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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $.001 par value, outstanding
as of October 30, 1998: 22,693,653
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SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
September 30, 1998
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<S> <C> <C> <C> <C> <C> <C>
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 3
1998 (unaudited) and December 31, 1997
Condensed Statements of Operations for the three
and nine months ended September 30, 1998 and
September 30, 1997 (unaudited) 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and September 30,
1997 (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosure About
Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults in Senior Securities 25
Item 4. Submission of Matters to a Vote of Security 25
Holders
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
<S> <C> <C> <C> <C> <C> <C>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,502,747 $ 11,340,702
Short-term investments 1,014,058 10,079,943
Amounts due from related parties 457,589 192,551
Prepaid expenses and other current assets 838,314 553,507
------------ ------------
Total current assets 11,812,708 22,166,703
Property and equipment, net 3,194,873 3,972,140
Other assets 610,724 613,657
------------ ------------
Total assets $ 15,618,305 $ 26,752,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and other accrued expenses $ 1,724,991 $ 925,701
Accrued clinical trial costs 3,258,241 1,689,659
Accrued professional fees 1,025,723 718,625
Accrued compensation 343,441 368,272
Advances - contract research 343,750 1,133,605
Current installments of long-term obligations 2,571,953 2,783,976
------------ ------------
Total current liabilities 9,268,099 7,619,838
Long-term obligations, excluding current
installments 3,296,406 4,017,979
Senior convertible notes 5,412,475 9,967,044
Stockholders' equity (net capital deficiency):
Preferred stock 515 400
Common stock 22,562 17,796
Additional paid-in capital 137,885,228 117,164,524
Deferred compensation and other adjustments (58,371) (124,910)
Accumulated deficit (140,208,609) (111,910,171)
------------ ------------
Total stockholders' equity (net capital deficiency) (2,358,675) 5,147,639
------------ ------------
Total liabilities and stockholders' equity
(net capital deficiency) $ 15,618,305 $ 26,752,500
============ ============
</TABLE>
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to condensed financial statements.
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SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
Revenue from collaborative
agreements $ 560,000 $ 875,000 $ 2,284,855 $ 2,625,000
Operating expenses:
Research and
development 8,537,221 5,525,369 24,277,208 17,078,567
General and
administrative 1,589,399 1,207,184 4,273,012 3,916,530
----------- ----------- ----------- -----------
Total operating expenses 10,126,620 6,732,553 28,550,220 20,995,097
----------- ----------- ----------- -----------
Loss from operations (9,566,620) (5,857,553) (26,265,365) (18,370,097)
Other income (expense):
Interest income 87,606 327,047 444,484 881,787
Interest expense (cash) (488,280) (449,583) (1,798,921) (729,966)
Interest expense (non-cash) - (3,692,140) - (3,692,140)
---------- ----------- ---------- ----------
Net loss $ (9,967,294) $(9,672,229) $(27,619,802) $(21,910,416)
Deemed dividend on
Preferred Stock (678,636) - (678,636) -
---------- ----------- ---------- ----------
Net loss applicable to
Common Stockholders (10,645,930) (9,672,229) (28,298,438) (21,910,416)
Net loss per share $ (0.55) $ (0.55) $ (1.54) $ (1.31)
=========== =========== =========== ===========
Shares used in calculation
of net loss per share 19,255,000 17,555,000 18,414,000 16,758,000
=========== =========== =========== ===========
</TABLE>
See Notes to condensed financial statements.
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<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30,
--------------------------------
1998 1997
------------- ------------
Operating activities:
Net loss $ (28,298,438) $ (21,910,416)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 985,697 1,312,983
Amortization of warrants and deferred
equity costs 492,588 210,284
Deemed dividend on Preferred Stock 678,636 -
Other compensation 72,145 -
Interest expense on issuance of
sr. convertible notes - 3,692,140
Loss on disposal of fixed assets 19,834 -
Payment of interest in Common Stock 569,229 -
Changes in operating assets and liabilities:
Prepaid expenses, current assets and other assets
other assets (546,912) 388,766
Accounts payable, accrued expenses and
contract research advances 1,860,282 (1,382,593)
------------- ------------
Net cash used in operating activities (24,166,939) (17,688,836)
------------- ------------
Investing activities:
Purchases of available-for-sale investments (1,999,049) (7,039,457)
Maturities of available-for-sale investments 5,058,784 986,097
Sales of available-for-sale investments 6,030,149 -
Capital expenditures (228,264) (699,151)
------------- ------------
Net cash provided by (used in) investing
activities 8,861,620 (6,752,511)
------------- ------------
Financing activities:
Proceeds from issuance of Series C
Convertible Preferred Stock, net 13,052,260 -
Proceeds from issuance of Common Stock, net 1,493,601 17,456,041
Principal payments on long-term obligations (1,589,620) (2,512,287)
Proceeds from issuance of senior convertible notes - 9,531,013
Proceeds from issuance of long-term obligations - 5,000,000
Proceeds from asset financing arrangements 511,123 -
------------- ------------
Net cash provided by (used in) financing
activities 13,467,364 29,474,767
------------- ------------
Net increase (decrease) in cash and cash
equivalents (1,837,955) 5,033,420
Cash and cash equivalents at beginning of period 11,340,702 16,051,251
------------- ------------
Cash and cash equivalents at end of period $ 9,502,747 $ 21,084,671
============= ============
</TABLE>
See Notes to condensed financial statements.
5
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SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Basis of Presentation
Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. We believe that by
focusing on drugs extracted from plants with a history of medicinal use, our
drug discovery efforts may be quicker and more likely to lead to safe and
effective pharmaceuticals. We have three product candidates in clinical
development: SP-303/Provir, an oral product for the treatment of diarrhea in
people with AIDS and other watery diarrhea indications; nikkomycin Z, an oral
antifungal for the treatment of systemic fungal infections; and SP-134101, an
oral product for the treatment of Type II diabetes. We maintain an active Type
II diabetes research program that serves as the basis for our collaboration
with Lipha S.A., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck").
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year.
This unaudited financial data should be read in conjunction with the
audited financial statements and notes thereto included in the our Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on May 28, 1998.
