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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 March 31, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
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Commission File Number 0-23155
TRIMERIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1808663
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3518 Westgate Drive
Durham, North Carolina 27707
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (919) 419-6050
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. [X] Yes [_] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [_] No
The number of shares outstanding of the registrant's common stock as of May 12,
2003 was 21,390,539
TRIMERIS, INC.
(A Development Stage Company)
FORM 10-Q
For the Three Months Ended March 31, 2003
INDEX
PART 1. FINANCIAL INFORMATION Page
- ------------------------------------------ ----
Item 1. Financial Statements
--------------------
Balance Sheets as of December 31, 2002 and
March 31, 2003 (unaudited) 1
Statements of Operations (unaudited) for the Three Months
Ended March 31, 2002 and 2003 and Period From
Inception (January 7, 1993) Through March 31, 2003 2
Statements of Cash Flows (unaudited) for the Three Months
Ended March 31, 2002 and 2003 and Period From
Inception (January 7, 1993) Through March 31, 2003 3
Notes to Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations 7
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
----------------------------------------------------------
Item 4. Controls and Procedures 16
-----------------------
PART 2. OTHER INFORMATION
- --------------------------------------
Item 1. Legal Proceedings 18
-----------------
Item 2. Changes in Securities and Use of Proceeds 18
-----------------------------------------
Item 3. Defaults Upon Senior Securities 18
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 18
---------------------------------------------------
Item 5. Other Information 18
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
--------------------------------
Signature Page 19
- --------------
Exhibit Index 20
- -------------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIMERIS, INC.
(A Development Stage Company)
BALANCE SHEETS
(in thousands, except par value)
December 31, March 31,
2002 2003
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 119,729 $ 120,638
Short-term investments 29,453 19,303
Accounts receivable 1 6
Prepaid expenses 1,130 1,064
--------- ---------
Total current assets 150,313 141,011
Property, furniture and equipment, net 2,816 2,641
--------- ---------
Other assets:
Patent costs, net 1,245 1,500
Equipment deposits 165 129
--------- ---------
Total other assets 1,410 1,629
--------- ---------
Total assets $ 154,539 $ 145,281
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,492 $ 1,026
Accounts payable - Roche 15,249 15,550
Current installments of capital lease obligations 694 552
Accrued compensation 2,967 1,918
Deferred revenue - Roche 620 2,483
Accrued expenses 902 642
--------- ---------
Total current liabilities 21,924 22,171
Obligations under capital leases, excluding current installments 321 240
Deferred revenue - Roche 2,167 8,068
--------- ---------
Total liabilities 24,412 30,479
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A, B, C, and D preferred stock at $.001 par value
per share, 10,000 shares authorized, zero
shares issued and outstanding at December 31,
2002 and March 31, 2003 (unaudited) -- --
Common Stock at $.001 par value per share, 60,000
shares authorized, 21,366 and 21,385 shares issued
and outstanding at December 31, 2002 and
March 31, 2003 (unaudited) 21 21
Additional paid-in capital 395,536 395,615
Deficit accumulated during the development stage (264,573) (280,501)
Deferred compensation (824) (356)
Accumulated other comprehensive income (loss) (33) 23
--------- ---------
Total stockholders' equity 130,127 114,802
--------- ---------
Total liabilities and stockholders' equity $ 154,539 $ 145,281
========= =========
See accompanying notes to financial statements.
1
TRIMERIS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Cumulative from
Inception
Three Months (January 7, 1993)
Ended March 31, to March 31,
---------------
2002 2003 2003
---- ---- ----
Milestone revenue $ 326 $ 236 $ 9,263
--------- --------- ----------
Operating expenses:
Research and development:
Non-cash compensation (21) (60) 7,795
Other research and development expense 14,759 9,683 208,744
--------- --------- ----------
Total research and development expense 14,738 9,623 216,539
--------- --------- ----------
General and administrative:
Non-cash compensation 403 412 14,299
Marketing expense 1,525 -- 21,520
Other general and administrative expense 1,865 2,168 44,416
--------- --------- ----------
Total general and administrative expense 3,793 2,580 80,235
--------- --------- ----------
Collaboration loss -- 4,452 4,452
--------- --------- ----------
Total operating expenses 18,531 16,655 301,226
--------- --------- ----------
Operating loss (18,205) (16,419) (291,963)
--------- --------- ----------
Other income (expense):
Interest income 537 506 17,402
Interest expense (33) (15) (1,760)
--------- --------- ----------
Total other income (expense) 504 491 15,642
--------- --------- ----------
Net loss before cumulative effect of change
in accounting principle $ (17,701) $ (15,928) $ (276,321)
Cumulative effect of change in accounting
principle -- -- (4,180)
--------- --------- ----------
Net loss $ (17,701) $ (15,928) $ (280,501)
========= ========= ==========
Basic and diluted net loss per share $ (0.97) $ (0.75)
========= ========-
Weighted average shares used in per share
computations 18,286 21,375
========= =========
See accompanying notes to financial statements.
2
TRIMERIS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Period
From Inception
Three Months Ended (January 7, 1993)
March 31, through March 31,
--------------------
2002 2003 2003
---- ---- ----
Cash flows from operating activities:
Net loss $(17,701) $(15,928) $(280,501)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 480 437 9,171
Other amortization 12 20 209
Amortization of deferred revenue - Roche (326) (236) (3,629)
Non-cash compensation 382 352 22,094
401(k) plan stock match - - 2,057
Provision for equipment held for resale - - 61
Stock issued for consulting services - - 5
Stock issued to repay interest on notes to stockholders - - 195
Debt issued for research and development - - 194
Cumulative effect of change in accounting principle - - 4,180
Restricted stock donation - - 79
Patent costs expensed - - 677
Loss on disposal of property and equipment - - 16
Changes in operating assets and liabilities:
Accounts receivable (3) (5) (6)
Prepaid expenses 37 66 (1,064)
Other assets 13 36 (129)
Accounts payable (1,657) (466) 1,026
Accounts payable - Roche (2,093) 301 15,550
Accrued compensation (462) (1,049) 1,918
Accrued expenses (37) (260) 552
Deferred revenue - Roche - 8,000 10,000
-------- -------- ---------
Net cash used by operating activities (21,355) (8,732) (217,345)
-------- -------- ---------
Cash flows from investing activities:
Sales (purchases) of short-term investments, net (5,887) 10,206 (19,280)
Purchases of property and equipment (327) (262) (5,097)
Equipment held for resale - - (61)
Organization costs - - (8)
Patent costs (86) (275) (2,324)
-------- -------- ---------
Net cash provided (used) by investing activities (6,300) 9,669 (26,770)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - - 6,150
Lease costs - - (13)
Principal payments under capital lease obligations (260) (223) (5,939)
Proceeds from issuance of Common Stock 40,765 - 323,170
Proceeds from issuance of Preferred Stock - - 23,896
Proceeds from sale of options - - 3,528
Proceeds from exercise of stock options 267 195 6,635
Proceeds from employee stock purchase plan exercise - - 1,658
Repayment of notes receivable from stockholders - - 268
Warrant issuance - - 5,400
-------- -------- ---------
Net cash provided (used) by financing activities 40,772 (28) 364,753
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 13,117 909 120,638
Cash and cash equivalents, beginning of period 22,288 119,729 -
-------- -------- ---------
Cash and cash equivalents, end of period $ 35,405 $120,638 $ 120,638
======== ======== =========
See accompanying notes to financial statements.
3
TRIMERIS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Trimeris, Inc. (the "Company") was incorporated on January 7, 1993 in
Delaware, to discover and develop novel therapeutic agents that block viral
infection by inhibiting viral fusion with host cells. These financial statements
have been prepared in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises," to recognize the fact that the Company is devoting substantially
all of its efforts to establishing a new business. Although planned principal
operations have commenced with the commercial launch of Fuzeon on March 27,
2003, significant revenue has not yet been generated from the sale of Fuzeon.
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and applicable Securities and Exchange Commission (the "SEC")
regulations for interim financial information. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the SEC rules and regulations. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations have been made. Operating results for interim periods are not
necessarily indicative of results which may be expected for a full year. The
information included in this Form 10-Q should be read in conjunction with the
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections and the 2002 financial statements and notes
thereto included in the Company's 2002 Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the SEC on March 27, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. BASIC NET INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic loss per common
share is calculated by dividing net loss by the weighted-average number of
common shares outstanding for the period after certain adjustments described
below. Diluted net income per common share reflects the maximum dilutive effect
of common stock issuable upon exercise of stock options, stock warrants, and
conversion of preferred stock. Diluted net loss per common share is not shown,
as common equivalent shares from stock options, and stock warrants, would have
an antidilutive effect. At March 31, 2002, there were 2,341,000 options to
purchase common stock outstanding and 362,000 warrants to purchase common stock
outstanding. At March 31, 2003, there were 2,557,000 options to purchase common
stock outstanding and 362,000 warrants to purchase common stock outstanding.
