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| TRMS > SEC Filings for TRMS > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Executive Summary
Trimeris is a biopharmaceutical company primarily engaged in the commercialization of a class of antiviral drug treatments called fusion inhibitors. Fusion inhibitors prevent viral fusion, a complex process by which viruses attach to, penetrate and infect host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, like the Human Immunodeficiency Virus ("HIV"), our first commercial product, T-20, and our development-stage compound, TRI-1144, offer a novel mechanism of action to treat and potentially prevent the transmission of HIV.
Trimeris has a worldwide agreement (the "Development and License Agreement") with F. Hoffmann-La Roche Ltd., or "Roche," to develop and market T-20, marketed as FUZEON, whose generic name is enfuvirtide. FUZEON is manufactured and distributed by Roche through Roche's sales and distribution network throughout the world in countries where regulatory approval has been received. The Company shares gross profits equally from the sale of FUZEON in the United States and Canada with Roche, and receives a royalty based on net sales of FUZEON outside the United States and Canada.
For the second quarter of 2009, the Company recorded net income of $1.3 million, or $0.06 per share, compared to $590,000, or $0.03 per share, in the second quarter of 2008. This increase was primarily driven by decreased operating expenses offset, in part, by decreased FUZEON® sales and an increase in tax expense.
2009 will continue to be a year of transition for Trimeris:
• Strategic Alternatives - We will continue to evaluate strategic alternatives to enhance shareholder value.
• Profitability - We will focus our efforts on maintaining profitability based on FUZEON sales.
• Competition - The market introduction of three new oral agents in late 2007 early 2008 significantly impacted FUZEON sales in 2008 and into 2009. We have noticed that weekly prescription trends (a leading indicator for FUZEON sales) for FUZEON have begun to stabilize. Future FUZEON prescription trends will depend on the further refinement of the optimal regimen for treatment experienced patients and the role of FUZEON in these regimens.
• FUZEON Sales and Marketing - We believe that our selling and marketing expense in 2009 will be lower than 2008, as we have exercised again our right under our Development and License Agreement with Roche that prevents Roche from adopting a budget for the marketing of FUZEON above a certain limit without our consent.
• Novartis Litigation - We, along with our partner Roche, are working with outside counsel to come to the most expedient and satisfactory resolution of the patent infringement suit brought by Novartis Vaccines and Diagnostics, Inc.
• Cost of Goods Sold - We have exercised our rights under the Development and License Agreement and entered into negotiations with Roche related to excess capacity charges and cost of goods sold variances for 2008 and overall cost of goods sold for 2009. Accordingly, we cannot accurately determine if cost of goods sold as a percentage of net sales will increase, decrease or remain the same in the future. Although active discussions are on-going, we cannot be certain when a final resolution will be reached. Depending upon the resolution of our negotiations with Roche, cost of goods sold may increase or decrease in future periods.
On May 18, 2009, we entered into an agreement releasing us from $8.3 million in future lease obligations relating to our former corporate office and research facility. The total consideration paid by the Company for release of the future lease obligations was $1.8 million of which $1.3 million was expensed in periods prior to the second quarter of 2009. The remaining consideration, or $496,000, related to real estate commissions was expensed in the second quarter of 2009.
RESULTS OF OPERATIONS
Comparison Of Three Months Ended June 30, 2009 and 2008
Revenues
The table below presents our revenue sources for the three months ended June 30,
2009 compared to the three months ended June 30, 2008.
Three Months Ended
June 30, Increase
(in thousands) 2009 2008 (Decrease)
Milestone revenue $ 66 66 $ -
Royalty revenue 2,141 2,450 (309 )
Collaboration income 1,411 2,006 (595 )
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Total revenue and collaboration income $ 3,618 $ 4,522 $ (904 )
Milestone revenue: Total milestone revenue represents the amortization of achieved milestones under our collaboration with Roche.
