Shares of Trimeris (Nasdaq: TRMS ) skyrocketed last week after the company announced a reorganization plan aimed at boosting profitability and cash flow. Investors salivated over an unofficial promise of 2007 EPS "well in excess of" $1 per share, with $20 million in additional cash flow resulting from proposed cuts. That's an understandable reaction; after all, the company has yet to show a full-year profit, although it is on track for positive earnings this year.
But the company was a bit vague on where it plans to make those cuts. Part of its "change in direction" involved the ouster of CEO Steven Skolsky and the return of Dani Bolognesi to the top spot. According to Bolognesi, the new strategic thrust is twofold: Concentrate on profitability through Fuzeon, and focus on its pipeline.
Fair enough; that sounds not dissimilar to some of Skolsky's previously outlined goals. But what exactly is the plan? For one thing, Trimeris says it no longer wants to focus so heavily on commercial operations, leaving them instead to its marketing partner Roche (OTC BB: RHHBY). By stripping away some of its own infrastructure, the company hopes to save costs in its 50/50 partnership. (That said, unless the deal terms are restructured, half these savings will presumably accrue to Roche.) Trimeris will also cut its own expenses.
Shoring up the pipeline, Bolognesi says, means focusing on "not just the next-generation fusion inhibitor" -- which is pretty much all the company has in development now -- ". but beyond." And the path to a richer pipeline is to ... umm ... slash R&D spending. Mind you, this is coming from the guy who, until this week, was chief scientific officer; he'll continue in that role in addition to his chief executive duties.
Now, a better pipeline and lower R&D spending aren't mutually exclusive. A company can cut an expensive program with poor prospects and still look to expand and diversify an early stage pipeline. In Trimeris' case, however, it's not clear what it plans to cut. Shoring up its pipeline might mean using some of its cash to acquire potential products. But unless those are ready for market, that strategy means more R&D spending, not less. To me, the move sounds a bit more like, "Hey! If you buy us, we could shore up your pipeline."
Indeed, Bolognesi seemed to be hinting in that direction, saying that his company will be "relying more and more on Roche's commercial and development capabilities." The plea was enough to cause at least one analyst, who had been bearish on the company because of what he saw as poor growth prospects for Fuzeon, to raise his rating from "Sell" to "Accumulate," purely on the basis of takeover speculation.
Fuzeon has been something of a tough sell. While it's quite effective for some patients, it's difficult to use, requiring two injections per day, and almost always causes irritation at the injection site, sometimes severely so. Nevertheless, sales have been steadily climbing since the drug's 2003 approval. For the first nine months of this year, net sales in the U.S. and Canada were $92 million, up 19% from the same period a year earlier, and Trimeris recognized $13.2 million of that in revenue.
Assuming net 2007 Fuzeon sales on the order of $150 million in the U.S. and Canada, the company's goal of creating earnings greater than $1 per share in 2007 isn't unattainable. But that also requires substantially cutting back R&D spending, which is currently on a $19 million run rate for 2006. Scaling back that kind of spending can support some R, but precious little D. The company seems to be setting itself up to produce preclinical compounds meant for further development by a partner -- say, one it's "relying more and more on."
To complicate matters, while Fuzeon is the only HIV fusion inhibitor on the block right now, there are competing products in the works that prevent the entry of HIV into healthy T-cells. Pfizer's (NYSE: PFE ) maraviroc and Schering-Plough's (NYSE: SGP ) vicriviroc are both in phase 3 trials. Genentech (NYSE: DNA ) will also soon have a phase 2 fusion inhibitor called TNX-355, assuming it completes its proposed acquisition of Tanox (Nasdaq: TNOX ) . Trimeris' follow-on drugs, in contrast, are in preclinical development.
So will Roche -- or someone else -- bite? It's seems that while Trimeris was hashing out this restructuring and talking to Roche, the subject of acquisition must have come up. Roche apparently passed. Maybe it's waiting to see how productive Trimeris will be in the lab. Maybe it's waiting to see how the competitive landscape shakes out. Maybe it's just not interested. But if Roche is going to take a wait-and-see approach regarding Trimeris, so am I.
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