3. STATEMENTS OF CASH FLOWS
Interest of approximately $33,000 and $15,000 was paid during the three months
ended March 31, 2002 and 2003, respectively. No new capital leases were incurred
for the three months ended March 31, 2002 or 2003 for the purchase of new
furniture and equipment. Unrealized gains on short-term investments totaled
$56,000 during the three month period ended March 31, 2003.
4
4. STOCKHOLDERS' EQUITY
In October 1997, the Company closed its initial public offering of common
stock at $12 per share. The net proceeds of the offering, including the proceeds
received in connection with the exercise of the underwriters' over-allotment
option which closed in November 1997, were approximately $34.5 million after
deducting applicable issuance costs and expenses of approximately $3.4 million.
In connection with the public offering, all the outstanding preferred stock was
converted into 6,261,615 shares of the Company's common stock.
In June 1999, the Company closed a public offering of common stock at $11.75
per share. The net proceeds of the offering, including the proceeds received in
connection with the exercise of the underwriters' over-allotment option, were
approximately $31.4 million after deducting applicable issuance costs and
expenses of approximately $2.4 million.
In February 2000, the Company closed a private placement of 1.75 million
shares of common stock at $40.50 per share. The net proceeds of the offering
were approximately $66.6 million after deducting applicable issuance costs and
expenses of approximately $4.2 million.
In May 2001, the Company closed a private placement of approximately 1.4
million shares of common stock at $33.00 per share. The net proceeds of the
offering were approximately $43.4 million after deducting applicable issuance
costs and expenses of approximately $2.7 million.
In January 2002, the Company closed a private placement of approximately 1.3
million shares of common stock at $34.00 per share. The net proceeds of the
offering were approximately $40.8 million after deducting applicable issuance
costs and expenses of approximately $2.0 million.
In October 2002, the Company closed a public offering of approximately 2.5
million shares of common stock at $45.25 per share. The net proceeds of the
offering, including the proceeds received in connection with the exercise of the
underwriters' over-allotment option, were approximately $106.7 million after
deducting applicable issuance costs and expenses of approximately $6.6 million.
In September 2001 and April 2002, the Company entered into derivative
transactions with a financial institution that may be settled by selling up to a
total of 307,000 shares of its stock to the financial institution at prices
significantly higher than the market price per share of the Company's stock at
the inception of the transaction. The Company received approximately $344,000
and $388,000, respectively, in proceeds that were accounted for as an increase
to additional paid-in capital in accordance with Emerging Issues Task Force
("EITF") Issue No. 00-19, "Determination of Whether Share Settlement Is within
the Control of the Company for Purposes of Applying EITF Issue No. 96-13,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock."" Alternatively, the Company has the option
to settle these contracts by making a cash payment to the financial institution
for the underlying value of the derivative contracts to the financial
institution on the settlement date. The Company's intent would be to settle the
contracts, if exercised, by issuing shares. Derivative transactions relating to
107,000 of these shares expired unexercised in September 2002. Derivative
transactions relating to the remaining 200,000 shares expired unexercised in
April 2003.
In July 2000, the Company entered into a derivative transaction with a
financial institution that may be settled by selling up to 300,000 shares of its
stock to the financial institution at prices significantly higher than the
market price per share of the Company's stock at the inception of the
transaction. The Company received $2.8 million in proceeds that were accounted
for as an increase to additional paid-in capital in accordance with EITF Issue
No. 00-19. Concurrently, the Company entered into a second derivative
transaction with the same financial institution on shares of its common stock at
no net premium to either party. These contracts expired unexercised during July
2001.
Other significant changes in additional paid-in capital during the three
months ended March 31, 2002 and 2003 were $77,000 and $116,000, respectively,
charged to additional paid-in capital related to expense reversal of non-cash
compensation charges.
5
5. ROCHE COLLABORATION
In July 1999, the Company announced an agreement with F. Hoffmann-La Roche
Ltd., or Roche, to develop and market T-20, currently known as Fuzeon, whose
generic name is enfuvirtide, and T-1249 worldwide. In the United States and
Canada, the Company and Roche will share equally development expenses and
profits for Fuzeon and T-1249. Outside of these two countries, Roche will fund
all development costs and pay the Company royalties on net sales of these
products. Roche made a nonrefundable initial cash payment to the Company of $10
million during 1999, and a milestone payment of $2 million in 2000. The Company
earned and recorded a $8 million milestone in March 2003 that was received in
April 2003. Roche will provide up to an additional $48 million in cash upon
achievement of developmental, regulatory and commercial milestones. This
agreement with Roche grants them an exclusive, world-wide license for Fuzeon and
T-1249, and certain other compounds. Under this agreement with Roche, a joint
management committee consisting of members from Trimeris and Roche oversees the
strategy for the collaboration. Roche may terminate its license for a particular
country in its sole discretion with advance notice. This agreement with Roche
gives Roche significant control over important aspects of the commercialization
of Fuzeon and our other drug candidates, including but not limited to pricing,
sales force activities, and promotional activities.
In July 1999, the Company granted Roche a warrant to purchase 362,000 shares
of Common Stock at a purchase price of $20.72 per share. The warrant is
exercisable prior to the tenth annual anniversary of the grant date and was not
exercised as of March 31, 2003. The fair value of the warrant of $5.4 million
was credited to additional paid-in capital in 1999, and as a reduction of the
$10 million up-front payment received from Roche. The value was calculated using
the Black-Scholes option-pricing model using the following assumptions:
estimated dividend yield of 0%; expected stock price volatility of 86.00 %;
risk-free interest rate of 5.20%; and expected option life of ten years.
In June 2001, the Company announced a research agreement with Roche to
discover, develop and commercialize novel generations of HIV fusion inhibitor
peptides. Roche and Trimeris will equally fund worldwide research, development
and commercialization costs, as well as share equally in profits from worldwide
sales of new HIV fusion inhibitor peptides discovered after July 1, 1999. The
joint research obligations under the agreement expired in January 2003. The
renewal of this agreement is currently being negotiated.
The Company had a $20 million financing agreement with Roche accessible at the
Company's option on a quarterly basis beginning in July 1999 and expiring on
December 31, 2000. No amounts were borrowed under this agreement.
Product sales of Fuzeon began in the United States on March 27, 2003. Under
the collaboration agreement with Roche, the Company shares profits equally from
the sale of Fuzeon in the United States and Canada with Roche, which is reported
as collaboration income (loss) on the Statement of Operations. Collaboration
income (loss) is calculated as follows: Total gross sales of Fuzeon in the
United States and Canada is reduced by any discounts or rebates resulting in
total net sales. Net sales is reduced by costs of goods sold resulting in gross
margin. Gross margin is reduced by selling and marketing expenses related to the
sale of Fuzeon, resulting in operating income or loss. The Company's 50% share
of the operating income or loss is reported as collaboration income or loss.
Total net sales of Fuzeon were $7,000 during the three months ended March 31,
2003. During the quarter ended March 31, 2003, sales and marketing expenses
exceeded the gross margin from the sale of Fuzeon resulting in the Company's 50%
share of operating loss from the collaboration's sale of Fuzeon in the United
States of $4.5 million. Roche has entered into an exclusive distribution
arrangement with Chronimed, Inc. ("Chronimed") to distribute Fuzeon in the
United States during the initial commercial launch in 2003. Revenue from product
sales is recognized when title and risk of loss has passed to Chronimed, which
is when Chronimed allocates drug for shipment to a patient.
6. COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income", establishes rules for the
reporting and display of comprehensive income or loss and its components. This
Statement requires that unrealized gains or losses on the Company's
available-to-sale securities be included in other comprehensive income.
Comprehensive income (loss) totaled ($15,796,000) for the three months ended
March 31, 2003. Comprehensive income (loss) totaled ($17,782,000) for the three
months ended March 31, 2002. For the Company, other comprehensive income
consists of unrealized gains or losses on securities available for sale.
6
7. STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Compensation costs for stock options granted to non-employees are accounted
for in accordance with SFAS No. 123 and EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," which requires that compensation
be measured at the end of each reporting period for changes in the fair value of
the Company's common stock until the options are vested.
SFAS No. 123 permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25. Had the Company determined
compensation expense based on the fair value at the grant date for its
stock-based plans under SFAS No. 123, the Company's net loss and basic loss per
share would have been increased to the pro forma amounts indicated below for the
three months ended March 31 (in thousands, except per share data):
2002 2003
---- ----
Net loss:
As reported ........................................................................................ $ (17,701) $ (15,928)
Compensation cost recorded under APB Opinion No. 25 ................................................ 459 468
Compensation cost resulting from common stock options, restricted stock and employee stock
purchase plan ................................................................................... (3,157) (2,967)
--------- ---------
Pro forma .......................................................................................... $ (20,399) $ (18,427)
========= =========
Basic and diluted loss per share:
As reported ........................................................................................ $ (0.97) $ (0.75)
Pro forma .......................................................................................... $ (1.12) $ (0.86)
The fair value of common stock options is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used:
2002 2003
---- ----
Estimated dividend yield ........................................................................... 0.00% 0.00%
Expected stock price volatility .................................................................... 65.0% 35.0%
Risk-free interest rate ............................................................................ 4.00% 2.00%
Expected life of options ........................................................................... 5 years 5 years
Expected life of employee stock purchase plan options .............................................. 2 years 2 years
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123." This Statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included above.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
7
As of March 31, 2003, the Company had commitments of approximately $7.0
million to purchase product candidate materials and fund various clinical
studies over the next 24 months contingent on delivery of the materials or
performance of the services. Substantially all of these expenditures will be
shared equally by Roche under the Company's collaboration agreement. Under this
collaboration agreement, Trimeris and Roche are obligated to share equally the
future development expenses for Fuzeon and T-1249 for the United States and
Canada.
