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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the transition period from              to             

Commission File Number 0-23155

TRIMERIS, INC.

(Exact name of registrant as specified in its charter)

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 November 1, 2004 was 21,857,603.

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TRIMERIS, INC.

FORM 10-Q

For the Nine Months Ended September 30, 2004

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIMERIS, INC.

BALANCE SHEETS

(in thousands, except par value)

See accompanying notes to financial statements.

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TRIMERIS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See accompanying notes to financial statements.

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TRIMERIS, INC.

STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes to financial statements.

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TRIMERIS, INC.

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. Prior to April 1, 2003, the financial statements were 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 was devoting substantially all of its efforts to establishing a new business. Principal operations commenced with the commercial launch of Fuzeon^® on March 27, 2003, and revenue was recognized from the sale of Fuzeon during the year ended December 31, 2003. As a result, beginning on April 1, 2003, the Company no longer prepares its financial statements in accordance with SFAS No. 7.

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 2003 financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 12, 2004.

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, restricted stock, stock warrants, and conversion of preferred stock. Diluted net loss per common share is not shown, as common equivalent shares from stock options, restricted stock grants and stock warrants, would have an anti-dilutive effect. At September 30, 2003, there were 2,645,000 options to purchase common stock outstanding and 362,000 warrants to purchase common stock outstanding. At September 30, 2004, there were 3,350,000 options to purchase common stock, 190,350 restricted stock grants, which become fully vested in 2007, 50,000 restricted stock grants, which become fully vested in 2008 and 362,000 warrants to purchase common stock outstanding.

3. STATEMENTS OF CASH FLOWS

Interest of approximately $35,000 and $6,000 was paid during the nine months ended September 30, 2003 and 2004, respectively.

There was an additional $42,000 charged to interest expense for the nine months ended September 30, 2004. This amount represents the accretion of the liability resulting from the Company’s share of estimated selling and marketing expenses in excess of $10 million in 2004. The Company recorded a liability of $9.6 million, as part of collaboration loss, which represents the net present value of the Company’s estimated share of these expenses, based on the expected timing and terms of payment under the agreement.

No new capital leases were incurred for the nine months ended September 30, 2003 or 2004.

Net unrealized gains on short-term investments totaled $35,000 during the nine month period ended September 30, 2003 and net unrealized losses on short-term investments totaled $11,000 during the nine month period ended September 30, 2004. Unrealized gains/losses are reported on the balance sheet as accumulated other comprehensive gain / (loss).

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4. STOCKHOLDERS’ EQUITY

Changes in Additional Paid-In Capital

A change in additional paid-in capital during the nine months ended September 30, 2003 was $38,000 related to expense reversal of non-cash compensation charges. A change in additional paid-in capital during the nine months ended September 30, 2004 was $44,000 related to expense reversal of non-cash compensation charges.

In June 2004, a grant of 191,500 shares of restricted stock was made to substantially all employees. A $2.7 million charge, equal to the market value of these shares on the grant date, was made to deferred compensation and credited to additional paid-in capital. This deferred compensation will be charged to expense ratably over the three-year vesting period of the restricted stock. In September 2004, a grant of 50,000 shares of restricted stock was made to the newly appointed Chief Executive Officer. A $575,000 charge, equal to the market value of these shares on the grant date, was made to deferred compensation and credited to additional paid-in capital. This deferred compensation will be charged to expense ratably over the four-year vesting period of the restricted stock. Amortization expense, related to these restricted stock grants, in the amount of $258,000 was charged to non-cash compensation expense for the nine months ended September 30, 2004.

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5. ROCHE COLLABORATION

In July 1999, the Company announced a worldwide 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, or a replacement compound. In the United States and Canada, the Company and Roche will share development expenses and profits for Fuzeon and T-1249 equally, or a replacement compound. Outside of these two countries, Roche will fund all development costs and pay the Company royalties on net sales of these products. To date Roche has made nonrefundable payments and milestone payments of approximately $28.3 million. Roche will provide up to an additional $33 million in cash upon achievement of developmental, regulatory and commercial milestones. This agreement with Roche grants them an exclusive, worldwide 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 and operation of 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 manufacturing and distribution, pricing and discounts, sales and marketing activities, and promotional activities.

