West Coast Editor

Though still haunted by questions about its management's handling of flu vaccine production, Chiron Corp. got a not-unexpected Halloween treat from Novartis AG, which upped to $5.1 billion its offer to buy out the company - and this time Chiron is recommending that shareholders approve.

"The whole [vaccine] landscape is intensifying," said Jennifer Chao, of New York-based Deutsche Bank Securities Inc., and what "once was thought of as a very dull, flat business" is turning out otherwise, as shown also by GlaxoSmithKline plc's recent offer to take over the vaccine firm ID Biomedical for $1.4 billion.

Under the terms of the Chiron buyout, approved by the boards of both firms in a definitive agreement and expected to close in the first half of next year, Basel, Switzerland-based Novartis would pay $45 each for about 113 million Chiron shares that make up the 58 percent Novartis does not already own.

That price amounts to a 23 percent premium over Chiron's closing price Aug. 31, the last day of trading before the pharmaceutical giant - Chiron's largest stockholder for a decade - offered $40 each for the shares. (See BioWorld Today, Sept. 7, 2005.)

Emeryville, Calif.-based Chiron's stock (NASDAQ:CHIR) closed Monday at $44.14, up 74 cents.

Novartis' move comes on the heels of a $62.5 million contract for Chiron to supply the U.S. government with pre-pandemic vaccine for a stockpile to protect against the H5N1 avian flu virus strain. That vaccine is made at the Liverpool, UK, facility, which found itself in the spotlight a year ago when regulators cited sterility issues related to batches of Fluvirin and the plant was shut down. (See BioWorld Today, Oct. 6, 2004.)

The Fluvirin plant was acquired in Chiron's 2003 buyout of Oxford, UK-based PowderJect Pharmaceuticals plc, and was known to be somewhat antiquated. Closing it temporarily cost Chiron, which is the second-largest vaccine maker in the U.S. and fifth largest in the world, $14 million, plus $5 million in legal fees and $8 million in remediation expenses. It also cost the U.S. half of its flu vaccine, which Chiron had been expected to produce.

This fall, the FDA cleared the Liverpool facility to reopen, but the Fluvirin trouble led to Chiron's reported third-quarter decline this year of 9 percent in revenues compared to the same period last year.

A spokesman for Novartis was traveling and could not be reached, and the companies have not disclosed whether the Novartis will make Chiron a subsidiary or integrate it.

Chao declined to speculate on whether heads would roll at Chiron when Novartis takes over.

While operating two other units for blood testing and biopharmaceuticals, Chiron expects to provide 18 million to 26 million doses of Fluvirin to the U.S. for the approaching flu season, though it will not provide any Begrivac flu vaccine to the UK or Germany, resulting in a $15 million charge to write off the entire inventory because of sterility problems in what the company described as a "small number of lots."

Novartis issued a report Monday about its plans for "unlocking Chiron's potential" and "creating a global vaccines platform," and London-based GSK holds similar ambitions in its plan to acquire the vaccine firm ID Biomedical. GSK recently won approval for its flu vaccine Fluarix, and IDB, of Vancouver, British Columbia, has another, Fluviral, already marketed in Canada and waiting for clearance in the U.S. (See BioWorld Today, Sept. 8, 2005.)

IDB has supplied more than 75 percent of flu vaccine to the Canadian public market with its product, and started expanding its manufacturing site last year so it could enter the U.S. market with Fluviral, which has fast-track status from the FDA. If the vaccine is approved, the firm expects to produce about 20 million to 25 million doses for the U.S. market next year and about 40 million doses in 2007.

"Glaxo got a great deal - a pure play, state of the art manufacturing facility," which IDB acquired in its $120 million buyout of the vaccines business from Shire Pharmaceuticals Group plc, of Basingstoke, UK. (See BioWorld Today, April 21, 2004.)

"Manufacturing capacity is at a real shortage," Chao said, adding that IDB "could have gotten a better valuation if they had held out a little bit. And all of this is going to be compounded with a very real avian threat." Another player in that area is Sanofi Pasteur in Lyon, France, which topped Chiron's grant for avian-flu work with government funding of $100 million for a similar effort.