The table below presents certain achieved milestones from Roche as of June 30, 2009. We are recognizing the milestones with remaining unrecognized balances on a straight-line basis through the expiration of certain FUZEON patents.
Total Revenue Revenue Recognized
Recognized for the Three
Milestone Date Through Months Ended End of Recognition
(in thousands) Total Achieved June 30, 2009 June 30, 2009 Period
$ 2,500 June 2003 $ 1,421 $ 50 November 2014
750 June 2004 392 16 November 2014
Total $ 3,250 $ 1,813 $ 66
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Royalty revenue: Royalty revenue represents the royalty payments earned from Roche based on total net sales of FUZEON outside the United States and Canada and will continue until all patents covering FUZEON, licensed to Roche, on a country by country basis have expired. Sales of FUZEON outside the United States and Canada began in June 2003. To calculate the royalty revenue, an 8% distribution charge is deducted from Roche's reported net sales, from which the Company receives a 12% royalty. Royalty revenue decreased for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 as a result of decreased net sales of FUZEON outside the U.S. and Canada. Net sales of FUZEON outside the U.S. and Canada for the three months ended June 30, 2009 and 2008, were $19.4 million and $22.2 million, respectively.
Collaboration income: The table below presents our collaboration income (United States and Canada) for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Collaboration income is reported on our Statements of Operations as a component of revenue. Under our Development and License Agreement with Roche, we share gross profit equally from the sale of FUZEON in the United States and Canada. The sharing of expenses is according to contractual arrangements and is not equal in all cases. FUZEON was launched commercially in March 2003. FUZEON sales have been significantly impacted by the market introduction of three new oral HIV agents in late 2007 and early 2008.
Three Months Ended
June 30,
(in thousands) 2009 2008 Change
Gross FUZEON sales by Roche $ 11,899 $ 19,555 $ (7,656 )
Less sales adjustments (2,154 ) (3,476 ) 1,322
Sales adjustments as a % of Gross Sales 18 % 18 %
Net sales 9,745 16,079 (6,334 )
Cost of goods sold (3,252 ) (6,006 ) 2,754
Cost of goods sold as a % of Net Sales 33 % 37 %
Gross profit 6,493 10,073 (3,580 )
Gross profit as a % of Net Sales 67 % 63 %
Selling and marketing expenses (2,832 ) (6,390 ) 3,558
Roche development expenses (480 ) (442 ) (38 )
Other costs (708 ) (922 ) 214
Total shared profit 2,473 2,319 154
Trimeris share * 1,483 2,154 (671 )
Costs exclusive to Trimeris (72 ) (148 ) 76
Collaboration income $ 1,411 $ 2,006 $ (595 )
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* We have exercised our right under our Development and License Agreement with Roche that prevents Roche from adopting a budget for the marketing of FUZEON above a certain limit without our consent. As a result, the Company's and Roche's share of the collaboration income was not equal in the second quarter of 2009 or 2008. Depending on the level of marketing expenses for 2009, our share of the collaboration profit may continue to be greater than that of Roche.
Gross FUZEON sales by Roche: Revenue is recognized when Roche ships drug and title and risk of loss passes to wholesalers.
The table below presents the number of kits shipped to wholesalers in the U.S. and Canada during 2009 and 2008.
Kits Shipped 2009 2008
Q1 5,000 9,600
Q2 4,800 9,000
Q3 - 7,900
Q4 - 9,500
Total 9,800 36,000
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Sales adjustments: Sales adjustments are recorded by Roche based on their experience with selling FUZEON. Based on discussions with Roche, we expect sales adjustments for 2009 to fall within a range of 16% to 18% of gross sales for 2009.
Cost of goods sold: We have exercised our rights under the Development and License Agreement and entered into negotiations with Roche related to excess capacity charges and cost of goods sold variances for 2008 and overall cost of goods sold for 2009. Accordingly, we cannot accurately determine if cost of goods sold as a percentage of net sales will increase, decrease or remain the same in the future. Although active discussions are on-going, we cannot be certain when a final resolution will be reached. Depending upon the resolution of our negotiations with Roche, cost of goods sold may increase or decrease in future periods.