2. Series C Convertible Preferred Stock Financing
In August 1998, we filed a registration statement with the Securities and
Exchange Commission (the "SEC") for a public offering of a minimum of 140,000
("the Minimum") and a maximum of 200,000 (the "Maximum") shares of Series C
Convertible Preferred Stock for gross proceeds of a minimum of $14.0 million and
a maximum of $20.0 million (the "1998 Public Offering"). Each share of Series C
Preferred Stock shall be entitled to receive cumulative dividends paid
semi-annually in each year to the holders of record of such shares as follows:
(i) a stock-on-stock dividend of $10.00 per annum, paid in arrears, in shares of
Common Stock (valued at 85% of the average closing price of the Common Stock for
the 10 trading day period ending three trading days prior to the date on which
the dividend is paid); plus (ii) a cash amount equaling 0.00005% of the
Company's United States net sales, if any, for the preceding two calendar
quarters of its SP-303/Provir product for the treatment of diarrhea (equivalent
to a 7% royalty for the Minimum and a 10% royalty for the Maximum of the
aggregate shares of Series C Preferred Stock) less $5.00 (the value of the
semi-annual stock dividend). If, under Delaware law, the Company is unable to
pay the cash amount of the Dividends, then the cash portion of the Dividends
shall be payable in shares of Common Stock (valued at 85% of the average closing
price of the Common Stock for the 10 day trading period ending three trading
days prior to the date on which the dividend is paid). Each share shall be
convertible at any time commencing on the date on which any shares of Series C
Preferred Stock were first issued and continuing for a period of 30 days
thereafter, and again commencing 12 months after such initial issuance date at
the election of each holder, and automatically on the sixth anniversary of the
initial issuance date into greater of (i) 16.6667 shares of Common Stock or (ii)
such number of shares of Common Stock as equals $100 divided by 85% of the
average closing price
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of the Common Stock reported by the Nasdaq Stock Market for the 10 trading day
period ending three trading days prior to the date of conversion. The
registration statement was declared effective by the SEC on August 14, 1998.
In September 1998 and October 1998, we completed two separate closings of
the Series C Convertible Preferred Stock offering for aggregate gross proceed of
$14.1 million. Of the 200,000 maximum shares registered, an aggregate of 140,880
shares were sold to the investors and the remaining 59,120 shares were
deregistered. During the initial 30 day conversion period, a total of 24,922
shares of the Series C Convertible Preferred Stock were converted into an
aggregate of 1,861,550 shares of Common Stock at a conversion price of $1.33875
per share.
In connection with the issuance of the Series C Convertible Preferred
Stock, we recognized a non-cash charge in the amount of $679,000 in the third
quarter ended September 30, 1998.
3. Series B Convertible Preferred Stock Financing
In June 1998, we entered into Stock Purchase Agreements (the "Stock
Agreements") with certain of our stockholders (the "Buyers") pursuant to which
we acquired the right to sell to the Buyers, subject to certain conditions and
in one or two tranches closing no later than February 28, 1999, up to an
aggregate of 7,000 shares of Series B Custom Convertible Preferred Stock (the
"Series B Preferred Stock") for an aggregate purchase price of $7,000,000. The
Stock Agreements became effective on June 22, 1998 (the "Effective Date") but
were terminated upon the closing of the Series C Convertible Preferred Stock
Financing. See Note 2 - Series C Convertible Preferred Stock.
As consideration for entering into the Stock Agreements, we issued to the
Buyers on the Effective Date warrants to purchase an aggregate of 350,000 shares
of Common Stock (the "June Warrants"). The June Warrants are exercisable for a
period of five years after the Effective Date at an exercise price per share
equal to 115% of the average trading price of Common Stock during specified
measurement periods. The June Warrants provide for adjustment of the number of
shares of Common Stock issuable upon exercise thereof, including upon the
distribution of certain dividends, or upon the division or combination of the
our Common Stock. We filed a registration statement with the SEC for the resale
of shares issued upon exercise of the June Warrants, which registration
statement was declared effective on July 10, 1998. We have attributed a value of
$1.5 million to these June Warrants.
4. Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. At September 30, 1998 and 1997, outstanding
stock options and other stock equivalents are antidilutive.
5. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components including unrealized gains or losses on
available-for-sale securities; however, adoption in the quarter and nine months
ended September 30, 1998 did not have a material impact on our net income or
stockholders' equity.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes
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standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for the financial statements for
fiscal years beginning after December 15, 1997, and therefore we will adopt the
new requirements retroactively in 1998. Management has not completed its review
of Statement 131, but does not anticipate that the adoption of this statement
will have a significant effect on our reported segments and disclosures.
8
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SHAMAN PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Resutls
of Operations
Overview
Shaman discovers and develops novel pharmaceutical products for the
treatment of human diseases and their symptoms through the isolation and
optimization of active compounds found in tropical plants. We believe that by
focusing on drugs extracted from plants with a history of medicinal use, our
drug discovery efforts may be quicker and more likely to lead to safe and
effective pharmaceuticals. We have three product candidates in clinical
development: SP-303/Provir, an oral product for the treatment of diarrhea in
people with AIDS and other watery diarrhea indications; nikkomycin Z, an oral
antifungal for the treatment of systemic fungal infections; and SP-134101, an
oral product for the treatment of Type II diabetes. We maintain an active Type
II diabetes research program that serves as the basis for our collaboration
with Lipha S.A., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany
("Lipha/Merck").
We began operations in March 1990. To date, we have not sold any products.
However, patient enrollment in a Phase III human clinical trial has been
completed for our lead compound, SP-303/Provir for the treatment of diarrhea in
people with AIDS. If the results of this trial are positive, we expect to file
an NDA for commercial approval of SP-303/Provir in early 1999. With a fast track
designation from the FDA for the indication of diarrhea in people with AIDS, we
are preparing for potential product launch in the second half of 1999 and intend
to retain U.S. marketing rights to this product. Our accumulated deficit at
September 30, 1998, was approximately $140.2 million. Since inception, we have
financed our research, development and administrative activities through various
private and public equity financings, loan and debt financings, collaborative
agreements with pharmaceutical companies and, to a lesser extent, through
equipment and leasehold improvement lease financings.
Results of Operations for the Nine Months Ended September 30, 1998 and 1997
For the third quarter and nine months ended September 30, 1998, revenue was
$560,000 and $2.3 million, respectively, as compared to $875,000 and $2.6
million for the corresponding periods in 1997. Revenue for the quarter ended
September 30, 1998 resulted from research fees paid in conjunction with Shaman's
on-going partnership with Lipha/Merck. Revenue for the nine months ended
September 30, 1998 also resulted from our partnership with Lipha/Merck and our
partnership with Ono Pharmaceutical Co. Ltd. of Osaka, Japan ("Ono"), which
expired in May 1998. Revenue for the quarter and nine months ended September 30,
1997 also resulted from our partnerships with Lipha/Merck and Ono. We expect
that revenues from collaborative agreements will continue to fluctuate in the
future as development of our various compounds proceeds and new product
candidates are partnered for development and commercialization. In May 1998, our
collaborative agreement with Ono (the "Agreement") expired and the ongoing
research and development funding has terminated under the original terms and the
Agreement was not renewed. Under the Agreement, Ono will continue to provide
milestone payments and royalties to Shaman for any resulting products they
develop from compounds identified during the three-year term of the Agreement.