The Company has entered into a letter of intent that contemplates the
construction of a building by a third party, that upon completion would be
leased by the Company from the third party for an initial period of 15 years,
with the option to renew for two additional five-year periods. In the event a
lease is not executed within the time frame described in the letter of intent,
the letter of intent terminates and the Company will reimburse the third party
for any related costs incurred by them to that date.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion of our financial condition and the results of operations
should be read together with the financial statements and notes contained
elsewhere in this Form 10-Q. Certain statements in this section and other
sections of this Form 10-Q are forward-looking. While we believe these
statements are accurate, our business is dependent on many factors, some of
which are discussed in the "Risk Factors" and "Business" sections of our Annual
Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on
March 27, 2003. These factors include, but are not limited to: that we are a
development stage company that has sustained losses since our inception, and
expect our losses to continue; that if we are unable to commercialize Fuzeon,
our lead drug candidate, our business will be materially harmed; that our drugs
may not achieve market acceptance; that if Roche does not meet its contractual
obligations to us, our research and development efforts and the regulatory
approval and commercialization of our drug candidates could be delayed or
otherwise materially and adversely affected; that if sufficient amounts of our
drug candidates cannot be manufactured on a cost-effective basis, our financial
condition and results of operations will be materially and adversely affected;
that even if we are successful in developing a commercially viable drug, in
order to become profitable we will need to maintain arrangements with third
parties for the sale, marketing and distribution of our drug candidates or
expend significant resources to develop these capabilities; that we may not
receive all necessary regulatory approvals for Fuzeon or our other drug
candidates or approvals may be delayed; that we are dependent on the successful
outcome of clinical trials for our drug candidates; that obtaining regulatory
approvals and maintaining compliance with government regulations will entail
significant costs that could harm our ability to achieve profitability; that our
business is based on a novel technology called fusion inhibition, and unexpected
side effects or other characteristics of this technology may delay or otherwise
adversely affect the development, regulatory approval and/or commercialization
of our drug candidates; that failure to raise additional capital necessary to
support our development programs and expand our operations could lower our
revenues and reduce our ability to compete; that if we cannot maintain
commercial manufacturing agreements with third parties on acceptable terms, or
if these third parties do not perform as agreed, the commercial development of
our drug candidates could be delayed or otherwise materially and adversely
affected; that if Roche or our manufacturing partners do not maintain good
manufacturing practices, it could negatively impact our ability to obtain
regulatory approvals and commercialize our drug candidates; that HIV is likely
to develop resistance to Fuzeon and our other our drug candidates, which could
adversely affect demand for those drug candidates and harm our competitive
position; that our internal research programs and our efforts to obtain rights
to new products from third parties may not yield potential products for clinical
development, which would adversely affect any future revenues; that we depend on
patents and proprietary rights, which may offer only limited protection against
infringement, and if we are unable to protect our patents and proprietary
rights, our assets and business could be materially harmed; that the
intellectual property of our competitors or other third parties may prevent us
from developing or commercializing our drug candidates; that we face intense
competition in our efforts to develop commercially successful drugs in the
biopharmaceutical industry and if we are unable to compete successfully, our
business will suffer; that uncertainty relating to third-party reimbursement and
health care reform measures could limit the amount we will be able to charge for
our drugs and adversely affect our results of operations; that if an accident or
injury involving hazardous materials occurs, we could incur fines or liability,
which could materially and adversely affect our business and our reputation;
that if the testing or use of our drug candidates harms people, we could face
costly and damaging product liability claims far in excess of our liability and
indemnification coverage; that our quarterly operating results are subject to
fluctuations, and if our operating results for a particular period deviate from
the levels expected by securities analysts and investors, it could adversely
affect the market price of our common stock; that if we lose any of our
executive management or other key employees, we will have difficulty replacing
them, and if we cannot attract and retain qualified personnel on acceptable
terms, the development of our drug candidates and our financial position may
suffer; that any additional financing we obtain may result in dilution to our
stockholders, restrictions on our operating flexibility, or the transfer of
particular rights to our technologies or drug candidates; and that our charter
requires us to indemnify our officers and directors to the fullest extent
permitted by law, which obligates us to make substantial payments and to incur
significant insurance-related expenses. Many of these factors are beyond our
control and any of these and other factors could cause actual clinical and
financial results to differ materially from the forward-looking statements made
in this Form 10-Q. The results of our previous clinical trials are not
necessarily indicative of the results of future clinical trials. Please read the
"Risk Factors" section of our Annual Report on Form 10-K for the year ended
December 31, 2002. We undertake no obligation to release publicly the results of
any revisions to the statements contained in this Form 10-Q to reflect events or
circumstances that occur subsequent to the date hereof.
Critical Accounting Policies
We believe the following accounting policies are the most critical to our
financial statements. We believe they are important to the presentation of our
financial condition, and require the highest degree of management judgment to
make the estimates necessary to ensure their fair presentation.
9
Revenue Recognition Under Staff Accounting Bulletin No. 101
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB No. 101
establishes the SEC's view that it is not appropriate to recognize revenue until
all of the following criteria are met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; the seller's price
to the buyer is fixed or determinable; and collectibility is reasonably assured.
Further, SAB No. 101 requires that both title and the risks and rewards of
ownership be transferred to the buyer before revenue can be recognized. We
believe that our revenue recognition policies are in compliance with SAB No.
101.
Milestone Revenue
SAB No. 101 provides guidance that it is appropriate to recognize revenue
related to license and milestone payments over the research and development term
of a collaboration agreement. The primary estimate we make in connection with
the application of this policy is the length of the period of the research and
development under our collaboration agreement with Roche. In the event our
judgment of the length of this research and development term changes, the
milestone revenue to be recognized under our collaboration with Roche would
change prospectively in accordance with APB No. 20, "Accounting Changes." If the
term is expected to be longer, the amount of revenue recognized would be less
per quarter than currently being recognized. If the term is expected to be
shorter, the amount of revenue recognized would be more per quarter than
currently being recognized.
During the fourth quarter of 2002, we increased our estimate of the length of
this development term based on the expected development schedule of T-1249, the
final compound covered by our collaboration agreement with Roche. Our current
expectations for development of T-1249 would result in the end of the
development period ranging from late 2005 to mid 2007. This estimate is subject
to significant variability since T-1249 has only completed two Phase I/II
trials. Any future change in our judgment of the length of this research and
development term will result in a prospective change in the milestone revenue to
be recognized under our collaboration with Roche. Any future milestone payments
received from Roche under our collaboration agreement will be amortized from the
date of receipt to the end of the remaining research and development term. We
earned and recorded a $8 million milestone in March 2003 that will be amortized
from March 2003 to mid 2007.
Collaboration Income (Loss)
Under our collaboration agreement with Roche, we share profits equally from
the sale of Fuzeon in the United States and Canada and we will receive a royalty
on the net sales of Fuzeon outside of these two countries. Collaboration income
(loss) represents our 50% share of total gross sales of Fuzeon in the United
States and Canada, less any discounts or rebates, less cost of goods sold, less
sales and marketing expenses. Product sales of Fuzeon began in the United States
on March 27, 2003. During the quarter ended March 31, 2003, sales and marketing
expenses exceeded the gross margin from the sale of Fuzeon resulting in a net
loss from the sale of Fuzeon. Roche has entered into an exclusive distribution
arrangement with Chronimed to distribute Fuzeon in the United States during the
initial commercial launch in 2003. Revenue from product sales is recognized when
title and risk of loss has passed to Chronimed, which is when Chronimed
allocates drug for shipment to a patient. Roche prepares its estimates for sales
returns and allowances, discounts and rebates quarterly based primarily on their
historical experience with other anti-HIV drugs and their estimates of the payor
mix for Fuzeon, updated for changes in facts and circumstances, as appropriate.
If actual results differ from these estimates, these estimates will be adjusted
which could have an effect on results from operations in the period of
adjustment.
Calculation of Compensation Costs for Stock Options Granted to Non-Employees
Compensation costs for stock options granted to non-employees are accounted
for in accordance with SFAS No. 123 and EITF 96-18, which require that such
compensation costs be measured at the end of each reporting period to account
for changes in the fair value of the Company's common stock until the options
are vested. These costs are non-cash charges resulting from stock option grants
to non-employees. The primary estimate we make in connection with the
calculation of this expense is the future volatility of our stock price used to
calculate the value of the stock options in the Black-Scholes option-pricing
model. At March 31, 2003 we estimated the future volatility at 35% based on the
implied future volatility for call options in Trimeris stock quoted on the
Chicago Board Options Exchange in April 2003. A higher volatility would result
in greater compensation costs, and a lower volatility would result in lower
compensation costs for these stock options.
