Wednesday night, Trimeris ( TRMS) warned of supply constraints for its experimental AIDS drug Fuzeon. Thursday morning, analysts across Wall Street slashed near-term sales forecasts. So how does Trimeris' stock price react? It's up. Huh? Well, in Wall Street logic, bad news is only bad when it's unexpected, and in this case, there were few institutional investors who lent any credence to the original Fuzeon supply forecasts offered by Trimeris and its partner, the Swiss drugmaker Roche. Simply put, everyone knew the Fuzeon numbers were coming down, it was just a question of when. Now that it's
happened , the downside risk is gone, so for many fund managers, it's time to buy. Trimeris' shares were up 6% to $42.45 Thursday. But prior to today, Trimeris had fallen almost 30% from its 52-week high of $56.90, reached Nov. 2, because of all the concerns over Fuzeon's supply problems. "There were a lot of hedge funds shorting Trimeris since late October. Today they got caught and were forced to cover, as some of the big mutual funds stepped in to buy now that the bad news is out in the open," says one hedge fund manager, who hasn't been involved in the stock. To see what happens to a stock when unexpected bad news hits, check out Icos ( ICOS), which was down 15% Thursday after the company surprised investors with news that it was halting development of an experimental sepsis drug already in phase III studies. In addition to the reasons mentioned above, Banc of America Securities biotech analyst Mike King says Trimeris' shares are strong today because the expected bad news wasn't as bad as it could have been. Trimeris and Roche drastically reduced forecasts for 2003, but left guidance for 2004 and beyond relatively unchanged.
King reduced his 2003 sales guidance for Fuzeon to $94.1 million from $158.2 million (among the highest on Wall Street), but he kept his 2004 Fuzeon sales forecast essentially unchanged at $305 million. King rates Trimeris a buy, and his firm has a banking relationship with the company. Morgan Stanley analyst Steve Harr has been a bit less bullish on near-term Fuzeon sales, reflected in his new forecasts. Harr lowered his 2003 Fuzeon sales forecast to $62 million from $125 million. He also chopped his 2004 forecast to $247 million from $281 million. Harr has an equal weight rating on the stock, and his firm has a banking relationship with the company. If Wall Street's sell-side analysts were wrong with their original Fuzeon estimates, then why should investors have any more confidence in the new figures? That's a good question, especially because gauging precise Fuzeon sales is affected by some rather opaque guidance coming from Trimeris and Roche. For starters, the companies have given guidance only on the number of patients they expect to have on Fuzeon by the end of 2003 and 2004. Pricing for the drug, and the cost to produce it, is still a guessing game. Some analysts have been using a price tag of $12,000 per year; others have estimated the cost to each patient to be $15,000 per year. Trimeris and Roche have said they will offer pricing information as Fuzeon nears U.S. approval, expected in the first quarter of 2003. The uncertainty over the exact sales potential for Fuzeon is reflected in the Grand Canyon-esque chasm between the low and high sales estimates on the Street. Prior to Wednesday's warning, 2003 Fuzeon sales estimates ranged from $60 million to $160 million. For 2004, the estimates ranged from $250 million to $350 million. If Trimeris and Roche continue to have manufacturing problems, these numbers may have to come down once again. But Wednesday, investors clearly were not focused on that risk. Instead, they were simply happy that the "expected" bad news was over and done with. That, it seems, was a signal to buy.