Research and development expenses were $8.5 million and $24.3 million for
the third quarter and nine months ended September 30, 1998, respectively,
compared to $5.5 million and $17.1 million for the corresponding periods in
1997. These increases were primarily attributable to the progress in our
clinical development program, particularly in the continuation of a Phase III
human clinical trial for SP-303/Provir for the treatment of diarrhea in people
with AIDS, which was only partially offset by a reduction of costs associated
with our diabetes program. Research and development expenses are expected to
increase in 1998 as we continue our clinical development activities with respect
to SP-303/Provir and other product candidates.
General and administrative expenses were $1.6 million and $4.3 million for
the third quarter and nine months ended September 30, 1998, compared with $1.2
million and $3.9 million for the
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third quarter and nine months of 1997. The increase in the quarter ended
September 30, 1998 compared to the quarter ended September 30, 1997 was
primarily attributable to compensation, costs associated with commercial
development activities and an increase in legal dispute costs associated with
our on-going litigation. The increase for the nine months ended September 30,
1998 compared to the same period in 1997 was primarily attributable to
compensation and costs associated with commercial development activities,
partially offset by a reduction in legal dispute costs. Our expanded research
and clinical activities are not expected to require commensurate increases in
general and administrative support and expense.
Interest income was $88,000 and $444,000 for the third quarter and nine
months ended September 30, 1998, compared with $327,000 and $882,000 for the
quarter and nine months of 1997. Interest income decreased for the quarter and
nine months ended September 30, 1998, compared with the quarter and nine months
ended September 30, 1997, due to lower average cash and investment balances as
we continue to fund our operations.
Interest expense was $488,000 and $1.8 million for the third quarter and
nine months ended September 30, 1998, compared with $4.1 million and $4.4
million for the quarter and nine months of 1997. Interest expense decreased for
the quarter and nine months ended September 30, 1998, compared with the quarter
and nine months ended September 30, 1997 primarily due to a non-cash interest
charge of $3.7 million in conjunction with our issuance of senior convertible
notes in August 1997. In 1998, the Company incurred a non-cash interest expense
of $374,000 in connection with certain debt financings closed in 1997.
Liquidity and Capital Resources
As of September 30, 1998, our cash, cash equivalents and short-term
investments totaled approximately $10.5 million, compared with $21.4 million at
December 31, 1997. We invest excess cash according to our investment policy
which provides guidelines with regard to liquidity, type of investment, credit
ratings and concentration limits.
On October 16, 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible Preferred Stock for aggregate gross
proceeds of $14.1 million. (See Notes to Condensed Financial Statements -- Note
2 - Series C Convertible Preferred Stock Financing.)
In June 1997, we issued $10.4 million in 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 our option. The notes are convertible into our Common Stock at a 10%
discount from the low trading price during a designated time period prior to the
conversion. We filed a registration statement with the SEC for the resale of
shares issued upon conversion of these notes, which registration statement was
declared effective on August 29, 1997. As of October 31, 1998, a total principal
amount of $5.1 million of the notes had been converted into an aggregate of
2,080,804 shares of Common Stock.
In March 1998, the Company and the purchasers of the notes entered into an
Amendment Agreement (the "Amendment Agreement"), in order to prevent conversion
of the notes at a price that would be unduly dilutive to our existing
stockholders. As consideration for entering into the Amendment Agreement, we
issued to the purchasers of the notes warrants to purchase an aggregate of
137,500 shares of Common Stock (the "March Warrants"). The March Warrants are
exercisable through March 18, 2001 at an exercise price of $7.50 per share. We
filed a registration statement with the SEC for the resale of shares issued upon
exercise of the March Warrants, which registration statement was declared
effective on July 10, 1998.
In May 1997, we obtained a $5.0 million loan, which amortizes over 36
months, to pay off pre-existing debt, finance capital asset acquisitions and
finance continued research and clinical development of our existing product
candidates. The loan carries an annual interest rate of 14.58% and is payable in
equal monthly installments over the term of the loan. The lender was granted
10-year warrants to purchase 200,000 shares of our Common Stock at an exercise
price of $6.25 per share. We have attributed a value of $648,000 to these
warrants. This amount has been
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recorded as a discount on the related debt and is being amortized as interest
expense over the term of the loan.
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs. Upon
signing the collaboration, we received an annual research fee o f $1.5 million
which was amortized to revenue over 12 months, as work was performed. We 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 our Common Stock at the time of purchase. In exchange for development and
marketing rights in all countries except Japan, South Korea, and Taiwan (which
are covered under an earlier agreement between Shaman and Ono), Lipha/Merck will
provide up to $9.0 million in research payments and up to $10.5 million in
equity investments priced at a 20% premium to a multi-day volume weighted
average price of our Common Stock at the time of purchase. The agreement also
provides for additional preclinical and clinical milestone payments to us in
excess of $10.0 million per compound for each antihyperglycemic drug
developed and commercialized. Lipha/Merck will bear all pre-clinical, clinical,
regulator and other development expenses associated with the compounds
selected under the agreement. In addition, as products are commercialized,
we will receive royalties on all product sales outside the United States and up
to 50% of the profits (if we exercise our 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 us from sales of
products developed pursuant to the agreement. As of October 31, 1998, we have
received an aggregate of $9.4 million under the agreement. A balance of $10.1
million in committed capital remains under the agreement.
In July 1996, we closed a private placement (the "1996 Private Placement")
pursuant to Regulation S under the Securities Act of 1933, as amended, with one
investor in which we received gross proceeds of $3.3 million for the sale of
400,000 shares of Series A Preferred Stock and for the issuance of a six-year
warrant to purchase 550,000 shares of our Common Stock at an exercise price of
$10.18 per share. The Series A Preferred Stock does not carry a dividend
obligation and will convert into Common Stock no later than July 23, 1999 at a
price per share between $6.00 and $8.15, depending on the market value of our
Common Stock during the period prior to conversion. Holders of Series A
Preferred Stock are entitled to a liquidation preference of $8.15 per share. In
addition to the sale of Series A Preferred Stock and the warrant, we have the
right, from time to time during the period beginning January 1997 and ending
July 2000, subject to certain conditions, including continued listing of our
Common Stock on any national exchange, to sell up to 1,200,000 additional shares
of Common Stock to the investor at a formula price of 100% or 101% of a
multi-day average of our Common Stock price at the time of sale. If we exercise
this right, the investor has the option to increase the number of shares it
purchases by up to an aggregate of 527,500 shares.