In addition, the closing market price per share of our stock at the end of
each reporting period has a significant effect on the value of the stock options
calculated using the Black-Scholes option-pricing model. A higher market price
per share of our stock
10
would result in greater compensation costs, and a lower market price per share
of our stock would result in lower compensation costs for these stock options.
At March 31, 2003, there were options to purchase approximately 39,000 shares of
common stock granted to non-employees outstanding that were not fully vested
that could result in additional changes in compensation costs under EITF 96-18.
Capitalization of Patent Costs
The costs of patents are capitalized and are amortized using the
straight-line method over the estimated remaining lives of the patents, either
17 years from the date the patent is granted or 20 years from the initial filing
of the patent, depending on the patent. These costs are primarily legal fees and
filing fees related to the prosecution of patent filings. We perform a
continuous evaluation of the carrying value and remaining amortization periods
of these costs. The primary estimate we make is the expected cash flows to be
derived from the patents. In the event future expected cash flows derived from
any patents are less than their carrying value, the related costs would be
expensed at that time.
Call Transaction Accounting
In July 2000, September 2001 and April 2002, we entered into derivative
transactions with a financial institution that may be settled by selling shares
of our stock to the financial institution at prices significantly higher than
the market price per share of our stock at the inception of the transaction. We
received proceeds from the sale of these call options that were accounted for as
an increase to additional paid-in capital in accordance with EITF Issue No.
00-19. An extensive list of requirements, including the ability to settle the
transaction by issuing stock, is required by this EITF in order to allow
accounting for proceeds received as an increase to additional paid-in capital.
The contracts for our derivative transactions met the detailed requirements in
this EITF Issue. Proceeds of $2.8 million, $344,000 and $388,000 were received
and credited to additional paid-in-capital in the years ended December 31, 2000,
2001 and 2002, respectively. In the event these contracts did not meet the
requirements in the EITF, these transactions would be accounted for in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires derivatives to be recorded on the balance
sheet at fair value, and would require the carrying value of these call options
to be adjusted at the end of each reporting period until their expiration or
exercise. During April 2003, all outstanding derivative transactions had expired
unexercised.
11
OVERVIEW
We began our operations in January 1993 and are a development stage company
to recognize the fact that we are devoting substantially all of our efforts to
establishing a new business. Although planned principal operations have
commenced with the commercial launch of Fuzeon on March 27, 2003, significant
revenue has not yet been generated from the sale of Fuzeon. Accordingly, we have
a limited operating history. Since our inception, substantially all of our
resources have been dedicated to:
. the development, patenting, preclinical testing and clinical trials of our
drug candidates, Fuzeon and T-1249,
. the development of a manufacturing process for Fuzeon and T-1249,
. production of drug material for future clinical trials of Fuzeon and
T-1249,
. preparation of materials for regulatory filings for Fuzeon,
. pre-marketing activities for the anticipated launch of Fuzeon, and
. research and development and preclinical testing of other potential
product candidates.
We have lost money since inception and, as of March 31, 2003, had an
accumulated deficit of approximately $280.5 million. We have received revenue
only from federal small business innovative research grants, otherwise known as
SBIR grants, an investigative contract, and an initial collaboration payment and
milestone payments from Roche, and have not generated any significant revenue
from product sales or royalties. On March 27, 2003 we began the commercial sale
of Fuzeon, our first commercial product. We may never generate significant
revenue from product sales or royalties.
Under our collaboration agreement with Roche, we will share profits equally
from the sale of Fuzeon in the United States and Canada and we will receive a
royalty on the net sales of Fuzeon outside of these two countries. Sales and
marketing expenses in the United States and Canada exceeded the gross margin
from the sale of Fuzeon in these countries during the quarter ended March 31,
2003, and we expect this to be the case for the year ending December 31, 2003,
resulting in negative cash flow from the sale of Fuzeon in these countries in
2003. During 2003 we expect our share of this negative cash flow to exceed any
royalties from the sale of Fuzeon outside these countries, should Roche receive
Fuzeon regulatory approval in other countries. As a result, we expect to have
negative cash flow from the sale of Fuzeon worldwide during 2003.
Development of current and future drug candidates will require significant
additional, time-consuming and costly research and development, preclinical
testing and extensive clinical trials prior to submission of any regulatory
application for commercial use. We expect to incur substantial losses for the
foreseeable future and expect losses to increase as our research and
development, preclinical testing, drug production and clinical trial efforts
expand. The amount and timing of our operating expenses will depend on many
factors, including:
. the status of our research and development activities, including the
announcement of the results of the full analysis of our 48-week data from
TORO-1 and TORO-2,
. product candidate discovery and development efforts, including preclinical
testing and clinical trials,
. the timing of regulatory actions, including the potential full approval of
Fuzeon by the FDA,
. the costs involved in preparing, filing, prosecuting, maintaining,
protecting and enforcing patent claims and other proprietary rights,
. our ability to work with Roche to manufacture, develop, sell, market and
distribute Fuzeon and T-1249,
. technological and other changes in the competitive landscape,
. changes in our existing or future research and development relationships
and strategic alliances,
. development of any future research and development relationships or
strategic alliances,
. evaluation of the commercial viability of potential product candidates,
and
12
. other factors, many of which are outside of our control.
As a result, we believe that period-to-period comparisons of our financial
results are not necessarily meaningful. The past results of operations and
results of previous clinical trials should not be relied on as an indication of
future performance. If we fail to meet the clinical and financial expectations
of securities analysts and investors, it could have a material adverse effect on
the market price of our common stock. Our ability to achieve profitability will
depend, in part, on our own or Roche's ability to successfully develop, obtain,
and maintain regulatory approval for Fuzeon, T-1249 or other drug candidates,
and our ability to develop the capacity, either internally or through
relationships with third parties, to manufacture, sell, market and distribute
approved products, if any. We may never generate significant revenues or achieve
profitable operations.
Clinical Development
The following discussion highlights certain aspects of our on-going and
planned clinical development programs, including data presented during the three
months ended March 31, 2003. Please refer to our Annual Report on Form 10-K for
the year ended December 31, 2002 filed with the SEC on March 27, 2003 for a
summary of previous clinical data presented on Fuzeon. The results of our
previous clinical trials are not necessarily indicative of the results of future
clinical trials.
Fuzeon(TM), T-20 or enfuvirtide
Fuzeon is our first-generation HIV fusion inhibitor. The FDA has approved the
use of Fuzeon in combination with other anti-HIV drugs for the treatment of
HIV-1 infection in treatment-experienced patients with evidence of HIV-1
replication despite ongoing antiretroviral therapy. Anti-HIV drugs are referred
to as antiretroviral agents. The standard approach to treating HIV infection has
been to lower viral loads by using drugs other than fusion inhibitors that
inhibit two of the viral enzymes that are necessary for the virus to replicate:
reverse transcriptase and protease. There are currently three classes of drugs
that inhibit these two enzymes: nucleoside reverse transcriptase inhibitors, or
NRTIs, non-nucleoside reverse transcriptase inhibitors, or NNRTIs, and protease
inhibitors, or PIs. We refer to NRTIs and NNRTIs collectively as RTIs. There are
ten FDA-approved RTIs and six FDA-approved PIs. On March 13, 2003, the FDA
granted accelerated approval for the commercial sale of Fuzeon, and commercial
sales of Fuzeon began on March 27, 2003. Roche received accelerated FDA approval
of Fuzeon based on 24-week clinical data from two Phase III pivotal trials for
Fuzeon. We refer to these clinical trials as TORO-1, which was conducted in
North America and Brazil, and TORO-2, which was conducted in Western Europe and
Australia. In these clinical trials, all patients received an individually
optimized background regimen of three to five anti-HIV drugs other than Fuzeon.
In the control group, patients received only the optimized background regimen.
In the Fuzeon treatment group, patients received the optimized background
regimen in combination with twice daily subcutaneous injections, each delivering
90 mg of Fuzeon. The background regimen was optimized based on the patient's
treatment history and the genotype and phenotype of the patient's virus. A
genotypic resistance analysis involves examination of the genetic sequence of
the strains of virus present in the sample. A phenotypic resistance analysis
involves an assessment of the ability of a drug to block infection caused by
strains of a virus grown in culture. In both TORO-1 and TORO-2, the primary
endpoint for the clinical trials, which is the incremental reduction of viral
load achieved in the Fuzeon group versus the control group, was met with
statistical significance. Viral load refers to the amount of HIV virus
particles, as measured by the presence of HIV ribonucleic acid, or RNA, found in
the blood of an HIV-infected person at a given time. We measure viral load in
terms of copies of HIV RNA per milliliter of blood. Additionally, the interim
analysis of TORO-1 and TORO-2 showed that important secondary endpoints were
also met with statistical significance. Roche intends to seek full approval
based on a full analysis of 48-week clinical data from TORO-1 and TORO-2 when it
becomes available later this year. There are no results from studies of Fuzeon
in patients who have not previously received anti-HIV drugs. There are no
results from controlled trials evaluating the effect of Fuzeon on the clinical
progression of HIV.
