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations
for the interim periods shown herein are not necessarily
indicative of operating results for the entire year.
This unaudited financial data should be read in
conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form
10-K/A, for the fiscal year ended December 31, 1996, filed
with the Securities and Exchange Commission on March 13, 1997.
2. Senior Convertible Notes
In June 1997, the Company privately issued $10.4 million
of senior convertible notes ("The 1997 Private Placement").
The notes mature in August 2000 and bear interest at a rate of
5.5% per annum. Interest on the notes may be paid in Common
Stock or cash at the Company's option. Initially, the notes
are convertible into Common Stock of the Company at 100% of
the low trading price during a designated time period prior to
conversion provided that the conversion price will not be less
than $5.50 per share. Starting in November 1997, the notes
are convertible into Common Stock of the Company at a 10%
discount from the low trading price during a designated time
period prior to the
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conversion. The Company filed a registration statement with
the SEC for the resale of shares issued upon conversion of
these notes, which registration statement was declared
effective on August 29, 1997. Of the notes issued, $400,000
were issued to the placement agent as part of the placement
fee. The Company paid the placement agent an additional
$300,000 in cash. The placement fees and other offering costs
have been capitalized in other assets as deferred issuance
costs and are being amortized to interest expense over the
life of the notes. The net proceeds totaled approximately
$9.5 million after the placement agent's fees and other
offering expenses.
The SEC has promulgated requirements for charges to be
recognized by companies which issue certain convertible
notes. In connection with the issuance of the Notes, the
Company recognized a non-cash charge in the amount of
$3,692,000 in the third quarter ended September 30, 1997.
This amount was calculated as required by the SEC.
3. Loss per Share
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which is
required to be adopted on December 31, 1997. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The
Company does not anticipate any material impact on the
calculated loss per share because common stock equivalents are
currently excluded from the computation as their effect is
antidilutive.
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SHAMAN PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Shaman Pharmaceuticals, Inc. ("Shaman" or the "Company")
discovers and develops novel pharmaceutical products for major
human diseases by isolating active compounds from tropical
plants. The Company has four compounds in clinical
development: Provir, an oral product for the treatment of
watery diarrhea; Virend, a topical antiviral for the treatment
of herpes; nikkomycin Z, an oral antifungal for the treatment
of endemic mycoses; and SP-13401, an oral product for the
treatment of Type II diabetes. Shaman also has an active Type
II diabetes research program which serves 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 September 30, 1997, was approximately $
104.5 million. Shaman expects to continue to incur
substantial and increasing losses over the next several years,
due primarily to the expense of preclinical studies, clinical
trials and its ongoing 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 and public equity financings, loans
and debt financings, and collaborative agreements with
pharmaceutical companies and, to a lesser extent, through
equipment and leasehold improvement lease financings.
Results of Operations
Nine Months Ended September 30, 1997 and September 30, 1996
The Company recorded collaborative revenues of $875,000
and $531,000 for the quarters ended September 30, 1997 and
1996, respectively, and $2,625,000 and $1,531,000 for the nine
months ended September 30, 1997 and 1996, respectively.
Revenues for the quarter and nine months ended September 30,
1997 and for the prior year comparable periods, resulted from
the Company's on-going research funding from Ono and research
funding from Shamam's collaboration with Lipha/Merck. The
increases in the 1997 periods are primarily due to the fact
that the Lipha Joint Venture was not entered into until
September 1996 and is therefore not included in the full 1996
periods. 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.
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Research and development expenses were $5,525,000 and
$4,754,000 for the quarters ended September 30, 1997 and 1996,
respectively, and $17,079,000 and $14,225,000 for the nine
months ended September 30, 1997 and 1996, respectively. These
increases reflect additional funding for the clinical
development of Provir, partially offset by a decrease in
expenditures for the Company's Virend and nikkomycin Z
development programs. While at a reduced level, funding for
Virend and nikkomycin Z remains at a level that the Company
believes will enable it to meet its target for completion of
clinical trials for these compounds. Research and development
expenses are likely to increase in the fourth quarter of 1997
and fiscal year 1998 as products continue through development
and the Company maintains an active diabetes research program.