Over the next year and potentially longer depending on clinical results
and regulatory reviews, we expect to incur substantial additional costs relating
to the continued preclinical and clinical testing of our products, regulatory
activities and research and development programs. We anticipate that our cash,
cash equivalents and short-term investment balances, the collaborative revenue
committed by Lipha/Merck, Lipha/Merck's commitment to purchase additional
equity, the proceeds of the 1998 Public Offering and Shaman's additional rights
to sell Common Stock under the 1996 Private Placement will be adequate to fund
operations through the filing of an NDA on SP-303/Provir for the fast track
indication of diarrhea in people with AIDS, and at least through the first
quarter of 1999. Milestone payments which may be received by us from Ono and
Lipha/Merck would extend our capacity to finance our operations beyond that
time. However, there can be no assurance that milestones will be achieved, nor
that additional funding, if needed, will be available on reasonable terms, or at
all. As of September 30, 1998, we had cash, cash equivalent, and short-term
investment balances of approximately $10.5 million. In September 1998, our
expenses were approximately $2.5 million. We expect this expenditure rate to
continue through December 31, 1998. Accordingly, unless we are successful in
obtaining additional funds, our current cash resources will be substantially
used by the first quarter 1999. We will require substantial additional funds to
conduct the development and testing of our potential products and to manufacture
and market any products that may be developed in the future.
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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 we are
still a relatively young company and have not yet completed a full cycle of
development, regulatory approval and commercialization for any of our product
candidates. The clinical and regulatory processes for testing and approval of
our products are complex, lengthy, uncertain and costly, and we cannot be sure
of the timing of clinical or regulatory processes or commercialization of any of
our product candidates. These development processes require substantial amounts
of funding, and we are dependent on corporate partners and the equity markets to
finance such efforts. Where access to funding is difficult, our stockholders may
face significant dilution, and our ability to proceed with our programs and
plans may be significantly and adversely affected. Actions and advances by
competitors may also significantly affect our prospects, as well as the
existence of patents held by such competitors or potential competitors. In
addition, there can be no assurance that any plants we use in our products will
be indefinitely available or that any compounds derived from the plant material
will be protected by our proprietary rights.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, cost
estimates for upgrades for those systems not in compliance total approximately
$200,000. After the assessment phase is completed, we will have to purchase,
install and test the upgrades to ensure they meet internal year 2000 compliance.
We expect to complete our internal year 2000 readiness program in the third
quarter of 1999. We have evaluated our financial and accounting systems and
concluded that they are not and will not be materially affected by Year 2000
problem. We are in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. To date, we are not aware of any
external agent with a Year 2000 issue that would materially impact our results
of operations, liquidity, or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolutions to process in a timely fashion
could materially impact us.
We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program. We plan to evaluate the status of
completion in the first quarter 1999 and determine whether such a plan is
necessary.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Not Applicable.
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Risk Factors
This Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties such as statements regarding
our plans, objectives, expectations and intentions. Our actual results could
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in our Annual Report on Form
10-K/A for fiscal year ended December 31, 1997, filed with the Securities and
Exchange Commission on May 28, 1998.
Risks Regarding Failure to Continue to Meet Nasdaq Listing Requirements
On June 10, 1998, we received correspondence from The Nasdaq National
Market ("Nasdaq") stating that we no longer met the $4,000,000 net tangible
asset requirement for continued listing on Nasdaq. As of September 30, 1998, we
had a net capital deficiency of ($2,359,000). We believe we comply with all
other listing requirements. On September 3, 1998, we attended a formal hearing
and presented a plan to a Nasdaq Listing Qualifications Panel (the "Panel") for
achieving and maintaining long-term compliance with Nasdaq listing requirements.
On October 14, 1998, we requested a waiver of Marketplace Rule 4310(H) to enable
us to exchange existing debt for equity, which will assist us in achieving
long-term compliance with the Nasdaq listing requirements. This rule would have
required us to seek stockholder approval of this exchange because we would be
selling greater than 20% of the common stock outstanding prior to the issuance.
On October 26, 1998, the Panel granted this waiver and stated we would continue
to be listed on Nasdaq providing:
- we must make a public filing with the SEC and Nasdaq on or
before December 15, 1998 showing an October 31, 199 balance
sheet with (i) pro forma adjustments for any significant
transactions or events occurring on or before the filing date
and (ii) evidencing a minimum of $8.0 million in net tangible
assets; and
- we must make a public filing with the SEC and Nasdaq on or
before February 1, 1999 showing a November 30, 1998 balance
sheet with (i) pro forma adjustments for any significant
transactions or events occurring on or before the filing
date and (ii) evidencing a minimum of $14.0 million in net
tangible assets.
We must also issue a press release describing the exchange of debt to
equity transaction and announce grant of the financial viability exception and
the associated audit committee determination. We must also notify each
stockholder with the same information as contained in the press release. The
press release must be issued and the letter must be mailed at least 10 days
prior to the closing of the transaction.
Without additional financing, the receipt of license fees or milestone
payments from corporate partnerships or the conversion of outstanding
convertible notes, we will not satisfy the Nasdaq listing requirements, and our
Common Stock will no longer be traded on Nasdaq. If that happens, we would need
to seek listing on the Nasdaq Over-the-Counter Bulletin Board. If our Common
Stock were traded on the Nasdaq Over-the-Counter Bulletin Board, our Common
Stock may be subject to reduced liquidity and reduced analyst coverage, our
ability to raise capital in the future may be inhibited and our business,
financial condition and results of operations could be materially adversely
affected. In addition, if our Common Stock is listed on the Nasdaq
Over-the-Counter Bulletin Board rather than on a national exchange, we will be
in default under various agreements with certain of our investors and
stockholders. Under one such agreement, we will lose rights to sell up to an
aggregate of 1,200,000 shares of our common stock. Under other agreements, we
will be required to redeem all or some portion of the principal balance
remaining under certain convertible promissory notes ($5.4 million at September
30, 1998). Redemption of these notes could significantly accelerate our cash
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expenditures and capital requirements beyond the levels currently anticipated
and would materially and adversely affect our ability to conduct our business.