Roche also filed an application for European marketing approval on September
19, 2002. In March 2003, the Committee for Proprietary Medicinal Products, or
CPMP, recommended granting a marketing authorization for Fuzeon. This
recommendation will now be considered by the European Agency for the Evaluation
of Medicinal Products, or EMEA, who has the final authority to grant a marketing
authorization for Fuzeon in Europe. Roche will manufacture the bulk drug
substance of Fuzeon. Currently, we anticipate Roche will be able to manufacture
sufficient drug supply for approximately 12,000 to 15,000 patients worldwide to
be receiving Fuzeon by the end of 2003, including approximately 8,000 to 10,000
in the United States, after taking into account the establishment of a six-month
"safety stock" for all patients receiving Fuzeon. Roche is working continually
to maximize the manufacturing capabilities of its facilities.
Ongoing Fuzeon Clinical Trials
13
Topline 48-week Phase III Data
In April 2003, we presented combined final topline 48-week data from TORO-1
and TORO-2. These results showed that responses seen at 24 weeks were maintained
at 48 weeks in most patients receiving FUZEON in combination with other anti-HIV
drugs.
At baseline, patients in the pivotal Phase III studies, TORO-1 and TORO-2,
had a median viral load level of more than 5.0 log10 copies per milliliter and
extensive prior exposure to multiple anti-HIV drugs. At 48 weeks, a combined
analysis of patients in the Fuzeon group achieved a mean reduction in viral load
of 1.48 log10 copies per milliliter compared to a mean reduction of 0.63 log10
copies per milliliter for those in the control group, a difference of 0.85 log10
copies per milliliter. The increase from baseline in CD4 cells was 91 cells per
cubic millimeter for patients in the Fuzeon group compared to 45 cells per cubic
millimeter in patients in the control group. CD4 cells are a critical component
of the human immune system and are often killed by HIV. An increase in CD4 cell
count is indicative of immune system restoration and is important in reducing
the likelihood of opportunistic infection. We measure CD4 cell counts in numbers
of CD4 cells per cubic millimeter of blood. The percentage of patients achieving
a reduction in viral load to below 400 copies per milliliter was 30.4% for the
Fuzeon group compared to 12.0% for the control group. All data described were
statistically significant. Stated otherwise, the statistical measures, p-values,
for all the data shown were less than 0.0001. Overall study discontinuation
rates were similar on the two groups, 26.5% for the Fuzeon group compared to
28.7% for the control group. Safety analyses for 48 weeks are ongoing. Local
injection site reactions were the most frequently reported adverse event
associated with the use of Fuzeon. 4.4% of patients treated with Fuzeon
discontinued treatment due to injection site reactions.
Future Fuzeon Clinical Trials
Throughout the remainder of 2003, we expect to initiate additional Fuzeon
clinical trials in the U.S. and internationally.
Safety Data at 24 Weeks
Fuzeon is administered as a twice-daily subcutaneous injection. Local
injection site reactions were the most frequent adverse events associated with
the use of Fuzeon. In Phase III clinical studies, 98% of patients at 24 weeks
had at least one local injection site reaction. Manifestations of injection site
reactions may include pain and discomfort, induration, redness, nodules and
cysts, itching, and bruising.
There was less than 5% difference in the most common adverse events seen
between the Fuzeon group and the control group. The events most frequently
reported in the Fuzeon group were diarrhea (26.8%), nausea (20.1%), and fatigue
(16.1%). All these events were seen at a lower incidence than in the control
group: diarrhea (33.5%), nausea (23.7%), and fatigue (17.4%). The most common
adverse events seen more frequently in the Fuzeon group than in the control
group include pain or numbness in the peripheral nervous system (8.9%), insomnia
(11.3%), depression (8.6%), decreased appetite (6.3%), weakness (5.7%), muscle
aches and pains (5.0%), constipation (3.9%) and pancreatitis (2.4%). The
majority of adverse events were of mild or moderate intensity. On rare
occasions, hypersensitivity reactions, or allergic reactions, have been
associated with Fuzeon therapy (less than or equal to 1%) and some of these
events have recurred on rechallenge. Symptoms of an allergic reaction may
include rash, fever, nausea and vomiting, chills, rigors, low blood pressure and
elevated liver enzymes. In addition, an increased rate of bacterial pneumonia
was observed in the Fuzeon group in the Phase III clinical trials compared to
the control group. It is unclear if the increased incidence of pneumonia is
related to Fuzeon use. Fuzeon does not cure HIV infection or AIDS. Patients
taking Fuzeon may acquire opportunistic infections or other conditions that are
associated with HIV infection. The list of side effects is not complete at this
time because Fuzeon is still being studied.
Manufacturing
The synthetic manufacture of peptides historically has been complex and
expensive. This constraint has not limited the commercialization of most
existing peptide therapeutics, which are administered in relatively small doses.
We anticipate dosing levels of Fuzeon to be relatively high compared to
therapeutic peptides currently prescribed for other indications. We have
developed a novel peptide manufacturing process, which we believe will allow us
to produce Fuzeon on a large-scale and cost-efficient basis. Roche will
manufacture bulk quantities of Fuzeon drug substance in its Boulder, Colorado
facility. We have selected one of Roche's manufacturing facilities and another
third party to produce the finished drug product from such bulk drug substance.
The scale-up of production of Fuzeon bulk drug substance at Roche's Boulder,
Colorado facility was achieved during the second half of 2002. Not surprisingly,
production yields were lower and cycle times were longer than projected in the
initial batches. Simple process modifications were made during the scale-up
process that brought the yields in subsequent batches to the
14
projected target levels derived from pilot plant production. Once the target
yields were achieved, we and Roche identified the final purification stage as
the rate limiting step that resulted in longer than projected cycle times. Based
on analysis of this stage, we and Roche believe that installation of a duplicate
piece of equipment will reduce the cycle time of the purification stage and
allow us to meet or exceed our initial targeted cycle times for the bulk drug
substance production process. This piece of equipment has been ordered and
installation is expected during 2003.
Roche's drug product manufacturing facility and the third-party drug product
manufacturing facility have both successfully completed validation batches of
Fuzeon drug product and are currently manufacturing drug product on commercial
scale.
Based on the positive Phase III data, better adherence to Fuzeon therapy than
we had anticipated, and the growing problems of resistance, drug toxicity and
patient intolerability to current therapies, we believe that Fuzeon can make a
significant contribution to patients with diminishing treatment options. We have
a global Early Access Program with 1,200 patients in addition to the 450
patients already on Fuzeon in T20-305, our open-label safety study. Due to these
factors, and an increased likelihood for regulatory approval in Europe, the
demand for Fuzeon may be greater than initially anticipated and may exceed
supply in the period after launch. While the current manufacturing
infrastructure does not allow the flexibility to increase production beyond our
current capacity at this time, Roche has announced that it has committed further
investment capital to increase capacity.
Our current expectations regarding available worldwide supply of Fuzeon,
based on current yield and cycle time targets assuming the successful
installation of additional equipment Roche plans to install at its Boulder,
Colorado facility, are as follows:
2003. Short-term manufacturing estimates for Fuzeon are based on the current
estimated ability to produce around two metric tons of Fuzeon in
2003--equivalent to up to 20,000 treatment packs (one treatment pack equals one
month supply for one patient) per month by year end. This translates to supply
for approximately 12,000 to 15,000 patients receiving Fuzeon by the end of 2003,
8,000 to 10,000 patients of whom are expected to be in the United States. This
is based on a planned allocation of approximately 65% of worldwide supply to the
United States. This number of patients is lower than would be calculated based
upon the manufacturing output for the year due to the fact that approximately
half a year "safety supply" is allocated to every patient to ensure continuity
of drug supply. We believe that a half-year safety supply is prudent given our
early stage of commercial production and the severity of the illness being
treated; however, we plan to evaluate the safety supply requirements as we move
forward.
2004. Annual production of Fuzeon is planned to increase to around 3.7 metric
tons--equivalent to up to 39,000 treatment packs per month during mid-2004.
After setting aside patient safety supplies, this will equate to up to a maximum
of 32,000 patients receiving Fuzeon by year-end 2004. These figures are based
upon the assumption that the individual patient safety supply of approximately
half a year is maintained and projected cycle times and yields remain on track.
As we continue to gain confidence in the process and fill the distribution
pipeline, we will evaluate the amount of safety stock required to maintain a
continuity of supply.
2005. It is expected that safety supplies will already be established and the
existing manufacturing capacity can therefore supply up to 39,000 patients,
based upon the improvements described.
T-1249
T-1249 is our second-generation fusion inhibitor for HIV. The history of HIV
treatment has demonstrated that the existence of multiple drugs within the RTI
and PI classes have allowed for a variety of drug combinations and improved
patient treatment. We believe that multiple HIV fusion inhibitors may further
enhance HIV therapy by providing an even broader range of treatment options. To
date, T-1249 has demonstrated potent HIV suppression in vitro, and is highly
active against a wide range of HIV strains in vitro, including strains resistant
to Fuzeon. We expect to initiate a Phase II clinical trial with respect to
T-1249 in 2003.