General and administrative expenses were $1,207,000 and
$862,000 for the quarters ended September 30, 1997 and 1996,
respectively, and $3,917,000 and $2,635,000 for the nine
months ended September 30, 1997 and 1996, respectively. These
increases are primarily attributable to increases in
compensation and marketing research related to late stage
clinical products as well as, for the nine months ended
September 30, 1997, additional legal expenses related to
certain disputes related to the Company's intellectual
property rights. The Company's general and administrative
expenses are likely to increase in the fourth quarter of 1997
and fiscal year 1998 as a result of continued market research
and business development activities as well as increased legal
expenses related to the Company's intellectual property rights.
Interest income was $327,000 and $246,000 for the
quarters ended September 30, 1997 and 1996, respectively, and
$882,000 and $834,000 for the nine months ended September 30,
1997 and 1996, respectively. Interest income increased for
the quarter ended September 30, 1997, compared to the
comparable 1996 period, due to higher average cash and
investment balances from the senior convertible notes financing
in August 1997. Interest income increased for the nine months
ended September 30, 1997, compared with the nine months ended
September 30, 1996, due to higher average cash balances during
the 1997 period. Interest expense was $4,150,000 and $146,000
for the quarters ended September 30, 1997 and 1996,
respectively, and $4,430,000 and $472,000 for the nine months
ended September 30, 1997 and 1996, respectively. Interest
expense increased for the quarter ended September 30, 1997,
compared with the quarter ended September 30, 1996, due to the
Company's secured debt financing in May 1997 and the senior
convertible notes issued in August 1997, including a non-cash
interest charge of $3.7 million. Interest expense increased
for the nine months ended September 30, 1997, compared with
the nine months ended September 30, 1996 due to higher average
debt balances and the non-cash interest charge of $3.7 million.
Liquidity and Capital Resources
As of September 30, 1997, the Company's cash, cash
equivalents, and short-term investments totaled $27.6 million,
compared with $16.5 million at December 31, 1996, with an
average investment maturity of five months and three months,
respectively. The Company invests excess cash according to its
investment policy that provides guidelines with regard to
liquidity, type of investment, credit rating and concentration
limits.
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In June 1997, the Company privately issued $10.4 million
of senior convertible notes ("The 1997 Private Placement").
See Note 2 to Notes to Condensed Financial Statements.
In May 1997, the Company obtained a $5.0 million,
36-month term loan to pay off pre-existing debt, finance
capital asset acquisitions and finance continued research and
clinical development of the Company's existing product
candidates. The loan carries an interest rate of 14.58% and is
payable in equal monthly installments. The lender was granted
ten-year warrants to purchase 200,000 shares of the Company's
Common Stock at $6.25 per share.
In April 1997, the Company sold 1,600,000 shares of
Common Stock at $4.97 per share in a registered direct public
offering, marketed solely by the Company, which yielded gross
proceeds of $7.95 million. The net proceeds of approximately
$7.75 million from this offering will be used for the
continued research and clinical development of the Company's
existing product candidates.
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 net proceeds of approximately
$8.11 million from this offering will be used for the
continued research and clinical development of the Company's
existing product candidates.
In September 1996, the Company entered into a five-year
collaborative agreement with Lipha/Merck to jointly develop
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. 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
preclinical, 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 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. 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
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exercises this right, the investor has the option to increase
the shares purchased by up to an aggregate of 527,500 shares.
Pursuant to the terms of the 1997 Private Placement, the
Company may not exercise this right until late February 1998.
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 believes that its cash,
cash equivalents and investment balances of approximately
$27.6 million at September 30, 1997, 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 1997 Private Placement (see Note 2 to Notes to
Condensed Financial Statements) will be adequate to fund
current operations, including payments due under long-term
obligations, through the end 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.
Future Outlook
In addition to historical information, this report contains
predictions, estimates, and other forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Actual results could differ
materially from any future performance suggested in this
report as a result of the risk factors set forth below under
the caption "Risk Factors" and elsewhere in this report and in
the Company's Annual Report on Form 10-K/A, for the fiscal
year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 13, 1997.