During 2008, we recorded a reserve for 2008 excess capacity charges in the amount of $4.1 million to be shared equally between Roche and Trimeris. In the first quarter of 2009, Roche informed us that actual excess capacity charges for 2008 were $1.9 million. The difference of $2.2 million has been recorded as a credit to cost of goods sold for the first quarter of 2009. Trimeris share of this credit was $1.1 million. We are disputing with Roche the remainder of the excess capacity charges for 2008. The resolution of this dispute may result in an additional credit to cost of goods sold for the collaboration in future periods.
Selling and marketing expenses: We have exercised our right under our Development and License Agreement with Roche that prevents Roche from adopting a budget for the marketing of FUZEON above a certain limit without our consent. As a result, the Company's and Roche's share of the collaboration income was not equal in the second quarter of 2009 or 2008. Depending on the level of marketing expenses for 2009, our share of the collaboration profit may continue to be greater than that of Roche.
Roche development expenses: On January 1, 2009, we adopted Financial Accounting Standards Board ("FASB") Emerging Issues Task Force ("EITF") Issue Number 07-1 "Accounting for Collaborative Arrangements." As a result, all development expenses generated at Roche related to FUZEON are included in the Company's collaboration income. Prior to January 1, 2009, such amounts were presented in research and development expenses. Prior period amounts have been reclassified to conform to the current period's presentation.
Under the Development and License Agreement, development costs for FUZEON are shared equally with Roche. Development typically includes certain clinical and pre-clinical studies performed on a clinical candidate compound, as well as post-marketing commitments related to approved drugs. Currently only Roche incurs development costs for FUZEON. Roche holds the Investigational New Drug ("IND") and the New Drug Application ("NDA") for FUZEON and is responsible for all regulatory issues, maintenance activities and communications with the FDA.
Other costs: Other costs for the three months ended June 30, 2009 and 2008 include general and administrative costs and distribution charges. The Company is responsible for 50% of these costs under the Development and License Agreement.
Costs exclusive to the Company: Costs exclusive to the Company includes license fees, based on net sales of FUZEON, for certain technology paid to a third party.
Research and Development Expenses
The table below presents our research and development expenses for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Total research and development expenses $ - $ 1,127 $ (1,127 )
On January 1, 2009, we adopted EITF 07-1 "Accounting for Collaborative Arrangements." As a result, we reclassified $221,000 from research and development expenses in the three months ended June 30, 2008 to collaboration income (see discussion above "Collaboration Income").
Total research and development expenses for 2008 primarily related to the preclinical development of the next generation HIV fusion inhibitor peptide TRI-1144 for which the Company has subsequently discontinued research and development. The Company no longer incurs any research and development expenses.
General and Administrative Expenses
The table below presents our general and administrative expenses for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Three Months Ended
June 30, Increase
Total general and administrative expenses $ 1,679 $ 2,567 $ (888 )
Total general and administrative expenses: Total general and administrative expenses decreased for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily as a result of the following:
• In May 2009, we entered into an agreement releasing us from $8.3 million in future lease obligations relating our former corporate office and research facility. The total consideration paid by the Company for release of the future lease obligations was $1.8 million of which $1.3 million was expensed in prior periods. The remaining consideration, or $496,000, related to real estate commissions was expensed in the second quarter of 2009.
• In the second quarter of 2008, we shut-down our corporate offices and research facility and relocated to smaller office space. Under Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", in the second quarter of 2008, we recorded a liability and non-cash expense of $939,000 based on the remaining rental payments reduced by estimated sublease rental income.
• Decreased employee costs and other expenses as a result of reduced headcount and general business activities.
