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Chiron: No One-Trick Biotech

While biotech stalwarts Amgen (AMGN) and Genentech (DNA) bask in the glory of blockbuster drugs, No. 3 Chiron (CHIR) has been content to pursue a less sexy strategy. Its diversified lineup includes vaccines, blood-testing technology, and a handful of niche drugs. It has worked, so far. The absence of blockbusters hasn't hampered Chiron's ability to turn in consistently solid earnings results. Year-to-date, the stock is up 45%, to $55, vs. a 36% rise for the broader biotech sector.

Yet most analysts say despite the health of Chiron's blood-testing and vaccine businesses, sustained long-term growth will depend on its ability to come up with new drugs. Merrill Lynch analyst Eric Ende points out that it has had a mixed record on this front. The focus on Chiron's pharmaceutical business is positive, says Ende, but "prior failures keep our optimism in check."

CEO Howard Pien, who was appointed in April, is unperturbed. He expects Chiron's drug business to be robust in the coming year. "We're now at a stage, having delivered reliable financial growth, to focus on some longer-term opportunities," he says of the product pipeline. A meningitis vaccine is likely to go before the Food & Drug Administration next year, and a more comprehensive test for blood-safety testing is expected to be approved in 2005. A drug for severe community-acquired pneumonia is now in late-stage testing, and one for cancer of the esophagus is in Phase II.

In his seven months on the job, Pien has delivered respectable results. The third-quarter ended Sept. 30 was stronger than expected, thanks largely to the strength of Chiron's flu-vaccine business, which was bulked up with the summer acquisition of PowderJect. Though Chiron is expected to spend more on research and development in the coming years to enhance its offerings, analysts nevertheless expect annual double-digit rises in sales and net profits. Ende predicts earnings per share will increase 19%, to $1.65, in 2003 on an boost in sales of 33%, to $1.7 billion.

Pien spoke to BusinessWeek Online Reporter Amy Tsao on Nov. 3 about his plans for Chiron. Edited excerpts of their conversation follow:

Q: Do you see pharmaceuticals being a larger part of the overall business?

A: It is an important part of our objective, yes. Our business model has been very, very sound -- pursuing a variety of areas. I don't have any plans to bring the company to a pure play. We've been able to show reliable growth through investing in sound, long-range opportunities.

Q: Wall Street analysts and investors I've talked to are quite cautious on your drug-development efforts. Why do you think they have that view?

A: We have about 15 or 16 analysts following us now, and [eight] have buy ratings, so it's not that everybody is dumping on the stock. I think the perspective on this is that a lot of the biotech companies can be reduced down to one or two products. In Chiron's case, we're not reducible to one or two products. It's a lot more complicated because we have grown differently. Sometimes, the financial analysts haven't looked at it in sufficient detail.

Q: So what do investors have to look forward to from Chiron?

A: The company's prospects are good. We wish to do better in the pharmaceutical arena. The infectious-disease and oncology areas will be where we spend most of our resources in the next few years.

In cancer, we have Interleukin on the market. It's indicated for terminal renal cancer, and now we're studying it for non-Hodgkin's lymphoma in combination with Genentech's Rituxan. If this combination works, it should be a fairly substantial leap. It's in Phase II testing now.

In infectious disease, we have an inhaled drug that deals with bacterial infection in cystic fibrosis patients. We're looking at the design so the drug can be used more easily and conveniently.

We have another program in oncology for esophageal cancer. We hope that we'll be able to determine whether or not tezacitabine is a viable candidate in the next six months or so. It's now in Phase II trials.

Q: How is the blood-testing business doing?

A: We have a dominant market share in this technology in the U.S., and we're doing fairly well in Europe. While the European and the U.S. market are very much driven by safety testing for hepatitis C virus and HIV, in other countries they also would like to have [the blood supply tested for] hepatitis B. In the next couple of years our Ultrio test will address that.

Q: What about the vaccines business?

A: We have a meningitis vaccine in late-stage testing. The PowderJect acquisition we made has significant importance because it gives us a substantial business in the U.S. flu-vaccine market.

Q: You also are in the early stages of testing vaccines for hepatitis C and HIV. Can you talk about those programs a little bit?

A: They are both highly risky -- HIV in particular. We may very well be one of the few candidates that remain standing. From a financial standpoint, it's doubtful whether you can really make a lot of money in an HIV vaccine.

Q: Where do you stand on the increasing noise about generic equivalents of biotech drugs?

A: It's a very, very complex issue. Many of the biotech products are proteins, and as we've learned, unlike with small-molecule chemicals, the way that you make proteins matters quite a bit.

How long should biotech products be protected is the question. The FDA has said that it will decide on a case-by-case basis. That's probably a rational approach. There's going to be a considerable amount of debate on the science.

Q: How will Medicare reimbursement changes that are taking place now and presumably down the road affect Chiron?

A: We think it's a good idea that there is reform. [The impact on us wouldn't be great,] but I'm very hopeful that it would change the nature of the debate in the public realm. There has been considerable demonization of the pharmaceutical industry for the very simple reason that the U.S. is one of the few places where as a matter of routine there is a substantial population that can't [afford] drugs. I think many companies will come to agree that it would be more beneficial if the fruits of research were available to the largest population that would benefit.

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