See "-- Continuing Future Capital Needs; Uncertainty of Sources of Additional
Funding."
Continuing Future Capital Needs; Uncertainty of Sources of Additional Funding
As of September 30, 1998, we had cash, cash equivalents and short-term
investment balances of approximately $10.5 million. In September 1998, our
expenses were approximately $2.5 million. We expect this expenditure rate to
continue through December 31, 1998. Accordingly, unless we are successful in
obtaining additional funds, our current cash resources will be substantially
used by the first quarter 1999. We will require substantial additional funds to
conduct the development and testing of our potential products and to manufacture
and market any products that may be developed in the future. Our future capital
requirements will depend on numerous factors, including:
- the progress of our 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 our existing collaborative and licensing relationships,
- our ability to establish additional collaborative relationships for
the manufacture and marketing of our potential products, and
- our need to purchase additional capital equipment.
In addition, we entered into senior convertible note purchase agreements
in connection with a private placement which provide that under certain
circumstances we would be required to redeem all or some portion of the
principal balance remaining ($5.4 million at September 30, 1998). Redemption of
these notes could significantly accelerate our cash expenditures and capital
requirements beyond the levels currently anticipated and would materially and
adversely affect our ability to conduct our business.
Shaman will need to obtain additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources to
continue our research and development activities, fund operating expenses and
pursue regulatory approvals for our products in development. If additional funds
are raised by issuing equity securities, current stockholders may experience
significant dilution. If additional funds are obtained through collaborative
agreements, we may be required to relinquish rights to certain of our
technologies, product candidates, products or marketing territories that we
would otherwise seek to develop or commercialize ourselves. Additional financing
sources may not be available on acceptable terms if at all. If adequate funds
are not available, significant reductions in spending and the delay, scaling
back or elimination of one or more of our research, discovery or development
programs may be necessary which would have a material adverse effect on our
business, financial condition and results of operations.
RISKS DUE TO THE EARLY STAGE OF DEVELOPMENT OF OUR PRODUCTS AND TECHNOLOGICAL
UNCERTAINTY
We have not yet completed the development of any products. Many of our
products still require significant additional clinical testing and investment of
capital before they can be commercialized. Products for therapeutic use in human
health care must be evaluated in extensive human clinical trials to determine
their safety and efficacy. These clinical trials are part of a lengthy process
necessary to obtain government approval. Our SP-303/Provir, nikkomycin Z and
SP-134101 products are each in clinical development. However, 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.
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Clinical trials may be terminated at any time for many reasons, including
toxicity or adverse event reporting. It is possible that Shaman's products may
not be successfully developed, enter into human clinical trials, prove to be
safe and effective in clinical trials, meet applicable regulatory standards,
obtain required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs, be successfully marketed or may encounter
problems in clinical trials that will cause us to delay or suspend product
development. Failure of any of our products to be commercialized could have a
material adverse effect on our business, financial condition and results of
operations.
A significant portion of our assets are dedicated to the development and
commercialization of SP-303/ Provir. Should we be unable to commercialize
SP-303/Provir there could be a material adverse effect on our 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 our fiscal years since then. We incurred an operating loss of
approximately $27.6 million for the nine months ended September 30, 1998 and an
additional non-cash expense of $679,000 incurred in connection with the Series C
Convertible Preferred Stock offering. The nine-month loss was due to our
incurring research and development expenses of approximately $24.3 million,
general and administrative expenses of approximately $4.3 million and interest
expense net of interest income of approximately $1.4 million. These expenses
were partially offset by revenues in the first three quarters of 1998 of
approximately $2.3 million. As of September 30, 1998, our accumulated deficit
was approximately $140.2 million. We have not generated any product sales to
date. All of our products and compounds are still in the research and
development stage, which requires substantial expenditures. In order to generate
revenues or profits, we must, alone or with other third parties, successfully
develop, test, obtain regulatory approval for and market our potential products.
It is possible that our product development efforts may not be successful, and
that we may not obtain required regulatory approvals. Even if our products are
developed and introduced, they may not be successfully marketed or may not
achieve market acceptance.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
Our 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 for us to move additional
product candidates into clinical testing or to complete clinical testing of
current product candidates. Our research and development efforts on these or
other potential products, including SP-303/Provir, nikkomycin Z and SP-134101,
may not lead to development of products that are shown to be safe and effective
in clinical trials.
In addition, our products may not:
- 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.
Our products may also prove to have undesirable or unintended side effects
that may prevent or limit their commercial use. At any stage of this complex
product development process, products that appeared promising in preclinical
studies or Phase I and Phase II clinical trials may not demonstrate efficacy in
larger-scale, Phase III clinical trials and will therefore not receive
regulatory approvals. Accordingly, any of our product development programs may
be curtailed, redirected, suspended or eliminated at any time.
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UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
We have conducted, and plan to continue conducting, extensive and costly
clinical trials to assess the safety and efficacy of our potential products. The
rate of completion of these 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 our clinical
trial protocols, existence of competing protocols, size of patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Any delay in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on our ability to complete clinical trials
in a timely fashion.
In addition, any failure to meet our testing and development schedules
could have a material adverse effect on our business, financial condition and
results of operations. Our 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,
- difficulties in the acquisition of sufficient supplies of clinical
trial materials, or
- failure to show efficacy in clinical trials or adverse events
occurring during the clinical trials.
Completion of testing, studies and trials may take several years, and the
length of time varies substantially with the type, complexity, novelty and
intended use of each of our products. 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 our business, financial condition and results of operations.
Not all patients enrolled in our clinical trials will respond to our
product candidates. Human clinical trials often experience setbacks. Failure to
comply with the FDA regulations applicable to such testing can result in delay,
suspension or cancellation of such testing, and/or refusal by the FDA to accept
the results of such testing. In addition, the FDA or Shaman may suspend clinical
trials at any time if one or the other concludes that any patients in a trial
are 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
our clinical trials to demonstrate safety or efficacy in humans could cause the
delay, suspension or termination of any product program, including
SP-303/Provir, nikkomycin Z and SP-134101, and could have a material adverse
effect on our business, financial condition and results of operations.