Roche is manufacturing Fuzeon drug substance in its Boulder, Colorado facility. Roche’s manufacturing facility in Basel, Switzerland and another third party facility are producing the finished drug product from such bulk drug substance. Fuzeon is distributed and sold by Roche through Roche’s sales and distribution network throughout the world in countries where regulatory approval has been received.

Under provisions of this agreement, the Company’s actual cash contribution to the selling and marketing expenses for Fuzeon in 2004 is limited to approximately $10 million, even though Roche expects to spend significantly more on these expenses. If certain cumulative levels of sales for Fuzeon in the United States and Canada are achieved, our share of any additional expenses incurred by Roche during 2004 will be payable to Roche beginning at a future date over several years from that future date. During the nine months ended September 30, 2004, the Company’s share of selling and marketing expenses exceeded $10 million. In addition to the $10 million included in collaboration loss, the Company recorded a liability of $9.6 million as part of collaboration loss, which represents the net present value of the Company’s estimated share of these expenses in excess of approximately $10 million, based on the expected timing and terms of payment under the agreement.

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 September 30, 2004. 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. We deferred $4.6 million, the net of the $10 million up-front payment and the $5.4 million in warrants, over the research and development period. 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 2001, the Company executed 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 are renewable thereafter on an annual basis. The term of this agreement was extended to December 2005 during 2003.

Product sales of Fuzeon began in the United States on March 27, 2003 and are recorded by Roche. 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 loss in the Statements of Operations. Collaboration loss is calculated as follows: Total gross sales of Fuzeon in the United States and Canada is reduced by any discounts, returns 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, marketing and other 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 in the United States and Canada were $15.1 million and $61.5 million during the nine months ended September 30, 2003 and 2004, respectively. During the nine months ended September 30, 2003 and 2004, sales, marketing and other expenses exceeded the gross margin from the sale of Fuzeon resulting in the Company’s 50% share of operating loss from the sale of Fuzeon in the United States of $15.4 million and $14.7 million, respectively. Roche previously had an exclusive distribution arrangement with Chronimed, Inc. (“Chronimed”) to distribute Fuzeon in the United States during 2003. This exclusive arrangement terminated on April 26, 2004. Effective April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. Prior to April 26, 2004, revenue from product sales had been recognized when title and risk of loss had passed to Chronimed, which was when Chronimed allocated drug for shipment to a patient. Beginning April 26, 2004, revenue is recognized when Roche ships drug and title and risk of loss passes to wholesalers.

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Collaboration loss for the three months ended September 30, 2004 includes approximately $900,000 of a net charge comprised of our share of a supply contract penalty, partially off-set by an adjustment to Roche’s inventory.

Under our collaboration agreement with Roche, we contribute towards our share of the capital invested in their manufacturing facility through the depreciation charged to cost of goods sold as the products are sold. The charge for depreciation is based on Roche’s depreciation methods and respective lives of associated assets.

Through a series of negotiations, we have reached an understanding in principle with Roche whereby we will pay Roche for our share of the capital invested in Roche’s manufacturing facility, over a seven-year period. We are in the process of formalizing these terms in a written agreement. Our anticipated share of this capital investment is approximately $14 million. As a result, we accrued an initial payment of $4 million at June 2004 and expect to pay approximately $500,000 per quarter through June 2009. As a result, Roche will no longer include the depreciation related to the manufacturing facility in the cost of goods sold. In the event our collaboration agreement is terminated, we would not be obligated for any unpaid amounts for capital investment.

These payments, net of the portion allocated to cost of goods sold, are recorded as an asset presented as “Advanced payment – Roche”. This asset will be amortized based on the units of Fuzeon sold during the collaboration period, in order to properly allocate the capital investment to cost of goods sold in future periods. The life of the asset will be the commercial life of Fuzeon, which is the collaboration period. In addition, other peptide drug candidates discovered under our collaboration with Roche, including T-1249, can be manufactured using the same Roche facility. The carrying value of this asset will be evaluated annually for impairment or if a triggering event occurs.

6. COMPREHENSIVE LOSS

SFAS No. 130, “Reporting Comprehensive Income”, establishes rules for the reporting and display of comprehensive income or loss and its components. SFAS No. 130 requires that unrealized gains or losses on the Company’s available-to-sale securities be included in other comprehensive income. Comprehensive income (loss) totaled ($50,574,000) for the nine months ended September 30, 2003, and ($34,360,000) for the nine months ended September 30, 2004. For the Company, other comprehensive income (loss) consists of unrealized gains or losses on securities available for sale.

