MARCH 10, 2005
STREET WISE :E.BIZ
By Sarah Lacy
Still Shaky at Chiron
Last year's flu-vaccine debacle may be history, but the company is still grappling with accounting problems and tougher competition
For a week, it appeared the clouds above Chiron (CHIR ) were finally starting to clear. It faced a firestorm of criticism last October after its plant in Liverpool was shut down by British health authorities due to contamination, causing a flu-vaccine shortage in the U.S. But on Mar. 2, Chiron received approval to reopen the plant, and the stock jumped 6% on the news.
Investors were heartened when Chiron execs also said, now that they know they can count on their flu vaccine, Fluvirin, they'll be able to provide financial guidance for this year.
TROUBLING SIGNS. But it's one step forward and two steps back with this Emeryville (Calif.) concern. After the market closed on Mar. 8, Chiron announced a revenue restatement for 2004's fourth quarter because it was changing the way it accounted for some sales. The restatement dropped 2004's total earnings 10%, to $54 million. Revenues were $1.7 billion, $2.5 million less than initially reported. Chiron will restate 2004's second- and third-quarter numbers in its next quarterly report, but it's not clear what the impact of those moves will be, since an audit is ongoing.
More worrisome than the actual restatement, the Mar. 8 announcement also included an admission that Chiron has problems in the way it records vaccine revenues, tax gains, and legal expenses. Chiron will detail the problems in its annual report, which is expected to be released later this month. "There can be no assurance that the company and its external auditors will not identify further material weaknesses," Chiron said in a tersely worded statement.
To many, the restatement is a troubling sign that Chiron's management just doesn't have a good handle on finances. Banc of America Securities reiterated its sell rating on the news and said in a research note: "This event further weakens our confidence in management's ability to execute against the many changes that lie ahead."
CEO STUMBLES. Given all the uncertainty swirling around Chiron, investors were remarkably understanding. The stock fell just 2.2%, to end at $37.17 on Mar. 9. That's likely because the outfit had warned it would probably restate earnings back in February, and the hit was less than many had expected. Nonetheless, investors are taking a chance. With Chiron shares trading 16% above October lows, they may be banking a little too much on a 2005 rebound at a time when more problems are unfolding.
Some are still leery. "All this news is a reflection of the quality of the management," says Alan Lancz, a money manager in Toledo, Ohio, who owned Chiron shares in the late 1990s. "There might be other things that no one even knows about yet." Lancz considered investing again when the stock fell last year. But so far, management woes have him sitting on the sidelines.
All this may cast doubt on Chief Executive Howard Pien's future. Pien has been under pressure since October. Just weeks before British regulators shut down the Liverpool plant, he told congressional leaders in a Capitol Hill hearing that reported manufacturing glitches wouldn't stop Chiron from delivering nearly 50 million doses of its flu vaccine to the U.S. His missteps spurred investigations by the Justice Dept. and the Securities & Exchange Commission, as well as several shareholder lawsuits.
GOOD BLOOD WORK. It's quite a comedown from two years ago, when Pien, an executive at pharmaceutical giant GlaxoSmithKline (GSK ), took the corner office at Chiron and promised to build the concern into a vaccine and biotech powerhouse. It looked like he would do exactly that, after a gutsy acquisition of British flu-vaccine maker PowderJect Pharmaceuticals in July, 2003.
Despite an increase of 45% in research and development and general administrative costs, thanks to that acquisition, Chiron's fastest-growing business remains what it did before -- making blood-testing equipment for HIV and hepatitis. The old business generated 22% growth and $278 million in revenues last year.
By comparison, vaccine revenues dropped $200 million, to $481 million, and the biotech business grew 12%, to $563 million. "The blood-testing business is the only reason to own the stock," says Geoffrey Porges, an analyst at Bernstein Research. "It's actually a very nice business."
RIVALS MOVE IN. Vaccines are looking better this year, but there's still uncertainty. Analysts expect Chiron to sell about 30 million doses in 2005, 40% less than it had planned on selling last year. For one, the U.S. Food & Drug Administration still needs to approve the plant for this year's flu-vaccine production. And investors won't know for sure if the doses are good until they're delivered to the FDA in September, Porges says.
Even if all of that goes as Chiron plans, it still won't have the hold on the business it did prior to last year's bungling. Rapid sales growth was dependent on Chiron's ability to raise Fluvirin prices, a likely scenario when Sanofi-Aventis, a French drugmaker, was the only other U.S. supplier.
But Chiron's missteps have allowed two other big players into the U.S. market: GlaxoSmithKline, Pien's old company, and ID Biomedical (IDBE ) of Canada. The latter already has sewn up long-term deals with the three biggest flu-vaccine distributors in the U.S. and is ramping up to make 50 million doses annually. In recent years, total U.S. demand has been less than 90 million doses. With that kind of oversupply, Chiron can forget upping prices. It'll be lucky to maintain its market share.
Some wish it would cut spending and focus on blood testing, but that's not likely with Pien in charge, analysts say. He has staked his reputation on getting Fluvirin back in the market and getting something out of all that biotech R&D. Smart investors may want to wait this drama out before buying.
businessweek.com |
