FYI:
CHIRON - named for a mythological centaur with great medical knowledge - is the world's second-largest biotechnology firm (after Amgen). The 17-year-old company develops diagnostics, treatments and preventatives for an array of diseases that includes AIDS, hepatitis, cardiovascular disease and cancer, but the competition within the industry has been fierce.
On Thursday, Chiron announced it was selling its diagnostics business to Bayer AG of Germany for more than $1.1 billion. Chiron will redirect its business toward its most profitable division, therapeutics, which researches treatments for oncology and infectious diseases. The company developed Proleukin, the first treatment approved for metastatic kidney cancer and melanoma and Betaseron, a therapy for multiple sclerosis.
"Chiron is a company that, like most other biotech companies, has grown up over a short period of time in the life of the pharmaceutical industry," said Sean Lance, Chiron's CEO.
Lance, a native of South Africa and a former COO of Glaxo Wellcome, joined Chiron in May. He was charged with getting the company back on track as a lucrative, innovative force in developing drugs and diagnostics.
But meeting that goal is tough in such a volatile sector. It can take up to ten years and millions of dollars in research and development before a new drug therapy is brought to market. For the investor, it is high risk, high reward. "Chiron has been the worst performer of all the large-cap biotech companies with a 30 percent decline in its stock price over the last 12 months," said Charles Engelberg, analyst, AmericaCal Securities.
The company has underperformed the Dow Jones Biotechnology Index, which tracks the sector, since the mid-1990s. Over the last year alone, Chiron shares have traded between $13 and $24. Earnings are a particular concern for investors. After reporting a loss in the third quarter of '97, earnings popped up in the fourth quarter, although they began to drift downward in the first and second quarters of this year. But the company expects annual increases of 25 percent in operating earnings over the next full business cycle.
Chiron certainly devotes its full attention to research. The company's "R&D budget, which approaches $400 million a year is close to that of some of the pharmaceutical companies, such as Warner-Lambert, which spends maybe $600 million a year with maybe 40 times the market cap," said Engelberg.
Analysts are optimistic about the stock. According to Zack's Investment Research, of the 12 analysts surveyed who follow the company, eight have "buy" recommendations and four have "hold" recommendations.
Chiron has 6,500 employees in 30 countries, but heavy spending on R&D bloated the expense line and rocked the company financially. In 1995, Ciba-Geigy, the giant Swiss pharmaceutical, now Novartis, threw Chiron a lifeline, buying up nearly 49 percent of the California firm.
"We have full management control of Chiron. Their investment was by way of being a preferred partner. All indications are that they are still extremely happy with allowing themselves another avenue to the new science and the new technologies that are available," said Lance.
Rusty Williams, Chiron's president, says the company carefully manages which projects are proceeding along the development pipeline.
"The bottom line is that this is a business and so there is nobody here who misses the point," said Williams.
Chiron is also attempting to expand the applications of its existing drugs, thus making the biotech firm less of a technology-based company to a more commercial one. Drugs developed for specific maladies are being on other diseases. For example, Proleukin, developed for kidney cancer, is being tested on HIV.
Lance says all of new approaches help fulfill one of his top goals - shareholder value - even if it means giving up autonomy.
"A company like ours is better off standing alone because we've got a good income stream, we've got a healthy balance sheet and it's a good business. But if you are a very, very good and very lean and fit organization, you're opening yourself up for someone to say come along and say `I'll have you.' And if that's the outcome and it's good for shareholders, we can't stop it," said Lance.
From an article in Microsoft Investor 09/20/98
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