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 and nine months ended September 30 (in thousands, except per share data):

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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:

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.” SFAS No. 148 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, SFAS No. 148 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. POST-RETIREMENT HEALTH INSURANCE CONTINUATION PLAN

In June 2001, the Company adopted a post-retirement health insurance continuation plan (“the Plan”). Employees who have achieved the eligibility requirements of 60 years of age and 10 years of service are eligible to participate in the Plan. The Plan provides participants the opportunity to continue participating in the Company’s group health plan after their date of retirement. Participants will pay the cost of health insurance premiums for this coverage, less any contributions by the Company. In November 2003, the Plan was amended and the limit on contributions by the Company was changed to 50% of the health insurance premium for the employee and his or her spouse. No employees have received benefits under this Plan.

The components of net periodic post-retirement benefits cost of the Plan for the nine months ended September 30, consisted of the following (in thousands):

The accumulated post-retirement benefit obligation was determined using a discount rate of 6.75% and 6.25% at December 31, 2002 and 2003, respectively. A 1% change in the assumed medical care cost trend rate increases the accumulated post-retirement benefit obligation by approximately $150,000.

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9. 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.

As of September 30, 2004, the Company had commitments of approximately $988,000 to purchase product candidate materials and fund various clinical studies over the next six 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 the 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.

During June 2004, the Company signed an operating sublease on an existing office and laboratory building that will commence on January 1, 2005. The minimum payments under this lease are as follows (in thousands):

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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, 2003 filed with the SEC on March 12, 2004. These factors include, but are not limited to:

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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, 2003. 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.

OVERVIEW

We began our operations in January 1993 and, prior to April 1, 2003, we were a development stage company. Accordingly, we have a limited operating history. Since our inception, substantially all of our resources have been dedicated to:

We have lost money since inception and, as of September 30, 2004, had an accumulated deficit of approximately $364.6 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. We may never generate significant revenue from product sales or royalties.

Currently, our only significant source of revenue is from the sale of Fuzeon. Under our collaboration agreement with Roche, we share profits equally from the sale of Fuzeon in the United States and Canada and we receive a royalty on the net sales of Fuzeon outside of these two countries. Selling, marketing and other charges in the United States and Canada exceeded the gross margin from the sale of Fuzeon in these countries during the three and nine months ended September 30, 2003 and 2004, resulting in negative cash flow from the sale of Fuzeon in these countries for the three and nine months ended September 30, 2003 and 2004. During the three and nine months ended September 30, 2003 and 2004, our share of this negative cash flow exceeded royalties received from the sale of Fuzeon outside these countries. As a result, we had negative cash flow from the collaboration agreement during the three and nine months ended September 30, 2003 and 2004.

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Development of current and future drug candidates will require 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 losses for the foreseeable future and these losses may increase if 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:

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 and obtain and maintain regulatory approval for Fuzeon 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 achieve profitable operations, even if Roche achieves increased Fuzeon sales levels.

We are in the process of finalizing an amendment to our collaboration agreement with Roche. This amendment will clarify certain responsibilities of the parties under the collaboration agreement. To date we have reached an agreement in principle regarding certain key terms of this amendment. With respect to the understanding we have with Roche pertaining to amounts owed for future capital contributions, manufacturing milestones, and for manufacturing variances, we have recorded these amounts as of September 30, 2004 on the assumption that we will execute an agreement with terms substantially the same as those we have agreed to in principle.

Research and Development

The following discussion highlights certain aspects of our on going and planned research and development programs and commercialization efforts, including information presented during the nine months ended September 30, 2004. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 12, 2004 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.

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Fuzeon^®, enfuvirtide (formerly known as T-20)

Fuzeon is our first-generation HIV fusion inhibitor, a new class of anti-HIV drugs. 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 a combination of drugs other than fusion inhibitors that inhibit one of 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 eleven FDA-approved RTIs and nine 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 analyses of TORO-1 and TORO-2 showed that important secondary endpoints were also met with statistical significance. Roche submitted a full analysis of 48-week clinical data from TORO-1 and TORO-2 to the FDA in December 2003 seeking full approval for Fuzeon.

On October 15, 2004, the FDA granted full approval based on results from Phase III clinical trials over 48 weeks. 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.