We expect general and administrative expenses to decrease in 2009, when compared to 2008, as a result of the 2008 strategic plan which eliminated most general and administrative personnel at Trimeris after June 30, 2008 and reduced operating lease expenses.
Loss on disposal of equipment: The table below presents the loss on the disposal of equipment for the three months ended June 30, 2009 and 2008.
Three Months Ended
June 30, Increase
Loss on disposal of equipment $ - $ 924 $ (924 )
The loss on disposal of equipment for 2008 is due to the Company writing off its property, furniture and equipment due to the Company relocating its corporate office and shutting down the previous laboratory and office space.
Other Income (Expense): The table below presents our other income (expense) for the three months ended June 30, 2009 and 2008.
Three Months Ended
June 30, Increase
(in thousands) 2009 2008 (Decrease)
Interest income $ 115 $ 537 $ (422 )
Gain on investments 23 50 (27 )
Interest expense (64 ) (95 ) 31
Total other income (expenses), net $ 74 $ 492 $ (418 )
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Interest income decreased for the three months ended June 30, 2009 primarily due to lower cash balances as a result of the special dividends paid in 2008.
There was a realized gain on investments for the three months ended June 30, 2009 as a result of our redemptions of our investment in Bank of America Corporation's Columbia Strategic Cash Portfolio (the "Fund"). In December 2007, Columbia Management Group, LLC, the Fund's manager, determined that the assets of the Fund had declined in fair value and the Fund would no longer seek to maintain a net asset value ("NAV") of one dollar per share. As a result, the Fund's NAV began to fluctuate based on changes in the market values of the assets owned by the Fund. The Fund ceased accepting orders for new shares and began an orderly liquidation of Fund assets for distribution to its shareholders. At June 30, 2009, the Fund's NAV was $0.8717 per share. For the quarter ended June 30, 2009, we recorded an increase of $101,000 in accumulated other comprehensive income and a realized gain of $22,000 related to this investment.
Interest expense relates to the accretion of the excess marketing expenses recorded on the balance sheets as "Accrued marketing costs." The Company and Roche agreed to limit the Company's actual cash contribution to the FUZEON selling and marketing expenses in 2004 to approximately $11.2 million, even though Roche spent significantly more on these expenses. If certain cumulative levels of sales for FUZEON in the United States and Canada are achieved, the Company's share of the additional expenses incurred by Roche during 2004 will be payable to Roche beginning at a future date over several years from that future date. During the fourth quarter of 2008, we revised our estimate of the date that payments will begin from 2017 to 2022. During 2004, the Company recorded $15.6 million as part of collaboration loss, which represented the net present value of the Company's estimated share of the expenses that were in excess of approximately $11.2 million. This amount was determined by taking into account the expected timing and terms of payment under the Development and License Agreement, discounted at a risk free interest rate. The Company is increasing the liability over time to the expected payment amount. For the three months ended June 30, 2009 and 2008, the Company increased the recorded liability by $64,000 and $95,000, respectively, for accretion of interest. The total liability of $18.4 and $18.3 million at June 30, 2009 and December 31, 2008 is reflected on our balance sheets.
Income Tax Provision
We recognized income tax expense of $735,000 in the second quarter of 2009 compared to an income tax provision of $194,000 in the second quarter of 2008. For 2009, the Company believes, based on current estimates, that the effective annual blended tax rate is approximately 34.2%.
At December 31, 2008, the Company has net operating loss carryforwards ("NOLs") for federal tax purposes of approximately $302.4 million, which expire in varying amounts between 2018 and 2025. We determined that an ownership change under Section 382 of the Internal Revenue Code of 1986 ("IRC"), as amended, occurred during 2008. The effect of this ownership change was the imposition of a $457,000 annual limitation on the use of NOL carryforwards attributable to periods before the change. This annual limitation will result in the expiration of NOL carryforwards before they become available for utilization. Based on the $457,000 annual limitation, the Company anticipates that a total of approximately $7.8 million of NOL carryforwards will be available for utilization prior to 2025.