Phase I/II - T1249-102
In February 2003, we announced interim data from study T1249-102. This study
evaluated the antiviral activity and safety of T-1249 over a 10-day period in
patients who had failed an individualized anti-HIV drug regimen that had
previously included Fuzeon. Eligible patients were participating in Phase II or
Phase III studies of Fuzeon and were experiencing evidence of viral replication
while on this drug regimen. Patients in this study discontinued Fuzeon and added
T-1249 to the unchanged background regimen of anti-HIV drugs. A total of 53
patients received T-1249 in this trial; the data presented are based on a
planned interim analysis of the first 25 patients in the study. The median viral
load decline from baseline viral load after ten days
15
of treatment was 1.1 log\\10\\ copies per milliliter. There were no serious
adverse events judged possibly to be related to T-1249 in the trial. We expect
to present final data from this trial during 2003.
Future T-1249 Clinical Trials
We expect to initiate additional clinical trials with respect to T-1249 in
2003.
16
Results of Operations
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2002 AND 2003
MILESTONE REVENUE. Total milestone revenue of $326,000 and $236,000 for the
three months ended March 31, 2002 and 2003, respectively, represents the
amortization of the $10 million initial collaboration payment from Roche, net of
the $5.4 million assigned to the warrant granted to Roche concurrent with the
initiation of our collaboration, a $2.0 million milestone payment received from
Roche in 2000, and an $8.0 million milestone payment earned from Roche in 2003
over the expected research and development period of our collaboration with
Roche in accordance with SAB No. 101. Under SAB No. 101, $4.2 million was
reported as the cumulative effect of a change in accounting principle at January
1, 2000 to be amortized into revenue over future years. During the fourth
quarter of 2002, we increased our estimate of the length of this development
period based on the expected development schedule of T-1249, the final compound
covered by our collaboration agreement with Roche. This estimate is subject to
significant variability since T-1249 has only completed two Phase I/II trials.
This change in estimated term resulted in a prospective adjustment to milestone
revenue recognized beginning in the fourth quarter of 2002 in accordance with
APB 20. The change in our estimate of the development term resulted in less
revenue recognized for milestones received prior to 2003 in the three months
ended March 31, 2003 than in the three months ended March 31, 2002.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses were
$14.7 million and $9.6 million for the three months ended March 31, 2002 and
2003, respectively. Total research and development expenses include gross
research and development expenses less Roche's share of such costs for Fuzeon
and T-1249. Under our collaboration agreement, Roche and we shared equally the
development costs incurred during the period from July 1, 1999 until March 31,
2003 for Fuzeon and T-1249.
Non-cash compensation changed from $21,000 in expense reversal for the
three months ended March 31, 2002 to $60,000 in expense reversal for the three
months ended March 31, 2003. The expense reversals resulted because the
cumulative expense calculated under EITF 96-18 for stock options previously
granted to non-employees was greater at December 31, 2001 than at March 31, 2002
and greater at December 31, 2002 than at March 31, 2003 primarily because of the
reduction in the market price of our stock from December 31, 2001 to March 31,
2002 and from December 31, 2002 to March 31, 2003, respectively. The closing
market price per share of our stock was $44.97 and $43.20 on December 31, 2001
and March 31, 2002, respectively. The closing market price per share of our
stock was $43.17 and $41.14 on December 31, 2002 and March 31, 2003,
respectively. In addition, during the three months ended June 30, 2002, a
significant number of the options previously granted to non-employees became
vested. EITF 96-18 requires that compensation costs related to stock options
granted to non-employees be measured at the end of each reporting period to
account for changes in the fair value of our common stock until the options are
vested.
Total other research and development expenses, which are total research and
development expenses net of non-cash compensation charges, decreased from $14.8
million during the three months ended March 31, 2002 to $9.7 million during the
three months ended March 31, 2003 primarily because during 2003 we incurred less
expense than in 2002 for:
. our two Phase III clinical trials for Fuzeon which were initiated in late
2000, and the data accumulation and compilation process for clinical data
from these trials,
. the purchase of drug material for future clinical trials, and
. our Phase II clinical trials for Fuzeon which were substantially completed
in 2002.
This decrease in expenses was partially offset by increases in expenses during
the three months ended March 31, 2003 because we increased the number of our
personnel to support our clinical trial and research activities.
Total research personnel were 78 and 89 at March 31, 2002 and 2003,
respectively. We expect research and development expenses, net of reimbursements
for Fuzeon and T-1249 development costs from Roche, to increase in the future
due to:
. continuation of Phase III clinical trials for Fuzeon,
. preparation of additional materials and submissions for the Fuzeon NDA to
the FDA in support of full approval for Fuzeon,
17
. expanded clinical trials for Fuzeon, T-1249 and other product candidates,
. the manufacture of drug material for these trials,
. increased preclinical research and testing of potential product
candidates, and
. increased number of personnel to support these activities.
GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative expenses
were $3.8 million and $2.6 million for the three months ended March 31, 2002 and
2003, respectively. Total general and administrative expenses include gross
general and administration expenses less Roche's share of pre-marketing expenses
for Fuzeon.
Marketing expense during 2002 included expenses incurred for pre-launch
activities related to Fuzeon and consisted primarily of expenses for market
research and presentation of data on our Fuzeon Phase III trials at various
scientific meetings. During 2003 sales and marketing expenses related to Fuzeon
are included in Collaboration loss because we launched Fuzeon on March 27, 2003.
Other general and administrative expense increased from $1.9 million for
the three months ended March 31, 2002 to $2.2 million for the three months ended
March 31, 2003 because during 2003 we:
. incurred increased premiums for directors and officers' insurance, and
. increased administrative personnel from 32 at March 31, 2002 to 40 at
March 31, 2003.
Non-cash compensation expense increased from $403,000 for the three months ended
March 31, 2002 to $412,000 for the three months ended March 31, 2003 primarily
due to expense recognized during the three months ended March 31, 2003 for a
restricted stock grant made in April of 2002, net of the reduction due to the
fact that several option and stock grants to employees accounted for under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," became fully vested
during 2002, resulting in less deferred compensation expense amortization for
the three months ended March 31, 2003 compared to the three months ended March
31, 2002. We expect other general and administrative expenses to increase in the
future to support expansion of product development activities and to meet new
requirements recently placed on public companies by The Sarbanes-Oxley Act of
2002, related regulations issued by the SEC and new Nasdaq listing standards.
COLLABORATION LOSS. Under our collaboration agreement with Roche, we share
profits equally from the sale of Fuzeon in the United States and Canada.
Collaboration loss is calculated as follows. Total gross sales of Fuzeon in the
United States and Canada are reduced by any discounts or rebates resulting in
total net sales. Net sales are reduced by costs of goods sold resulting in gross
margin. Gross margin is reduced by selling and marketing expenses related to the
sale of Fuzeon, resulting in operating income or loss. Our 50% share of the
operating income or loss is reported as collaboration income or loss. Product
sales of Fuzeon began in the United States on March 27, 2003. Total net sales of
Fuzeon was $7,000 during the three months ended March 31, 2003. During the
quarter ended March 31, 2003, sales and marketing expenses exceeded the gross
margin from the sale of Fuzeon resulting in our 50% share of operating loss from
the collaboration's sale of Fuzeon in the United States of $4.5 million. We
expect sales and marketing expenses to exceed gross margin from the sale of
Fuzeon for 2003 resulting in a net collaboration loss from the sale of Fuzeon
for the year. Roche has entered into an exclusive distribution arrangement with
Chronimed to distribute Fuzeon in the United States during the initial
commercial launch in 2003. Revenue from product sales is recognized when title
and risk of loss has passed to Chronimed, which is when Chronimed allocates drug
for shipment to a patient.
OTHER INCOME (EXPENSE). Other income (expense) consists of interest income and
expense. Total other income was $504,000 and $491,000 for the three months ended
March 31, 2002 and 2003, respectively. The decrease was primarily due to lower
interest income because of lower interest rates on our investment portfolio
during the three months ended March 31, 2003 compared to the three months ended
March 31, 2002, net of increased average investment balances during the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
We expect yields on our investment portfolio to remain at these levels for the
foreseeable future based on the current short-term interest rate environment.
