The COGS Black Box in Trimeris (TRMS)

Trimeris just came out with their 4th quarter and 2007 year end numbers. Plugging this into my cash flow analysis results in a new valuation range:

So what happened in the 4th quarter numbers to help push the low/high end valuation range from my original analysis? The company increased its cash position to $60.6 million through additional “collaboration income” from their partner Roche, and an increase in overall worldwide sales of Fuzeon. Net income doubled in the 4th quarter from the same period in 2006.

So far so good… not so fast. The company achieved these massive gains through one time events:

• The company accelerated recognition of milestone payments from their partner Roche into 2007.
• Reduction in workforce.
• Changed the way cost of good sold were calculated.

Out of these 3 events, the one that is most concerning is how cost of goods sold was calculated with their partner Roche all the way back to 2003, and how it is different now. There must have been some serious negotiations with Roche because the resulting change allowed Trimeris to receive a credit of $5.5 million from Roche because of previous “over charges” in the way they calculated cost of goods sold (COGS). What poses an increased risk for current shareholders is that Trimeris and Roche are still in discussions about how to calculate COGS for 2007 and 2008. No forward guidance was given as to what the outcome of this will be. It is hard to comprehend the amount of time it is taking to figure out how to calculate COGS. You have X amount of inputs to create a dose of Fuzeon. What do those inputs cost? The fact that Trimeris did not have accurate visibility into Roche’s accounting method for COGS for several years, makes it all the much harder for investors to have trust in Trimeris’ controls. This can make it rather difficult to sell Trimeris to a prospective buyer. Will the new buyer continue their relationship with Roche for Fuzeon marketing and distribution, or will they disband?

If you strip away these one time events (well, there may be another COGS recalculation surprise in the works) the focus turns to the sales of Fuzeon. Sales in the US and Canada decreased due to what the CEO, Martin Mattingly described on the conference call as pressures from competing drugs by Pfizer and Merck. The company mentioned that they the US and Canadian Fuzeon sales decline leveled off going into the end of the year. With the one time events out of the way, more focus will be put on 2008 1st quarter sales to see if Fuzeon sales are leveling off within North America or continue its slide.

During the earnings call, a Piper Jaffray analyst posed an interesting question about Fuzeon’s inventory going into the end of the year. The company responded that they believe inventories rose due to the holiday season, and that they were able to work off this $8 million worth of inventory in the first part of 2008. I absolutely do not think that the holidays had anything to do with it, as Fuzeon requires two injections a day. HIV patients don’t suddenly stop using just because it is the holidays. This may have been more of a smoke screen to deflect some news surrounding competing drugs eating into Trimeris’ market share.

The company called to attention the development of the next version of Fuzeon (TRI-1144). The company started their first human clinical dose the very same morning of the earnings call. This highlights the urgency for Trimeris to get out any positive news. TRI-1144 apparently showed some positive signs during animal testing in which dosing could possibly be reduced to once a week and come in a form of a self-injectable pre-filled pen. However, this is way too early to tell if TRI-1144 will materialize.

Investors shouldn’t be too happy with the black box that Trimeris has put up surrounding how COGS will be calculated. The only good thing surrounding Trimeris at this point are the continued sales growth of Fuzeon overseas, the substantial cash position they have ($60.6 million), and no long term debt. Next quarter’s results will paint a clearer picture on Fuzeon’s market share within North America. Hopefully the COGS mess will be out of the way.