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS
The research and development efforts in our diabetes program and, to a
lesser extent, in our other programs, have been dependent upon arrangements with
Lipha/Merck and Ono and their funding for research and development efforts
thereunder. Funding from Ono has concluded and therefore in the future we must
rely on continued funding from Lipha/Merck or milestone payments from products
developed by either Ono or Lipha/Merck, if any. We may have to seek new
collaborations to provide further funding for our diabetes program. We cannot
assure our current or future stockholders that we can obtain further funding or
that we may ultimately derive any significant revenues from any of our
collaborations.
We expect to seek additional collaborative agreements to commercialize our
other product candidates and will, in particular, need to rely on such third
party arrangements to commercialize our products, including SP-303/Provir,
outside the United States. We may not be successful in
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negotiating or entering into such agreements on terms favorable to us or at all,
and any agreement, if entered into, may be unsuccessful. A failure to
successfully enter into such agreements and sell products thereunder would have
a material adverse effect on our business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION
Technological changes in the pharmaceutical industry are rapid and
substantial, and 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 us. Developments by others may render our products or
technologies noncompetitive, and we may not be able to keep pace with
technological developments. Competitors have, and continue to develop,
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 the products we may
develop. These competing products may be more effective and less costly than the
products we may develop. In addition, other forms of medical treatment may offer
competition to our products. The development of competing compounds could have a
material adverse effect on our business, financial condition and results of
operations.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
All new drugs, including our products under development, are subject to
extensive and rigorous regulation by the federal government, principally the
FDA, as well as comparable agencies in state and local jurisdictions and in
foreign countries. These authorities, particularly the FDA, impose substantial
requirements upon preclinical and clinical testing, manufacturing and marketing
of pharmaceutical products. The steps required before a drug may be approved for
marketing in the United States generally include:
- preclinical laboratory and animal tests,
- the submission to the FDA of an IND for human clinical testing,
- adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug,
- submission to the FDA of an NDA, and
- 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, or GMP.
There are many costly and time-consuming procedures required for approval
of a new drug, including lengthy and detailed preclinical and clinical testing
and validation of manufacturing and quality control processes. Several years may
be needed to satisfy these requirements, and this time period may vary
substantially depending on the type, complexity and novelty of the product
candidate. Government regulation can delay or prevent marketing of potential
products for a considerable period of time and impose costly procedures upon our
activities. Moreover, the FDA or any other regulatory agency may not grant
approval for any products developed or not grant approval on a timely basis, and
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.
Even if regulatory approval of a product is granted, limitations may be imposed
on the indicated uses for a product. Further, later discovery of previously
unknown problems with a product may result in added 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 our
business, financial condition and results of operations.
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The FDA also requires that a drug manufacturer (either Shaman or one of
our third-party manufacturers) must have quality controls and manufacturing
procedures which conform to GMP, a protocol which must be followed at all times.
The FDA strictly enforces GMP requirements through periodic unannounced
inspections. The FDA could determine that Shaman's or any third-party
manufacturer's facilities and manufacturing procedures do not conform to GMP
requirements. Additionally, we or our third-party manufacturers must pass a
pre-approval inspection of their manufacturing facilities by the FDA even before
we can obtain marketing approval. Failure to comply with applicable regulatory
requirements may result in penalties such as restrictions on the marketing of
our products or withdrawal of a product from the market.
The FDA's policies may change and additional government regulations and
policies may be instituted, both of which could prevent or delay regulatory
approval of our potential products. Moreover, increased attention to the
containment of health care costs in the United States could result in new
government regulations that could have a material adverse effect on our
business. We are unable to predict the likelihood of adverse governmental
regulation that could arise from future legislative or administrative action,
either in the United States or abroad.
We will also be subject to a variety of foreign regulations governing
clinical trials, registration and sales of our products. Regardless of whether
FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process varies from country to country and the
time needed to secure approval may be longer or shorter than that required for
FDA approval. Delays in the approval process or the failure to obtain such
foreign approvals would have a material adverse effect on our business,
financial condition and results of operations.
DEPENDENCE ON SOURCES OF SUPPLY
We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. To the extent
that our products cannot be economically synthesized or otherwise produced, we
will continue to be dependent upon a supply of raw plant material. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply 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 our 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 our current or future products are derived, such destruction could
have a material adverse effect on our business, financial condition and results
of operations.
LIMITED MANUFACTURING AND MARKETING EXPERIENCE AND CAPACITY
We currently produce products only in quantities necessary for clinical
trials and do not have the staff or facilities necessary to manufacture products
in commercial quantities. Therefore, we must rely on collaborative partners or
third-party manufacturing facilities. Should we or our third party manufacturers
encounter delays or difficulties in producing, packaging and distributing our
finished products, clinical trials, regulatory filings, market introduction and
subsequent sales of our products could be adversely affected.
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Contract manufacturers must conform to GMP regulations strictly enforced by
the FDA on an ongoing basis through their facilities inspection programs.
Contract manufacturing facilities must pass a pre-approval inspection of their
manufacturing facilities before the FDA will approve an NDA. Certain material
manufacturing changes that occur after approval are also subject to FDA review
and clearance or approval. FDA or other regulatory agencies may not approve the
process or the facilities by which any of our products may be manufactured. Our
dependence on third parties for the manufacture of our products may adversely
affect our ability to develop and deliver products on a timely and competitive
basis. If we are required to manufacture our own products we will be required to
build or purchase a manufacturing facility, will be subject to the regulatory
requirements described above, to similar risks regarding delays or difficulties
encountered in manufacturing any such products and will require substantial
additional capital. We may be unable to manufacture any such products
successfully or in a cost-effective manner.
We currently have no sales staff and may be unable to successfully
establish a marketing and sales force. If we are unable to successfully
establish a complete marketing and sales force, we may not achieve a successful
product entry into the marketplace. Such failure would have a material adverse
effect on our business, financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS; CURRENT LEGAL PROCEEDINGS
REGARDING PATENTS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability to obtain and maintain
patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. Moreover, others may have filed patent
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to competitive products or processes. Our patent
applications may not be approved, we may be unable to develop additional
proprietary products that are patentable, issued patents may not provide us with
adequate protection for our inventions or they may be challenged by others, or
the patents of others may impair our ability to commercialize our products. The
patent position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office, or PTO, or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents. There is considerable variation between countries as to the level of
protection afforded under patents and other proprietary rights. Such differences
may expose us to differing risks of commercialization in each foreign country in
which we may sell products. Others may independently develop similar products,
duplicate any of our products or design around any of our patents.
