Was Chiron a victim of too-lofty goals?
By Jim Hopkins, USA TODAY
Posted 10/11/2004 11:45 AM
SAN FRANCISCO — Chiron (CHIR), the company at the center of the USA's burgeoning flu vaccine crisis, thought it had a winning formula this year.
Managers would boost vaccine production 37% at its aging British factory to grab a bigger slice of the U.S. market, growing amid fears of vaccine shortages.
"Last influenza season hit early and hit hard," CEO Howard Pien said in a news release just three months ago. "Our manufacturing teams have worked hard to increase production to record levels."
The strategy worked during last year's flu season, when Chiron trumpeted a 50% vaccine production bump through "efficiency measures" that added $245 million to annual revenue.
Now the company faces tough questions from Wall Street to Washington about whether this year's push played a role in the contamination and presumed loss of Chiron's vaccine for the USA — nearly half the nation's supply. "Whether or not corners were cut in order to achieve that goal is unclear," says analyst Jennifer Chao of Deutsche Bank. "I think that's entirely possible."
Friday, Pien told a congressional panel that its internal investigations had shown the vaccine "was safe."
"Chiron did not at any time mislead public health stakeholders or the public," he said in a written statement to an urgent meeting of the House Committee on Government Reform.
Chiron did not return telephone calls seeking comment Sunday or last week.
British regulators' decision last week to yank Chiron's license to make Fluvirinvaccine in Liverpool and impound its vaccine left U.S. authorities scrambling to head off a public health crisis that could cost thousands of lives this winter. Chiron slashed its 2004 earnings estimates by 75%. Its stock dived 22%. And Pien, a fast-rising pharmaceuticals executive who joined Chiron just last year, saw his reputation tarnished.
Left wondering
Sen. Larry Craig, R-Idaho, chairman of the Special Committee on Aging, wonders whether he grilled Pien closely enough Sept. 28. Pien assured the panel that Chiron was on track to deliver up to 48 million doses this month.
Craig says a spike in deaths among the elderly, who comprise more than 90% of a typical year's 36,000 flu deaths, may be avoided through vaccine rationing. "But, having said that, we are down by 46 to 48 million doses," he says.
Chiron is now focused on fixing problems at the Liverpool plant, bought last year for nearly $1 billion despite its history of contamination problems, so it can deliver flu vaccine to the USA next year.
But that won't be easy. It must regain its license in as little as three months to meet the start date for next year's production. "They will be under the microscope," Chao says.
It is unclear what steps, such as beefing up staff or equipment, Chiron took to boost production at the former PowderJect Pharmaceuticals plant. Executives, in conference calls with securities analysts since buying the plant, spoke often of raising productivity, comparing the Liverpool plant's performance with Chiron factories in Italy and Germany. "They thought there was room for improvement," says analyst Thomas Shrader of investments firm Harris Nesbitt.
Chiron's board last year approved $97 million for a new Liverpool factory. But the firm spent just $6.3 million of that through June 30, according to Securities and Exchange Commission filings.
It was well known that previous owners had long under-invested in the Liverpool factory, says analyst Alexander Hittle of A.G. Edwards.
Four years ago, British health authorities told Celltech, which then owned the factory, to withdraw an oral polio vaccine because of concerns about contamination at the plant, according to British news accounts. Celltech's production problems were coupled with a collapse in sales. It sold the plant to PowderJect in September 2000.
Chiron, Hittle says, made a "calculated gamble" that it could meet higher demand at the old factory while it built a new one. "Their luck ran out," he says.
CEO bullish just 2 weeks ago
Pien still hoped that gambit would pay off as recently as two weeks ago in his appearance before Craig's panel. The CEO reiterated statements made Aug. 26: Chiron's vaccine delivery remained on track for October.
Chiron's focus on vaccines came as the company, pressed by Wall Street, sought to bolster revenue.
The San Francisco area biotech, founded in 1981, gets revenue mostly from three sources: drugs, vaccines and blood testing. Higher revenue would pay for research to develop other, more lucrative businesses such as biotech drugs to fight cancer and other diseases. The company's drug-development efforts from its own labs have been weak, Chao says.
Expanding more into vaccines seemed like the answer. Chiron already sold vaccines in Europe — but not the USA, one of the biggest markets. PowderJect had contracts with U.S. hospitals, governments and other big health care buyers.
Buying it gave Chiron fast access to the USA, including a distribution network it could tap for other vaccines it might one day develop. It is working on cell-culture flu vaccines that are faster to produce than the decades-old method of using cultured chicken eggs.
Plus, buying PowderJect immediately jolted revenue. Vaccines grew to 40% of Chiron's $1.8 billion in revenue last year, vs. 30% of $1.3 billion in 2002. That made it a "rarity among biotech investments," which often take years to produce revenue, Hittle says.
What's more, the company faced dwindling competitors. Major suppliers exited the business in recent years. MedImmune, another U.S. biotech, spent $1 billion to launch the nasal spray vaccine FluMist last year to mixed consumer response. FluMist is only for patients 5 to 49 years old. The most at-risk population is 65 or older.
PowderJect also promised more profit. That's because many of its contracts were up for renewal, giving Chiron a chance to raise prices as demand rose, analysts say.
Chiron was banking on more demand if health experts recommended annual vaccination for more young people. Last year, at least 152 U.S. children died during the vaccine shortage.
Given those stakes, Pien was pressed to make the most of Chiron's PowderJect investment. Still, business associates who know him say it's inconceivable that Pien, 46, would have driven Liverpool managers to take unnecessary risks.
"He's not a flashy guy," says Steven Burrill, CEO of Burrill & Co., a San Francisco investment bank focused on biotech ventures. "He's about as solid a guy as you could ever get in a job like that."
Pien became CEO in April 2003, three months before Chiron bought PowderJect. Still, Pien told the Contra Costa Times last year, he "was very much part of the decision."
He came to Chiron from GlaxoSmithKline, where he was president of international pharmaceuticals.
Before that, he was a senior executive at SmithKline Beecham prior to its merger with Glaxo. He also held jobs at Abbott Laboratories and drug giant Merck.
Chiron paid Pien $2.1 million last year, including a $650,000 hiring bonus. He stands to make at least $760,000 in base salary this year, plus a bonus of as much as $1.5 million if he meets certain goals, SEC filings show.
Pien's career race to the top made him an industry superstar, says Eric Topol, chief academic officer at the Cleveland Clinic. He knew Pien at Abbott.
"He was seen as the miracle man," Topol says.
Crisis of confidence
Now Pien must perform another miracle: regaining the confidence of consumers, regulators and investors who punished Chiron stock. It closed Friday at $35.63, down 2.5%. The stock stood at $45.42 on Tuesday, the day before its disclosures.
The shortage has already sent Americans stampeding for a vaccine that many might not have sought before last week. Chiron's vaccine cost $5.50 a dose, analyst Shrader says.
"Would you give $7.50 for a flu vaccine today?" he asks. "You don't miss your water until your well runs dry."
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