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Risk Factors
History of Operating Losses; Products Still in
Development; Future Profitability Uncertain. Shaman's
potential products are in research and development. 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 these product development efforts will be
successful, that required regulatory approvals will be
obtained, or that the products, if developed and introduced,
will be successfully marketed or 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. There can be no assurance that any of the
Company's research and development efforts on potential
products, including Provir, Virend, nikkomycin Z and SP-13401
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 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.
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
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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.
Additional Financing Requirements and Uncertain Access to
Capital Markets. The Company has significant long-term
capital requirements and, in the event Shaman receives
regulatory approval for any of its products, it will incur
substantial expenditures to develop manufacturing, sales and
marketing capabilities. In addition, Note Purchase Agreements
entered into by the Company in connection with the 1997
Private Placement, provide that under certain circumstances,
the Company would be required to redeem all or some portion of
the $10.4 million principal due thereunder, which redemption
could significantly accelerate the Company's cash expenditures
and capital requirements beyond the levels currently
anticipated. The Company will need to raise additional funds
through additional equity or debt financings, collaborative
arrangements with corporate partners or from other sources. No
assurance can be given that any additional funds will be
available to the Company on acceptable terms, if at all. The
Company may seek to raise funds through private or public
issuances of equity securities at any time or times as it
deems market conditions to be favorable.
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 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
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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.
No Assurance of FDA Approval for Marketing; Government
Regulation. The Company's activities with respect to
research, preclinical development, clinical trials,
manufacturing and marketing in the United States and other
countries are subject to extensive regulation by numerous
governmental authorities including, but not limited to, the
Food and Drug Administration ("FDA"). The process of obtaining
FDA and other required regulatory approvals is lengthy and
requires the expenditure of substantial resources. Success
cannot be assured. In order to obtain FDA approval, the
Company must perform clinical tests to demonstrate to the
FDA's satisfaction that a product is safe and effective for
its intended uses. The Company may encounter problems in
clinical trials which could cause the FDA or the Company to
delay or suspend clinical trials. Further, the Company must
demonstrate that it is capable of manufacturing bulk product
to the relevant standards. There can be no assurance that any
of the Company's future studies will demonstrate their
intended result, that the Company's products will not have
undesirable side effects that may prevent or limit their
commercial use, or that the FDA will otherwise approve any of
the Company's products.
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. While Shaman believes it has good relationships
with the local governments and suppliers of these plant
materials, the Company does not have formal agreements in
place with all of its suppliers.
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. 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.
Rapid Technological Change and Substantial Competition.
The pharmaceutical industry is subject to rapid and
substantial technological change. Technological competition
from pharmaceutical companies, 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
-14-
<PAGE>
technologies noncompetitive or that the Company will be able
to keep pace with technological developments.
Uncertainty Regarding Patents and Proprietary Rights.
The Company's success depends in part on its ability to obtain
patent protection for its products and to preserve its trade
secrets. No assurance can be given that the Company's patent
applications will be approved, that any patents will provide
the Company with competitive advantages for its products or
that they will not be successfully challenged or circumvented
by the Company's competitors. In addition, patents do not
necessarily prevent others from developing competitive
products. The Company has not conducted an exhaustive patent
search and no assurance can be given that patents do not exist
or could not be filed which would have an adverse effect on
the Company's ability to market its products.
Uncertainty of Health Care Reimbursement and Reform.
Shaman's ability to successfully commercialize its products
may depend in part on the extent to which reimbursement for
the cost of such products and related treatments will be
available from government health administration authorities,
private health insurers and other organizations. Significant
uncertainty exists as to the pricing, availability of
distribution channels and reimbursement status of newly
approved healthcare products.
Possible Volatility of Stock Price. 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.
Environmental Regulation. In connection with its
research and development activities and its periodic
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.
-15-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Ms.Jacqueline Cossmon's, Vice President, Corporate Communications
employment was terminated November 7, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997.
</TABLE>
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 13, 1997
Shaman Pharmaceuticals, Inc.
(Registrant)
/s/ Lisa A. Conte
___________________________________
Lisa A. Conte
President, Chief Executive Officer
and Chief Financial Officer
(on behalf of the Company and as principal
executive officer & principal financial and
accounting officer)
-17-
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