Regulatory

Roche filed an application for European marketing approval on September 19, 2002. Roche received approval from the European Medicines Evaluation Agency, or EMEA, for use in the European Union on May 27, 2003. Roche submitted a full analysis of 48-week clinical data from TORO-1 and TORO-2 to the Committee for Proprietary Medicinal Products, or CPMP, in December 2003 seeking full approval for Fuzeon. In April 2004, the CPMP recommended full approval for Fuzeon based on this 48-week data. Roche received full approval from the EMEA for use in the European Union on June 8, 2004. Outside the United States and the European Union, Roche has received approval and reimbursement for Fuzeon in over thirty-five countries, and is in the process of negotiating reimbursement from additional countries in which they plan to market Fuzeon.

On October 15, 2004, the FDA granted full approval to Fuzeon. The FDA had previously granted accelerated approval to Fuzeon on the basis of 24-week data in March 2003 and premised on the subsequent submission of 48-week data. Accelerated approval is a special regulatory status designed to expedite the approval of therapies for serious or life-threatening illnesses, which provide meaningful benefit to patients over existing treatments. The traditional approval of Fuzeon was based on results from Phase III clinical trials over 48 weeks which confirmed the durable efficacy and safety of Fuzeon -based regimens.

Manufacturing

Roche manufactures the bulk drug substance of Fuzeon. Based on our progress and experience to date, we believe that Roche will be able to produce supply of Fuzeon sufficient to meet anticipated demand. If Fuzeon sales levels do not meet Roche and our expectations, the resulting production volumes may not allow Roche to achieve their anticipated economies of scale for Fuzeon. If Roche does not achieve these economies of scale, the costs of goods for Fuzeon could be higher than our current expectations.

Distribution

On April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. This development will afford enhanced and simplified access to Fuzeon for patients and their healthcare providers. Physicians can write prescriptions for Fuzeon from their own prescription pads and patients can get Fuzeon from the pharmacy of their choice, including Chronimed. Prior to April 26, 2004, Fuzeon was only available in the U.S. exclusively through Chronimed, Inc. (“Chronimed”).

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Treatment Guidelines

In July 2004, the official Journal of the American Medical Association, or JAMA, published the IAS - USA new anti-HIV drug guidelines. These guidelines position Fuzeon for use in treatment-experienced HIV patients that require a change in therapy after the second, third, or fourth drug regimen failure. The guidelines caution that Fuzeon should not be delayed to a point when a patient’s outcome may be compromised by the inability to combine it with other active anti-HIV drugs. The guidelines further state that there is no evidence that Fuzeon should be discontinued once a patient achieves a viral load that is below the level of detection.

International consensus guidelines for Fuzeon were published on May 17, 2004 in AIDS, the official journal of the International AIDS Society. The international guidelines were the first to focus solely on optimizing the use of Fuzeon in treatment-experienced HIV patients. The guidelines provide a framework for physicians in deciding when to include Fuzeon in HIV treatment regimens for their patients. The consensus panel recommended that patients are most likely to experience maximum treatment success when Fuzeon is introduced earlier in the course of HIV therapy, specifically after the failure of a second anti-HIV drug regimen as part of a third or fourth anti-HIV drug regimen. Moreover, the consensus panel reiterated that Fuzeon benefited treatment-experienced patients across all sub-groups studied, including those taking few or no other active anti-HIV drugs.

While these guideline publications provide guidance to clinicians on the recommended role and use of in clinical practice, physicians are not required to adhere to these recommendations. The actual use of Fuzeon may or may not be positively affected by these guidelines.

96 Week Data

On July 12, 2004, we announced data from patients in TORO-1 and TORO-2 that have completed 96 weeks of treatment with Fuzeon. Fuzeon durably suppresses HIV and provides continuous increases in CD4 cells over a period of 96 weeks. 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 units of CD4 cells per cubic millimeter of blood.

Additional analyses derived from the TORO data indicate that there is a distinct disadvantage to patients who wait to initiate Fuzeon based therapy. In the TORO study, patients originally randomized to the control group were allowed to add Fuzeon to a re-optimized regimen at virological failure or after 48 weeks on study. Data continued to be collected from these patients that we have now defined as the “switch” patient. Patients in the Fuzeon treatment group from the outset of the studies achieved a median viral load reduction in blood levels of HIV of 2.1 log₁₀ through 96 weeks of treatment. This reduction was markedly greater than that achieved by the “switch” patients who achieved a mean reduction in viral load at 96 weeks of 1.1 log₁₀. Patients in the Fuzeon treatment group saw continuous improvements in CD4 cells over the study period with the mean CD4 increase from baseline of 166 cells per cubic millimeter at week 96 compared to 116 cells per cubic millimeter in the “switch” patient group.

