Bid for Chiron highlights CEO's uncertain future at company
San Francisco Business Times - March 24, 2006
by Daniel S. Levine
Chiron's problems with contamination at its Liverpool flu vaccine plant, though resolved, have overshadowed Howard Pien's tenure as CEO.
The flu vaccine troubles helped secure Pien the dubious distinction from BusinessWeek of being named among the worst managers of 2004. And the Business Times named him the Bay Area's most over-paid CEO in 2004.
When I have asked people who know the Emeryville-based biotechnology company why Pien hadn't been fired, they have consistently answered along the lines of "I've been wondering the same thing myself."
So when I read a letter the other day from a Chiron shareholder to the Chiron board, I wasn't surprised that it threatened to lead a campaign to oust Pien. What did surprise me is the case it made based on his positive performance as CEO. Have people failed to see Pien's accomplishments? Does Pien stink, or is he just misunderstood?
The letter came from G. Mason Morfit, a partner at the San Francisco-based hedge fund ValueAct Capital, which has been leading a campaign to get Chiron shareholders to reject a bid from Novartis to acquire the company for $45 a share.
One reason to take the campaign seriously is that Chiron shares have consistently traded above Novartis' $45 bid since Jan. 26, when reports came out that Citibank Asset Management North America LLC, Chiron's largest shareholder outside of Novartis, would join ValueAct in opposing the deal. CAM and ValueAct control 30 percent of the non-Novartis shares.
ValueAct's most recent letter was a response to Chiron's request to the dissident shareholder to meet with outside directors to discuss the Novartis acquisition.
Time is running out. Shareholders other than Novartis will decide to either give the deal a thumbs up or a thumbs down on April 12. In a response to ValueAct, Chiron issued a statement that its independent directors and management team continue to believe the Novartis deal represents "a full and fair price."
ValueAct believes the Novartis deal robbed shareholders of value because it came a day after the company announced U.S. Food and Drug Administration clearance to resume production of its flu vaccine. It feels that the stock didn't have a chance to react to the news or reflect the positive developments since then.
Morfit praised Pien and his management team not only for their ability to bring the Liverpool plant back into production, but for leading Chiron's growth.
"To support such a deal would be to say that Howard and the rest of management destroyed equity value over the past three years," Morfit wrote. "To the contrary, Howard and his team have created real business value."
Morfit pointed to projections that Chiron revenues will grow to $2.2 billion in 2006 from $1.2 billion in 2002. Projections also showed the company will increase earnings per share to $1.54 in 2006 from 96 cents in 2002 and increase earnings from its blood-testing business to $301 million in 2006 from $178 million in 2003.
Morfit notes that since the Novartis bid, Chiron has generated a flow of good news. The company has started a late-stage clinical trial for its inhaled antibiotic, resumed shipments of its flu vaccine, won a contract from the U.S. Department of Health and Human Services to supply an emergency stockpile of pandemic flu vaccines, won FDA approval for its West Nile Virus test and learned that Schering AG will exercise its option to purchase marketing rights to the company's multiple sclerosis drug Betaseron for what analysts estimate will be $1.2 billion.
The letter notes Chiron's balance sheet is strong, its three business segments are growing and a strategic plan is in place for earnings per share at a compounded rate of 30 percent a year for the next five years.
ValueAct would like to see Chiron buy back 47 million shares of its stock from Novartis and reduce the pharmaceutical company's stake to less than 20 percent. That would drop its board representation to one from three members and prevent it from blocking a sale to a third party.
Where's the best value for Chiron shareholders? A Novartis buy at $45, Chiron without Novartis or Chiron without Pien or Novartis?
ValueAct said it would work to oust Pien if he campaigns for the merger because it would show "he has chosen not to accept responsibility for maximizing shareholder value."
ValueAct came to praise Pien, but it's willing to bury him.
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