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 our business. Some of
these technologies, applications or patents may conflict with our 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 our specific
proanthocyanidin polymer composition (which covers the active pharmaceutical
ingredient in SP-303/Provir), to Leon Cariel and the Institut des Substances
Vegetales. The effective filing date of these patents is prior to the effective
filing date of our foreign pending patent application in Europe. Certain of the
foreign patents have been granted in jurisdictions where examination is not
rigorous. Shaman has instituted an Opposition in the European Patent Office
against granted European Patent No. 472531 owned by Leon Cariel and Institut des
Substances Vegetales. We believe that the granted claims are invalid and intend
to vigorously prosecute the Opposition.
We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. There can be no
assurance that Daniel Jean, Leon Cariel and the Institut des Substances
Vegetales will not assert against us claims relating to this patent. In that
event, we may not 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
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could limit the scope of the patents, if any, that we may be able to obtain or
result in the denial of our patent applications in Europe or elsewhere.
In the United States, the PTO has rendered judgment in an Interference
declared between our issued patent covering our specific proanthocyanidin
polymer composition and certain claims of 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. Judgment was awarded to Shaman on July
14, 1997. Since the period for appeal has passed, this judgment is now final.
Additionally, in connection with the Interference proceeding, we have had
an opportunity to review the claims and file history of the Daniel Jean and Leon
Cariel patent application which, under U.S. patent law, are kept confidential.
One broad claim, in particular, of the Daniel Jean and Leon Cariel patent
application, which was not involved in the Interference proceeding and which has
been indicated to be allowable, covers a large variety of proanthocyanidin
polymers. We believe that this broad claim is subject to attack as invalid in
view of prior art. Based on knowledge of our specific proanthocyanidin polymer
composition, we believe that the manufacture, use or sale of our specific
proanthocyanidin polymer composition would not constitute infringement of this
broad claim, once it issues. However, if Daniel Jean or Leon Cariel bring an
action for infringement of this claim, we may not prevail in defending our
beliefs. In addition, if patents that cover our activities have been or are
issued to other companies, we may be unable to obtain licenses to these patents
at a reasonable cost, or at all, or be able to develop or obtain alternative
technology.
If we cannot obtain such licenses, we could encounter delays or be
precluded from introducing our products to the market. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to us or to protect our trade secrets or know-how. Additional
interference proceedings may be declared or become necessary to determine issues
of invention; such litigation and/or interference proceedings could result in
substantial cost to and diversion of effort by us and may have a material
adverse effect on our business, financial condition and results of operations.
In addition, our efforts may be unsuccessful.
Our competitive position is also dependent upon unpatented trade secrets.
All of our employees have entered into confidentiality agreements. However,
others may independently develop substantially equivalent information and
techniques or otherwise gain access to our trade secrets, our trade secrets may
be disclosed or we may be unable to effectively protect our rights to unpatented
trade secrets. To the extent that we or our consultants or research
collaborators use intellectual property owned by others in their work for us,
disputes also may arise as to the rights in related or resulting know-how and
inventions.
Patent applications in the United States are generally maintained in
secrecy until patents are issued. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, we cannot be certain that we were the first to discover
compositions covered by our pending patent applications or the first to file
patent applications on such compositions. Our patent applications may not result
in issued patents and issued patents may not afford comprehensive protection
against potential infringement.
We currently have 10 U.S. patent applications pending with the U.S. PTO
and one international application filed via PCT, but we do not know whether any
of these applications will result in the issuance of any patents or, if any
patents are issued, whether any issued patent will provide significant
proprietary protection or will be circumvented or invalidated. During the course
of patent prosecution, patent applications are evaluated for, among other
things, utility, novelty, non-obviousness and enablement. The PTO may require
that the claims of an initially filed patent application be amended if it is
determined that the scope of the claims includes subject matter that is not
useful, novel, non-obvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights. In cases where
one party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may provoke an
interference proceeding in the PTO or such a proceeding may be declared by the
PTO. In general, in
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an interference proceeding, the PTO would review the competing patents and/or
patent applications to determine the validity of the competing claims, including
but not limited to determining priority of invention. Any such determination
would be subject to appeal in the appropriate U.S. federal courts.
We may not obtain additional patents and the 19 U.S. patents issued to
date may not provide substantial protection or be of commercial benefit to us.
The issuance of a patent is not conclusive as to its validity or enforceability,
nor does it provide the patent holder with freedom to operate without infringing
the patent rights of others. A patent could be challenged by litigation and, if
the outcome of such litigation were adverse to the patent holder, competitors
could be free to use the subject matter covered by the patent, or the patent
holder may license the technology to others in settlement of such litigation.
The invalidation of patents owned by or licensed to us or non-approval of
pending patent applications could create increased competition, with potential
adverse effects on us and our business prospects. In addition, applications of
our technology may infringe on patents or proprietary rights of others and
licenses that might be required as a result of such infringement for our
processes or products may be unavailable on commercially reasonable terms, if at
all.
We cannot predict whether we or our competitors' patent applications will
result in valid patents being issued. Litigation, which could result in
substantial cost to us, may also be necessary to enforce our patent and
proprietary rights and/or to determine the scope and validity of others'
proprietary rights. We may, on a voluntary or involuntary basis, participate in
interference proceedings that may in the future be declared by the PTO, which
could result in substantial costs to us. The outcome of any such litigation or
interference proceedings may not be favorable to us, we may be unable to obtain
licenses to required technology or we may be unable to license such technology
at a reasonable cost.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, cost
estimates for upgrades for those systems not in compliance total approximately
$200,000. After the assessment phase is completed, we will have to purchase,
install and test the upgrades to ensure they meet internal year 2000 compliance.
We expect to complete our internal year 2000 readiness program in the third
quarter of 1999. We have evaluated our financial and accounting systems and
concluded that they are not and will not be materially affected by Year 2000
problem. We are in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. To date, we are not aware of any
external agent with a Year 2000 issue that would materially impact our results
of operations, liquidity, or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolutions to process in a timely fashion
could materially impact us.
We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program. We plan to evaluate the status of
completion in the first quarter 1999 and determine whether such a plan is
necessary.
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UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The continuing efforts of governmental and third party payers to contain
or reduce the costs of health care through various means may materially
adversely affect us. For example, in certain foreign markets, the pricing or
profitability of health care products is subject to government control. In the
United States, there have been, and we expect there will continue to be, a
number of federal and state proposals to implement similar government control.
Although we 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 our ability to raise capital or form
collaborations, and therefore the adoption of such proposals or reforms could
have a material adverse effect on our business, financial condition and results
of operations.