No new safety issues were identified in the 96-week analysis, and there was no evidence of long-term or cumulative toxicities. Rather, patients in the Fuzeon treatment group experienced less diarrhea, nausea and fatigue, side effects often associated with anti-HIV drug therapy. Injection site reactions, which did not increase in severity over 96 weeks, are the most common adverse event associated with use of Fuzeon.

More than half of treatment-experienced patients who began using Fuzeon at the outset of the study were successful in completing 96 weeks of treatment.

Optimizing long-term response

On October 5, 2004 we announced that in a retrospective, subset analysis of 48-week data from the TORO Phase III studies, almost twice as many treatment experienced patients (52 percent) who took Fuzeon with an active protease inhibitor (PI) regimen (including at least two other active anti-HIV drugs) achieved undetectable levels of HIV (less than 400 copies/ mL), compared to those receiving an active boosted PI regimen without Fuzeon (27 percent). Patients taking Fuzeon with an active boosted PI regimen also experienced a significantly greater immunological response, with a median increase of 104 CD4 cells / mm³ versus an increase of 57 CD4 cells / mm³ among patients receiving an active boosted PI regimen without Fuzeon.

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Future Fuzeon Clinical Trials

We expect to initiate various clinical trials with Fuzeon during the remainder of 2004. These trials plan to focus on the following primary needs in potential Fuzeon patients: the effect of a more convenient regimen; the effect of Fuzeon in patients with less treatment experience than in our TORO trials; and the potential for reducing other anti-HIV drug related toxicities and/or adverse events.

T-1249 and Next Generation Peptides

T-1249 is our second-generation HIV fusion inhibitor being co-developed with Roche. In September 2002, we presented data from a Phase I/II trial of T-1249, which suggest that over 14 days of dosing, T-1249 was well-tolerated and produced dose-related decreases in HIV viral load. In September 2003, we presented final data from a ten-day Phase I/II trial of T-1249, which suggest that T-1249 reduced viral load in most patients who had failed an individualized anti-HIV drug regimen that had previously included Fuzeon. This data suggests that T-1249 is active in patients who have virus that has developed resistance to Fuzeon.

In January 2004, Roche and Trimeris announced that the clinical development of T-1249 was put on hold due to challenges in achieving the desired technical profile of the current formulation. The compound’s safety, efficacy and tolerability were not factors affecting the decision. As with any compound in development, the technical development is an evolving process where many challenges are identified. The physical properties of T-1249 differ from Fuzeon during its manufacturing and formulation. Our focus will be to continue the pursuit of new formulations of T-1249 that are more patient-friendly for chronic administration.

With respect to Trimeris’s next generation peptide program our intention is to identify a next generation fusion inhibitor candidate that has an optimized virological and pharmacokinetic profile and to identify a sustained-release formulation for that peptide as well. In January 2005, Trimeris expects to select a peptide with an optimized profile for large-scale synthesis and advanced formulation studies with toxicological studies to follow some time thereafter.

Other Research Programs

On June 3, 2004, we announced the renewal of an agreement with Array Biopharma Inc., or Array, to discover small molecule entry inhibitors directed against HIV. As part of this renewed agreement, Trimeris will screen small molecule compounds created by Array against HIV entry inhibitor targets. The terms of the agreement are substantially similar to those of the initial agreement, signed in August 2001. Array will be entitled to receive research funding as well as milestone payments and royalties based on the success of this program.

RESULTS OF OPERATIONS

Comparison Of Three Months Ended September 30, 2004 and 2003

Revenues

The table below presents our revenue sources for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

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Milestone revenue: Total milestone revenue represents the amortization of achieved milestones under our collaboration with Roche.

The table below presents our achieved milestones from Roche as of September 30, 2004. We are recognizing these milestones on a straight-line basis over the estimated development period, or estimated commercial period, as appropriate.