Liquidity and Capital Resources
18
Since inception, we have financed our operations primarily through private
placements and public offerings of common stock, equipment lease financing and
payments under our collaboration agreement with Roche. Net cash used by
operating activities was $21.4 million and $8.7 million for the three months
ended March 31, 2002 and 2003, respectively. The cash used by operating
activities during the three months ended March 31, 2003 was used primarily to
fund research and development relating to Fuzeon, T-1249, and other product
candidates, and decreased for the three months ended March 31, 2003 over the
same period in 2002 because of the timing of our quarterly payment to Roche, and
reduced research and development expenses for the development of Fuzeon. Cash
used by investing activities was $6.3 million for the three months ended March
31, 2002. Cash provided by investing activities was $9.7 million for the three
months ended March 31, 2003. The amount used for the three months ended March
31, 2002 resulted from the net purchase of short-term investments, using the
proceeds from our private placement of common stock in January 2002. The amount
provided for the three months ended March 31, 2003 resulted from the sale of
short-term investments to fund our operating activities. Cash provided by
financing activities for the three months ended March 31, 2002 was $40.8
million. Cash used by financing activities for the three months ended March 31,
2003, was $28,000. Cash provided by financing activities for the three months
ended March 31, 2002 was primarily the proceeds of our private placement of
common stock in January 2002. Cash used by financing activities for the three
months ended March 31, 2003 resulted from payments on our capital lease
obligations, net of proceeds from the exercise of stock options.
As of March 31, 2003, we had $139.9 million in cash and cash equivalents
and short-term-investments, compared to $149.2 million as of December 31, 2002.
The decrease is primarily a result of cash used by operating activities for the
three months ended March 31, 2003.
In July 2000, September 2001 and April 2002, we entered into derivative
transactions with a financial institution, which are described below under
"Off-Balance Sheet Arrangements." Proceeds of $2.8 million, $344,000 and
$388,000 were received and credited to additional paid-in-capital in December
31, 2000, 2001 and 2002, respectively, in accordance with EITF 00-19. As of
April 30, 2003, all outstanding derivative transactions had expired unexercised.
We may enter into similar transactions in the future, subject to market
conditions.
We have experienced negative cash flows from operations since our inception
and do not anticipate generating sufficient positive cash flows to fund our
operations in the foreseeable future. Although we expect to share the future
development costs for Fuzeon and T-1249 for the United States and Canada equally
with Roche, we have expended, and expect to continue to expend in the future,
substantial funds to pursue our drug candidate and compound discovery and
development efforts, including:
. expenditures for clinical trials of Fuzeon, T-1249 and other product
candidates,
. preparation of additional materials and submissions for the Fuzeon NDA to
the FDA in support of full approval for Fuzeon,
. expenditures for pre-marketing and marketing activities undertaken in
anticipation of the commercialization of Fuzeon,
. research and development and preclinical testing of other product
candidates,
. manufacture of drug material, and
. the development of our proprietary technology platform.
Under our collaboration agreement with Roche, we will share profits equally
from the sale of Fuzeon in the United States and Canada and we will receive a
royalty on the net sales of Fuzeon outside of these two countries. We expect
marketing expenses in the United States and Canada to exceed the gross margin
from the sale of Fuzeon in these countries during 2003, resulting in negative
cash flow from the sale of Fuzeon in these countries in 2003. During 2003 we
expect our share of this negative cash flow to exceed any royalties from the
sale of Fuzeon outside these countries, should Roche receive Fuzeon regulatory
approval in other countries. As a result, we expect to have negative cash flow
from the sale of Fuzeon worldwide during 2003.
We have an exclusive, worldwide, royalty-bearing license from the New York
Blood Center under certain U.S. and foreign patents and patent applications
relating to certain HIV peptides. Under this license we are required to pay to
the New York Blood Center a royalty equal to one-half of one percent of the net
sales of Fuzeon up to $100 million, and one-quarter of one percent of net sales
in excess of $100 million. There is no royalty payable with respect to T-1249.
As of March 31, 2003, we had commitments of approximately $7.0 million to
purchase product candidate materials and fund various clinical studies over the
next 24 months contingent on delivery of the materials or performance of the
services. Substantially all of these expenditures will be shared equally by
Roche under our collaboration agreement. Under this collaboration agreement, we
are obligated to share equally the future development expenses for Fuzeon and
T-1249 in the United States and Canada. We also expect to have capital
expenditures for furniture and equipment of approximately $2.0 million during
19
2003 that will not be shared with Roche. Our share of these expenditures may be
financed with capital or operating leases, debt or working capital.
Barring unforeseen developments, based on our current expectations regarding
regulatory approval, manufacturing and commercialization of Fuzeon, we expect
that our existing capital resources, together with the interest earned thereon,
will be adequate to fund our current programs for the next 24 months. However,
any delay or negative action by regulatory agencies regarding approval for the
marketing of Fuzeon, or failure of Fuzeon to achieve anticipated market
acceptance would increase our capital requirements substantially beyond our
current expectations. If we require additional funds and such funds are not
available through debt or equity financings, or collaboration arrangements, we
will be required to delay, scale-back or eliminate certain preclinical testing,
clinical trials and research and development programs, including our
collaborative efforts with Roche. In the event Roche becomes unable or unwilling
to share future development expenses for Fuzeon and T-1249, our capital
requirements would increase substantially beyond our current expectations.
Since our initial public offering in 1997, we have obtained the majority of
our funding through public or private offerings of our common stock. We expect
to continue to obtain our funding through public or private offerings of our
common stock or debt until such time, if ever, as we are able to generate
significant funds from operations.
We may have difficulty raising additional funds by selling equity. If we
fail to meet the clinical and financial expectations of securities analysts and
investors, it could have a material adverse effect on the market price of our
common stock and restrict or eliminate our ability to raise additional funds by
selling equity. The public capital markets in which shares of our common stock
are traded have been extremely volatile. The current geo-political situations in
Iraq, North Korea and other areas of the world have made it increasingly
difficult for companies to raise additional capital by selling equity. The
public equity markets for biotechnology companies were extremely volatile in
2002, and remain so in 2003. Drug candidates for several publicly-held
biotechnology companies, including Cubist Pharmaceuticals, Inc., Dendreon Corp.,
Inspire Pharmaceuticals, Inc., Miravant Medical Technologies, Pharmacia Corp.
and Pharmacyclics, Inc. failed to meet primary clinical endpoints in Phase III
clinical trials, resulting in significant reduction in the market price of their
common stock. The FDA's decision not to accept Imclone Systems, Inc's Biologics
License Application (BLA) for ERBITUX(TM) also has contributed to the volatility
of public equity markets for biotechnology companies. Therefore, even if we do
achieve positive clinical or financial results that meet or exceed the
expectations of securities analysts and investors, the state of the public
equity markets in general and particularly the public equity market for
biotechnology companies may prohibit us from raising funds in the equity markets
on acceptable terms or at all. Even if we are able to obtain additional funding
through an equity financing, the terms of this financing could be highly
dilutive to current shareholders.
We may also attempt to obtain additional funding through debt financings
and/or arrangements with new or existing collaborative partners. Any debt
financings may contain restrictive terms that limit our operating flexibility.
Arrangements with partners may require us to relinquish rights to our
technologies or product candidates or to reduce our share of potential profits.
This could have a material adverse effect on our business, financial condition
or results of operations.
Our future capital requirements and the adequacy of available funds will
depend on many factors, including the availability of funds from Roche under our
collaboration agreement; the condition of public capital markets; the results of
regulatory actions related to Fuzeon; the level of market acceptance of Fuzeon;
the progress and scope of our product development programs; the magnitude of
these programs; the results of preclinical testing and clinical trials; the need
for additional facilities based on the results of these clinical trials and
other product development programs; changes in the focus and direction of our
product development programs; the costs involved in preparing, filing,
processing, maintaining, protecting and enforcing patent claims and other
intellectual property rights; competitive factors and technological advances;
the cost, timing and outcome of regulatory reviews; changes in the requirements
of the FDA; administrative and legal expenses; evaluation of the commercial
viability of potential product candidates and compounds; the establishment of
capacity, either internally or through relationships with third parties, for
manufacturing, sales, marketing and distribution functions; and other factors,
many of which are outside of our control.
The following table summarizes our material contractual commitments at March
31, 2003 for the remainder of 2003 and subsequent years (in thousands):
Contractual Obligation 2003 2004 2005 2006 Total
- ----------------------- ---- ---- ---- ---- -----
Capital Leases ............................... $ 497 $ 326 $ -- $ -- $ 823
Operating Leases ............................. 915 498 382 -- 1,795
Other contractual obligations* ............... 6,446 514 -- -- 6,960
-------- ------- ------ ----- -------
Total ........................................ $ 7,858 $ 1,338 $ 382 $ -- $ 9,578
======== ======= ====== ===== =======
___________
20
* Includes contracts to purchase product candidate materials and fund various
clinical studies contingent on delivery of the materials or performance of
the services. Substantially all of these costs will be shared equally with
Roche.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than operating
leases for our properties and the derivative transactions described below. These
transactions represent call options sold on our stock to a third party financial
institution and were entered into in order to generate cash from the option
premiums and provide us with the opportunity to raise capital at prices
significantly in excess of the market price at the time of the transaction.
These contracts are expected to be settled by issuing shares of our stock in the
event the options are exercised. We have no subsidiaries or other unconsolidated
limited purpose entities, and we have not guaranteed or otherwise supported the
obligations of any other entity.
In September 2001 and April 2002, we entered into derivative transactions
with a financial institution that we may settle by selling up to 307,000 shares
of our stock to the financial institution at prices significantly higher than
the market price per share of our stock at the inception of the transaction.