In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of reimbursement from third
party payers, such as government and private insurance plans. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. Even if we succeed in bringing one or more
products to the market, reimbursement from third-party payers may be unavailable
or may be insufficient to allow us to sell our products on a competitive or
profitable basis.
POSSIBLE VOLATILITY OF STOCK PRICE
From time to time, the stock market experiences significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies or industries. Thus, the market price of our 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 us or our competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by us or our 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 our Common Stock.
ENVIRONMENTAL REGULATION
In connection with our research and development activities and
manufacturing of clinical trial materials, Shaman 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 we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, we cannot eliminate the risk of accidental contamination or injury
from these materials completely. In the event of such an accident, we could be
held liable for any resulting damages. Although we have secured insurance to
mitigate such expense, any such liability could exceed our insurance coverage
and resources. Such liability could have a material adverse effect on our
business, financial condition and results of operations.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of our Certificate of Incorporation and Bylaws make it
more difficult for a third party to acquire, and discourage a third party from
attempting to acquire, control of Shaman. These provisions could limit the price
that certain investors might be willing to pay in the future for
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shares of the Common Stock. At October 30, 1998, our Board of Directors had the
authority to issue up to 459,120 additional 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. Issuance of Preferred Stock with voting rights, while
providing desirable flexibility for possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of the outstanding voting stock. We may in the future issue shares of Preferred
Stock with voting rights. Certain provisions of Delaware law applicable to us
could also delay or make more difficult a merger, tender offer or proxy contest
involving Shaman, including Section 203 of the Delaware General Corporation Law,
which prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
Our business exposes us 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. Our present product liability insurance
coverage, which includes coverage for acts by third parties, including
manufacturers of our product candidates, may not be adequate under all
circumstances. Existing coverage will not be adequate as we further develop our
products, and we do not know that adequate insurance coverage against all
potential claims will be available in sufficient amounts or at a reasonable
cost. Some of our development and manufacturing agreements contain insurance and
indemnification provisions pursuant to which we could be held accountable for
certain occurrences. Such liability could have a material adverse effect on our
business, financial condition and results of operations.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our 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. Our Bylaws provide that we will
indemnify our officers, directors, employees and agents to the full extent
permitted by the general corporation law of Delaware. We have entered into
indemnification agreements with our 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 us, 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. We currently maintain
directors' and officers' insurance.
Section 145 of the Delaware Law provides that a corporation may indemnify
a director, officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred in connection with such action
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of our 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.
DILUTION
The biopharmaceutical industry is capital intensive. In this regard we
have entered into a number of financings, many of which have included securities
that are convertible into shares of
23
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Common Stock. Dilution may occur upon the exercise of outstanding options and
warrants and upon conversion of senior convertible notes, the Series A Preferred
Stock and the Series C Preferred Stock. Stockholders may also suffer additional
dilution if we exercise our right to sell additional shares of our Common Stock
to Fletcher International Limited, pursuant to our agreements with such
investor.
DEPENDENCE ON KEY PERSONNEL
Our ability to maintain our competitive position depends in part upon the
continued contributions of our key senior management. Our future performance
also depends on our ability to attract and retain qualified management and
scientific personnel. Competition for such personnel is intense, and we may be
unable 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 the necessary
expertise could have a material adverse effect on our business, financial
condition and results of operations.
24
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
In August 1998, we filed a registration statement with the
Securities and Exchange Commission (the "SEC") for a public offering
of a minimum of 140,000 ("the Minimum") and a maximum of 200,000 (the
"Maximum") shares of Series C Convertible Preferred Stock for gross
proceeds of a minimum of $14.0 million and a maximum of $20.0 million
(the "1998 Public Offering"). Each share of Series C Preferred Stock
shall be entitled to receive cumulative dividends paid semi-annually
in each year to the holders of record of such shares as follows: (i) a
stock-on-stock dividend of $10.00 per annum, paid in arrears, in
shares of Common Stock (valued at 85% of the average closing price of
the Common Stock for the 10 trading day period ending three trading
days prior to the date on which the dividend is paid); plus (ii) a
cash amount equaling 0.00005% of the Company's United States net
sales, if any, for the preceding two calendar quarters of its
SP-303/Provir product for the treatment of diarrhea (equivalent to a
7% royalty for the Minimum and a 10% royalty for the Maximum of the
aggregate shares of Series C Preferred Stock) less $5.00 (the value of
the semi-annual stock dividend). If, under Delaware law, the Company
is unable to pay the cash amount of the Dividends, then the cash
portion of the Dividends shall be payable in shares of Common Stock
(valued at 85% of the average closing price of the Common Stock for
the 10 day trading period ending three trading days prior to the date
on which the dividend is paid). Each share shall be convertible at any
time commencing on the date on which any shares of Series C Preferred
Stock were first issued and continuing for a period of 30 days
thereafter, and again commencing 12 months after such initial issuance
date at the election of each holder, and automatically on the sixth
anniversary of the initial issuance date into greater of (i) 16.6667
shares of Common Stock or (ii) such number of shares of Common Stock
as equals $100 divided by 85% of the average closing price of the
Common Stock reported by the Nasdaq Stock Market for the 10 trading
day period ending three trading days prior to the date of conversion.
The registration statement was declared effective by the SEC on August
14, 1998.
In September 1998 and October 1998, we completed two separate
closings of the Series C Convertible Preferred Stock offering for
aggregate gross proceed of $14.1 million. Of the 200,000 maximum
shares registered, an aggregate of 140,880 shares were sold to the
investors and the remaining 59,120 shares were deregistered. During
the initial 30 day conversion period, a total of 24,922 shares of the
Series C Convertible Preferred Stock were converted into an aggregate
of 1,861,550 shares of Common Stock at a conversion price of $1.33875
per share.
In connection with the issuance of the Series C Convertible
Preferred Stock, we recognized a non-cash charge in the amount of
$679,000 in the third quarter ended September 30, 1998.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
The Company accepted the resignation of Atul Khandwala, Senior Vice
President, Development and Regulatory Officer, effective October
1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27.1 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter ended
September 30, 1998.
25
<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, 1998
Shaman Pharmaceuticals, Inc.
(Registrant)
/s/ Lisa A. Conte
-------------------------------------
Lisa A. Conte
President and Chief Executive Officer
(principal executive officer)
/s/ Stephanie C. Diaz
-------------------------------------
Stephanie C. Diaz
Chief Financial Officer
(principal financial and accounting officer)
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