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During the first quarter of 2004, we put future clinical development of T-1249 on hold. As a result, we changed our estimate of the end of the research and development period for our Roche collaboration to 2010, from a period of 2005 to 2007, based on an estimate of the development period for T-1249 or another development compound under our collaboration agreement. This change in estimate resulted in lower milestone revenue in the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Royalty revenue: Royalty revenue represents the royalty payment earned from Roche based on total net sales of Fuzeon outside the United States and Canada. Sales of Fuzeon outside the United States and Canada began in June 2003. Total gross sales outside the United States and Canada for the three months ended September 30, 2003 and 2004 were $2.54 million and $13.1 million, respectively. To calculate the royalty revenue an 8% distribution charge is deducted from gross sales to calculate net sales, from which Trimeris receives a 10% royalty.

Collaboration Loss

The table below presents our collaboration loss for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. Collaboration loss is reported as “Collaboration loss” on our Statement of Operations. Under our collaboration agreement with Roche, we share profits equally from the sale of Fuzeon in the United States and Canada.

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Gross Fuzeon sales by Roche: Gross Fuzeon sales are recorded by Roche. Prior to April 26, 2004, Roche had an exclusive distribution arrangement with Chronimed to distribute Fuzeon in the United States during the initial commercial launch in 2003, which terminated on April 26, 2004. Effective April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. Prior to April 26, 2004, revenue from product sales was recognized when title and risk of loss has passed to Chronimed, which was when Chronimed allocated drug for shipment to a patient. Beginning April 26, 2004, revenue is recognized when Roche ships drug and title and risk of loss passes to wholesalers.

During the three months ended September 30, 2004 and 2003, Roche shipped approximately 14,600 kits and 7,000 kits of Fuzeon, respectively, to wholesalers/distributors in the United States and Canada. A kit represents a one-month supply of Fuzeon for a patient.

Roche shipped approximately 3,000 kits during the quarter ended June 30, 2003, 7,000 kits during the quarter ended September 30, 2003, 9,000 kits during the quarter ended December 31, 2003, 11,000 kits during the quarter ended March 31, 2004 and 16,000 kits during the quarter ended June 30, 2004, to wholesalers/distributors in the United States and Canada. The number of kits shipped may not remain constant and may increase or decrease in the future.

Sales adjustments: Sales adjustments are recorded by Roche based on their experience with selling Fuzeon. Sales adjustments increased for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 due to increased kit sales as described above. There were no material revisions to Roche’s recorded estimates related to total sales adjustments compared to net sales for the three months ended September 30, 2004.

Cost of goods sold: Cost of goods sold increased for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 primarily due to increased kit sales as described above. Also, during the three months ended September 30, 2004 there were additional manufacturing variances included in cost of goods sold.

Gross margin: Gross margin as a percentage of net sales for the three months ended September 30, 2004 was 46% compared to 55% for the three months ended September 30, 2003. The decrease in gross margin primarily resulted from lower than anticipated manufacturing volumes.

Selling and marketing expenses: Under provisions of our collaboration agreement, our actual cash contribution to the selling and marketing expenses for Fuzeon in 2004 is limited to approximately $10 million, even though Roche expects to spend significantly more on these expenses. If certain cumulative levels of sales for Fuzeon in the United States and Canada are achieved, our share of any additional expenses incurred by Roche during 2004 will be payable to Roche beginning at a future date over several years from that future date. During the six months ended June 30, 2004, we reached our $10 million limitation for the year. We recorded a liability of approximately $3.7 million as part of collaboration loss during the three months ended June 30, 2004. For the three months ended September 30, 2004, we recorded an additional liability of approximately $5.9 million as part of collaboration loss, which is reflected in the above table as “Costs exclusive to Trimeris, Inc.” This represents the net present value of our estimated share of the additional expenses, based on achievement of the sales milestones in the agreement. For the fourth quarter of 2004, we will record a similar liability based on the additional expense incurred during the quarter.

        Other costs: Other costs for the three months ended September 30, 2004 includes a net charge comprised of a supply contract penalty off-set by an adjustment to Roche’s inventory. Also included in other costs are general and administrative and distribution charges. Trimeris is responsible for 50% of these costs under the collaboration agreement.

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Costs exclusive to Trimeris: Costs exclusive to Trimeris includes the net present value of the Company’s estimated share of the marketing expenses in excess of approximately $10 million, based on expected timing and terms of payment under the agreement. The marketing limit is discussed above. Also included in the costs exclusive to Trimeris is approximately $91,000 related to license fees for certain technology paid to a third party.

Research And Development Expenses

The table below presents our research and development expenses for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

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 to September 30, 2004 for Fuzeon and T-1249.

