Revenge Of The Nerds In Biotech Land

They've been next-door neighbors for a decade in little Emeryville, Calif. But biotech outfits Chiron and Cetus are as different as tortoise and hare. Chiron Corp.'s nerdy scientists toiled quietly on modest projects. Cetus Corp.'s outspoken chief, Robert A. Fildes, wheeled and dealed in the limelight. But on July 22, Chiron proved Aesop right again: Chiron agreed to buy Cetus for $650 million in stock.

Investors begrudged the tortoise its victory lap. In part because the deal will help Chiron lose at least $15 million next year, its shares sank 6 to 54 3/4, while Cetus' tumbled 2 1/8 to 15 5/8. Ominous signs, since shareholders must vote on the deal this fall. Yet if it gets the green light, investors could find Chiron to be superbly positioned.

Unlike many of its competitors, Chiron spurned the 1980s biotech wisdom of settling for nothing less than life as a fully integrated pharmaceutical company. While such talk helped Genentech, Amgen, and certainly Cetus raise hundreds of millions of dollars, Chiron had more modest goals. Its top brass, highly regarded scientists from the University of California, concentrated on what they did best: science, specifically cutting-edge work on infectious diseases and viruses. They were happy to work with partners for royalties, even when that meant licensing potentially valuable technology. "We have not engaged in hype but in building value," says Chiron CEO Edward E. Penhoet.

That's not the kind of approach that puts companies on magazine covers. Indeed, the Street routinely criticized Chiron for a murky strategy and too many complex relationships. And products from Merck, Novo/Nordisk, and Johnson & Johnson's Ortho that use Chiron technology now reap more than $600 million in sales. That makes the $6.8 million Chiron earned last year on $78.5 million in revenue seem paltry.

Yet ever so slowly, Chiron has been gaining ground and racking up a string of research achievements and business ties (table). Add a slew of promising new products and some of Cetus' hidden assets, and Chiron is ready for big things.

The company's way of getting along with partners may be one of its top strengths. It has a 50-50 joint venture with Ciba-Geigy to sell vaccines and a blood-screening business with Ortho. Also, it's working with a handful of other big drugmakers to develop new compounds based on so-called rational drug design technology. In these and other deals, Chiron has spread its risk.

And because Chiron was content to watch from the sidelines for so long, it now may be able to buy assets cheaply from players who weren't so patient--such as Cetus. Since Fildes took the helm in 1982, Cetus raised about $500 million. Fildes spent most of it on top-grade facilities, a marketing organization, and research. But last summer, Cetus hit a wall: An advisory committee to the Food & Drug Administration sent Cetus back to collect more data on its flagship anticancer product, Interleukin-2. Fildes criticized the FDA, but within weeks, he had quit.

NEAT COMBO. Il-2 put such a cloud over Cetus that few wanted to rescue it. But Penhoet and Chiron Chairman William J. Rutter saw in it a startling array of assets useful to Chiron--most especially a brand-new, fully certified manufacturing plant just down the street. Chiron can quickly convert it to purify and package several products in its pipeline, including vaccines for AIDS and herpes. Moreover, Cetus' cancer business had several drugs in development besides Il-2. And since both companies work with the immune system, Rutter believes Cetus' work would dovetail with Chiron's to make cancer treatments.

Ironically, one reason Chiron's stock has taken such a beating is that Cetus simultaneously is shedding a highly regarded technology called PCR for $300 million to Hoffmann-La Roche Inc. Some investors are griping that PCR was Cetus' crown jewel, but that's far from certain. "PCR is a very promising research technology, but the commercial applications are still unclear," notes industry analyst Carol V. Hall of BioVenture Consultants. Adds Sutro & Co. analyst Margaret McGeorge: "Chiron is probably better off earning interest on that $300 million."

If the deal gets done, Chiron will double its cash hoard to $600 million and get a plant analysts say is worth $50 million to $75 million. That means roughly $275 million--less, if Chiron's stock keeps dropping--buys everything else: a decade of research, a 50-person sales force in the U. S. and Europe, a $30 million generic-drug business, and Il-2. Despite its setback, the drug is expected to win approval next year and could generate at least $30 million in annual revenues. One industry veteran is convinced the deal "is an absolute steal for Chiron." Tortoise, you've done it again.


1981 Chiron licenses hepatitis-B vaccine technology to Merck

1984 First to clone and describe genetic sequence of AIDS virus

1986 Hepatitis-B vaccine approved for marketing by Merck. Chiron forms joint venture in vaccines with Ciba-Geigy

1988 Discovery of hepatitis-C virus. Chiron and Ciba-Geigy begin testing AIDS vaccine

1990 Chiron expands ties to Johnson & Johnson unit to screen blood with its technology; turns first profit, $6.8 million, on $78.5 million in revenues


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