In the fourth quarter of 2008, we recognized a deferred tax benefit of $506,000 related to the anticipated future use of some of our federal net operating loss carryovers. In the future, we may reduce the valuation allowance over our federal net operating loss carryovers and recognize an additional deferred tax benefit. Management assesses this potential based upon all available evidence, including the last eleven quarters of profitability and forecasts. At the end of the first quarter, management determined that it was not appropriate to reduce the valuation allowance to recognize additional benefit.
The company continues to carry a full valuation allowance on its other deferred tax assets, the majority of which represent net operating loss carry forwards and tax credit carryovers which we generated prior to achieving profitability.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 2009 and 2008
Revenues
The table below presents our revenue sources for the six months ended June 30,
2009 compared to the six months ended June 30, 2008.
Six Months Ended
June 30, Increase
(in thousands) 2009 2008 (Decrease)
Milestone revenue $ 132 $ 132 $ 0
Royalty revenue 4,110 5,290 (1,180 )
Collaboration income 3,853 4,398 (545 )
Total revenue and collaboration income $ 8,095 $ 9,820 $ (1,725 )
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Milestone revenue: Total milestone revenue represents the amortization of achieved milestones under our collaboration with Roche.
The table below presents certain achieved milestones from Roche as of June 30, 2009. We are recognizing the milestones with remaining unrecognized balances on a straight-line basis through the expiration of certain FUZEON patents.
Total Revenue Revenue for the
Recognized Six Months Ended
Milestone Through June 30, June 30, End of Recognition
(in thousands) Total Date Achieved 2009 2009 Period
$ 2,500 June 2003 $ 1,421 $ 100 November 2014
750 June 2004 392 32 November 2014
Total $ 3,250 $ 1,813 $ 132
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Royalty revenue: Royalty revenue represents the royalty payments earned from Roche based on total net sales of FUZEON outside the United States and Canada and will continue until all patents covering FUZEON, licensed to Roche, on a country by country basis have expired. Sales of FUZEON outside the United States and Canada began in June 2003. To calculate the royalty revenue, an 8% distribution charge is deducted from Roche's reported net sales, from which the Company receives a 12% royalty. Royalty revenue decreased for the six months ended June 30, 2009 as compared to the six months ended June 30 2008, as a result of decreased net sales of FUZEON outside the U.S. and Canada. Net sales of FUZEON outside the U.S. and Canada for the six months ended June 30, 2009 and 2008, were $37.2 million and $47.9 million, respectively.
Collaboration income: The table below presents our collaboration income (United States and Canada) for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Collaboration income is reported on our Statements of Operations as a component of revenue. Under our Development and License Agreement with Roche, we share gross profits equally from the sale of FUZEON in the United States and Canada. The sharing of expenses is according to contractual arrangements and is not equal in all cases. FUZEON was launched commercially in March 2003. FUZEON sales have been significantly impacted by the market introduction of three new oral HIV agents in late 2007 and early 2008.
Six Months Ended
June 30,
(in thousands) 2009 2008 Change
Gross FUZEON sales by Roche $ 24,061 $ 40,265 $ (16,204 )
Less sales adjustments (4,362 ) (7,188 ) 2,826
Sales adjustments as a % of Gross Sales 18 % 18 %
Net sales 19,699 33,077 (13,378 )
Cost of goods sold (4,574 ) (12,220 ) 7,646
Cost of goods sold as a % of Net Sales 23 % 37 %
Gross profit 15,125 20,857 (5,732 )
Gross profit as a % of Net Sales 77 % 63 %
Selling and marketing expenses (5,809 ) (12,584 ) 6,775
Roche development expenses (1,063 ) (1,022 ) (41 )
Other costs (1,381 ) (1,577 ) 196
Total shared profit 6,872 5,674 1,198
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