Non-cash compensation: Non-cash compensation expense is recognized based on the cumulative expense calculated under EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for stock options previously granted to non-employees at the end of the period as compared to this amount at the beginning of the period. The primary factor affecting the expense to be recognized is the change in the market price of our stock. The closing market price per share of our stock was $45.62, $25.07, $14.43, and $15.05 on June 30, 2003, September 30, 2003, June 30, 2004 and September 30, 2004, respectively. The cumulative expense calculated under EITF 96-18 for stock options previously granted to non-employees was greater at September 30, 2004, compared to June 30, 2004. This increase in the expense resulted primarily due to the increase in the market price of our stock from June 30, 2004 to September 30, 2004. 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.

Also included in the non-cash compensation expense is amortization expense of $92,000 related to restricted stock granted in June 2004.

Other research and development expense: Total other research and development expenses decreased during the three months ended September 30, 2004 compared to the three months ended September 30, 2003, as a result of:

During 2003, we extended the term of our research agreement with Roche to December 2005. We also recognized reimbursement from Roche for their 50% share of certain research and development expenses, incurred by Trimeris, during the three months ended September 30, 2004. We did not recognize a similar reimbursement for the three months ended September 30, 2003 because the research agreement was not renewed until December 2003. This decrease in research and development expense during the three months ended September 30, 2004 was partially offset by expense incurred for preclinical studies under our research agreement with Roche.

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Total research personnel were 92 and 63 at September 30, 2003 and 2004, respectively. We expect research and development expenses, net of the reimbursements for Fuzeon and T-1249 development costs from Roche, to be lower during 2004 as compared to 2003, barring any unforeseen changes, due to:

General and Administrative Expenses

The table below presents our general and administrative expenses for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Non-cash compensation: Non-cash compensation expense for the three months September 30, 2004 represents amortization expense for the restricted stock granted in June 2004. The expense for the three months ended September 30, 2003 represents the stock options previously granted to non-employees at the end of the period as compared to this amount at the beginning of the period.

Other general and administrative expense: Other general and administrative expense increased for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 as a result of :

Total general and administrative employees were 42 and 31 at September 30, 2003 and 2004, respectively. We expect other general and administrative expenses to increase in the future due to increased costs to meet new requirements placed on public companies by The Sarbanes-Oxley Act of 2002 and related regulations issued by the SEC and new Nasdaq listing standards.

These expected increases will be partially offset by reduced expenses due to a headcount reduction that we implemented in January 2004.

Other Income (Expense). Other income (expense) consists of interest income and expense. Total other income was $314,000 and $211,000 for the three months ended September 30, 2003 and 2004, respectively. The decrease for the three months ended September 30, 2004 was primarily due to lower interest income because of lower average investment balances during the three months ended September 30, 2004 compared to the three months ended September 30, 2003. We expect yields on our investment portfolio to remain at current levels for the foreseeable future based on the current short-term interest rate environment.

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Comparison Of Nine Months Ended September 30, 2004 and 2003

Revenues

The table below presents our revenue sources for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Milestone revenue: Total milestone revenue represents the amortization of achieved milestones under our collaboration with Roche.

The table below presents our achieved milestones from Roche as of September 30, 2004. We are recognizing these milestones on a straight-line basis over the estimated development period, or estimated commercial period, as appropriate.

During the first quarter of 2004, we put future clinical development of T-1249 on hold. As a result, we changed our estimate of the end of the research and development period for our Roche collaboration to 2010, from a period of 2005 to 2007, based on an estimate of the development period for T-1249 or another development compound under our collaboration agreement. This change in estimate resulted in lower milestone revenue in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Royalty revenue: Royalty revenue represents the royalty payment earned from Roche based on total net sales of Fuzeon outside the United States and Canada. Sales of Fuzeon outside the United States and Canada began in June 2003. Total gross sales outside the United States and Canada for the nine months ended September 30, 2003 and 2004 were $3.5 million and $33.9 million, respectively. To calculate the royalty revenue an 8% distribution charge is deducted from gross sales to calculate net sales, from which Trimeris receives a 10% royalty.

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Collaboration Loss

The table below presents our collaboration loss for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Collaboration loss is reported as “Collaboration loss” on our Statement of Operations. Under our collaboration agreement with Roche, we share profits equally from the sale of Fuzeon in the United States and Canada.