Chiron's Flu Aches May Last Awhile
At the recent J.P. Morgan Health Care Conference in San Francisco, Howard Pien, CEO of embattled flu-vaccine maker Chiron Corp. (CHIR ), faced a less-than-friendly Wall Street crowd. During a presentation on Jan. 12, Pien euphemistically called 2004 "a momentous" year for the Emeryville (Calif.) biotech, which had to withdraw from this season's flu market after British regulators shut down its manufacturing plant in Liverpool. Audience members crossed their arms and rolled their eyes as Pien promised to try to get Chiron back in the game for next season. "They have a lot of digging out to do," said Morgan analyst Ronald C. Renaud Jr. after Pien's speech.
Pien may not have a big enough shovel. He has admitted that it's unlikely the vaccine problem will be resolved this quarter, and Chiron can't yet promise it will supply its vaccine, Fluvirin, next season. That could leave the door wide open for rivals and new U.S. flu players, including pharma giant GlaxoSmithKline (GSK ), which is racing to get its vaccine approved in the U.S. Even after Chiron reopens its plant, it may never regain the 50% share of the market it once enjoyed. Meanwhile, Chiron's other two businesses -- making biotech drugs and blood-testing tools -- aren't doing well enough to fill the vaccine void.
The flu debacle has hit Chiron hard. On Jan. 26 the company is expected to report that 2004 earnings fell by half from the previous year, to $78.5 million, on flat sales of $1.8 billion. In December, British authorities slapped a second suspension on Chiron's plant, which could keep it shut down until April. A few days later the U.S. Food & Drug Administration sent Chiron a warning letter citing concerns about its manufacturing practices. The Justice Dept. is investigating, the Securities & Exchange Commission has launched an informal probe, and multiple shareholder lawsuits have been filed. "Chiron has taken a systemic approach to addressing the observations noted by the regulatory authorities," says a spokesperson, who adds the company is doing "everything feasible" to be able to supply vaccine next season.
It's a wonder Wall Street still has some faith in Chiron's recovery. Chiron's shares, after falling more than 30%, to $29, on news of the plant suspension, have climbed back to $34. That optimism has been fueled by analysts such as Jennifer Chao of Deutsche Bank Securities Inc. (DB ), who upgraded the stock to a "buy" in early January. The bank owned 1% of Chiron's shares as of Sept. 30. Despite new players in the flu market, Chao believes Chiron can easily reclaim its share of U.S. sales if it resolves the manufacturing issues soon. "Competitors will only scale up as a function of Chiron's [inability] to ramp up Liverpool," she says.
Chiron's rivals say that theory doesn't stand up. In December, Glaxo began a trial in the U.S. of its vaccine, which it hopes will be approved by the FDA in time for next year's season. Canadian biotech ID Biomedical Corp. (IDBE ) has also sped up its efforts to get its vaccine approved in the U.S., and in December it signed long-term contracts to supply the product to three of the biggest flu-vaccine distributors. "We need to diversify our sources," says Doug Shaver, vice-president of marketing for McKesson Corp.'s Medical-Surgical unit (MCK ), one of the companies that signed on with ID Biomedical. McKesson is also a Chiron customer.
Sanofi-Aventis (SNY ), the other major vaccine provider, is already operating at peak capacity. This year it was able to produce 8 million extra doses by extending its manufacturing schedule. The company could make the same amount next year. If Chiron's plant is still out of commission when Sanofi starts taking orders -- possibly before the end of the quarter -- the distributors and health-care providers who order the vaccine will probably turn to suppliers that they know they can rely on.
Sanofi and other Chiron competitors consider flu vaccine to be a long-term growth opportunity. Health-care agencies such as the Centers for Disease Control & Prevention want to double the immunization rate in the U.S., and demand in some overseas markets, including Southeast Asia, is growing at double-digit rates. Sanofi is planning to increase its manufacturing capacity in coming years to meet the demand. "That has been our long-term plan, outside of the Chiron situation," says Wayne Pisano, executive vice-president for commercial operations at Sanofi's vaccine unit.
Chiron's vaccine troubles wouldn't be such a worry if its biotech drugs made up the slack. Sales of Chiron's three major products -- for patients with cystic fibrosis, multiple sclerosis, and some forms of cancer -- grew an estimated 12% in 2004. But competition looms, especially for Betaseron, the multiple sclerosis treatment. In November, Biogen Idec Inc. (BIIB ) won approval for Tysabri, a drug that could take a chunk of Chiron's customers. Chiron has one niche product awaiting FDA review, but its experimental drugs with blockbuster potential are nowhere near hitting the market. Analysts have long hoped the 23-year-old company would crank out a string of highly profitable biotech drugs. "They have a tradition of putting a lot of investment there and not getting a lot out," says Jay Markowitz, an analyst at T. Rowe Price Group Inc., which owns Chiron shares.
The one bright spot is Chiron's unit that makes tools to screen the blood supply. In 2004, sales grew an estimated 22%, to $278 million, largely on the strength of Procleix, a test for HIV and Hepatitis B and C that has been adopted worldwide. But some of last year's growth came from one-time royalties and license fees, and many analysts expect sales growth to drop by half this year. Furthermore, gross profit margins in blood testing are around 40%, far lower than the 70% margins in biotech and potential margins in vaccines.
For his part, Pien hasn't given up hope. At the J.P. Morgan conference, Chiron's CEO laid out the list of inspections that U.S. and European regulators will conduct at the Liverpool plant before they will allow it to release flu vaccine. But with competitors eager to lock up orders for the next flu season, Chiron may be stuck on its sickbed for quite a while longer.
By Arlene Weintraub in New York, with Sarah Lacy in San Francisco and Kerry Capell in London