Alternatively, we have the option to settle these contracts by making a cash
payment to the financial institution for the underlying value of the derivative
contracts to the financial institution on the settlement date. These contracts
are expected to be settled by issuing shares of our stock in the event the
options are exercised. Derivative transactions relating to 107,000 of these
shares expired unexercised in September 2002. Derivative transactions relating
to the remaining 200,000 shares expire or mature in April 2003. We received
approximately $344,000 and $388,000 in proceeds for the sale of these call
options that were accounted for as an increase to additional paid-in capital in
accordance with EITF 00-19. The financial institution has advised us that it has
engaged and may continue to engage in transactions, including the buying and
selling of shares of our common stock, to offset its risks related to these
transactions, which may or may not affect the market price of our stock. As of
April 30, 2003, all outstanding derivative transactions had expired unexercised.
We may enter into similar transactions in the future, subject to market
conditions. We enter into these transactions as a potential method to raise
capital and not to speculate on the future market price of our stock.
We have entered into a letter of intent that contemplates the construction
of a building by a third party, that upon completion would be leased by us from
the third party for an initial period of 15 years, with the option to renew for
two additional five-year periods. In the event a lease is not executed within
the time frame described in the letter of intent, the letter of intent
terminates and we will reimburse the third party for any related costs incurred
by them to that date.
Trimeris 401 (k) Plan
We have a 401(k) Profit Sharing Plan (the "Plan") covering all qualified
employees. Employees may elect a salary reduction from 1% to 75% as a
contribution to the Plan, up to the annual Internal Revenue Service allowable
contribution limit. Employee contributions may not be invested in Trimeris
stock. The Plan permits us to match employees' contributions. Beginning in 1998,
we matched 100% of an employee's annual contributions with Trimeris stock,
provided the employee was employed on the last day of the year. The number of
shares issued is based on the employee's contributions to be matched divided by
the closing price of Trimeris stock on the last trading day of the year. At
March 31, 2003 there were approximately 57,000 shares of our stock held by the
Plan. These shares vest ratably based on a participant's years of service and
are fully vested after four years of service. Employees may sell their vested
shares at any time, subject to applicable laws and the requirements of our
insider trading policy, and reinvest the proceeds in the other investment
options available within the Plan.
Net Operating Loss Carryforwards
As of December 31, 2002, we had a net operating loss carryforward of
approximately $254.3 million. We have recognized a valuation allowance equal to
the deferred asset represented by this net operating loss carryforward and other
deferred tax assets, and therefore recognized no tax benefit. Our ability to
utilize these net operating loss carryforwards may be subject to an annual
limitation in future periods pursuant to the "change in ownership rules" under
Section 382 of the Internal Revenue Code of 1986, as amended.
Accounting and Other Matters
SFAS No. 143, "Accounting for Asset Retirement Obligations", addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. This standard requires us to record the fair value of an asset retirement
obligation as a liability in the period in which we incur a legal obligation
associated with the retirement of tangible long-lived assets that results from
the acquisition, construction, development and/or normal use of the assets. We
also are required to record a corresponding increase to the carrying amount of
the related long-lived asset and to
21
depreciate that cost over the life of the asset. The liability is changed at the
end of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the initial fair value measurement. This statement
is effective for the fiscal years beginning after June 15, 2002. The adoption of
this standard had no impact on our financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in July 2002, and addresses financial accounting and
reporting for costs associated with exit or disposal activities. It nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability be recognized for
costs associated with an exit or disposal activity only when the liability is
incurred. SFAS No. 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. The statement
is effective for exit or disposal activities that are initiated after December
31, 2002. We believe that this standard will have no impact on our financial
statements.
In November 2002, the Financial Accounting Standards Board Emerging Issues
Task Force issued its consensus concerning Revenue Arrangements with Multiple
Deliverables ( "EITF 00-21"). EITF 00-21 addresses how to determine whether a
revenue arrangement involving multiple deliverables should be divided into
separate units of accounting, and if separation is appropriate, how the
consideration should be measured and allocated to the identified accounting
units. The EITF is effective prospectively for arrangements entered into in
fiscal periods beginning after June 15, 2003. We do not believe that adoption of
EITF 00-21 will have a material impact on our financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure, an amendment of FASB Statement No. 123" was issued in December 2002.
This Statement amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the
notes to our financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on our financial statements and monitors the status of
changes to issued exposure drafts and to proposed effective dates.
Risk Factors
Our business is subject to certain risks and uncertainties. Please read the
"Risk Factors" and "Business" sections of our Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the SEC on March 27, 2003, which
highlight some of these risks. If any of these risks materialize, our business,
financial condition and results of operations could be materially adversely
affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is primarily in our investment portfolio. We do
not use derivative financial instruments for speculative or trading purposes.
Substantially all of our contracts are denominated in U.S. dollars; therefore,
we have no material foreign currency risk. We have an investment policy that
sets minimum credit quality standards for our investments. The policy also
limits the amount of money we can invest in any one issue, issuer or type of
instrument. We have not experienced any material loss in our investment
portfolio, and we believe the market risk exposure in our investment portfolio
has remained consistent over this period.
The table below presents the carrying value, which is approximately equal to
fair market value, and related weighted-average interest rates for our
investment portfolio at March 31, 2003. Fair market value is based on actively
quoted market prices. Our investments are generally most vulnerable to changes
in short-term interest rates in the United States. Substantially all of our
investments mature in 12 months or less, and have been given a rating of A1 or
higher by a nationally recognized statistical rating organization or are the
debt obligations of a federal agency and, therefore, we believe that the risk of
material loss of principal due to changes in interest rates is minimal.
22
Carrying Average
Amount Interest Rate
------ -------------
(thousands)
Cash equivalents--fixed rate ........................... $ 119,731 1.28%
Short-term investments--fixed rate ..................... 19,303 1.77%
Overnight cash investments--fixed rate ................. 907 0.51%
---------- ----
Total investment securities ...................... $ 139,941 1.34%
========== ====
In September 2001 and April 2002, we entered into a series of call
transactions with respect to our common stock. These transactions are described
in detail under Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Off Balance Sheet Transactions." Derivative
transactions relating to 107,000 of these shares expired unexercised in
September 2002. Derivative transactions relating to the remaining 200,000 shares
expired unexercised in April 2003.
Item 4. Controls and Procedures
Within 90 days prior to the date of the filing of this report, our Chief
Executive Officer and Chief Financial Officer reviewed and evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, with the participation of the Company's management. Disclosure
controls and procedures are controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. In
designing and evaluating the disclosure controls and procedures, the Company and
its management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Based on their required evaluation, our Chief
Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are effective.
There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls including
corrective actions with regard to significant deficiencies or material
weaknesses subsequent to the date of our most recent evaluation of our internal
controls. Internal controls are designed with the objective of providing
reasonable assurance that (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principles.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q
are listed on the Exhibit Index and such list is incorporated
herein by reference.
(b) Reports on Form 8-K
We filed a report on Form 8-K on February 11, 2003 under Item 5
attaching a press release providing updated information on the
manufacture of Fuzeon.
We filed a report on Form 8-K on February 11, 2003 under Item 5
attaching a press release describing information regarding
clinical trial results for Fuzeon and T-1249.
We filed a report on Form 8-K on February 24, 2003 under Item 5
attaching a press release announcing a European Special License
Sales Program for Fuzeon.
We filed a report on Form 8-K on March 17, 2003 under Item 5
attaching a press release announcing FDA approval of Fuzeon.
We filed a report on Form 8-K on March 21, 2003 under Item 5
attaching press releases announcing the progressive distribution
and support program for Fuzeon, our fourth quarter 2002 financial
results, preliminary 48-week clinical data for Fuzeon, and a
positive opinion issued by the EU Regulatory Authority.
24
SIGNATURES
In accordance with 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.
Trimeris, Inc.
-----------------------
(Registrant)
May 14, 2003 By: /s/ DANI P. BOLOGNESI
------------------------------
Dani P. Bolognesi
Chief Executive Officer,
and Chief Scientific Officer
May 14, 2003 /s/ ROBERT R. BONCZEK
--------------------------
Robert R. Bonczek
Chief Financial Officer
(Principal Financial Officer)
May 14, 2003 /s/ TIMOTHY J. CREECH
--------------------------
Timothy J. Creech
Vice President of Finance
and Secretary (Principal
Accounting Officer)
25
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Dani P. Bolognesi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trimeris, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, ( including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the ( registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ Dani P. Bolognesi
-------------------------------
Dani P. Bolognesi
Chief Executive Officer
26
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Robert R. Bonczek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trimeris, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, ( including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the ( registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ Robert R. Bonczek
-----------------------------------
Robert R. Bonczek
Chief Financial Officer
27
EXHIBIT INDEX
Number Description
- ------ -----------
10.1* Specialty Pharmacy Fuzeon Agreement between Chronimed, Inc.
and Roche Laboratories, Inc. dated March 7, 2003 (without
exhibits or schedules).
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference to Chronimed, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 28, 2003 filed with the Commission on May
9, 2003.
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