Chiron Corp. released its third-quarter earnings Wednesday, and while those figures were better than expected, the Fluvirin disaster has faded their importance.

"They are almost irrelevant," said Eric Schmidt, analyst with SG Cowen & Co. in New York. "Most view 2004 as a wash for Chiron. To focus on consensus, at least they had a better quarter than expected. But does it matter one iota for the stock? No."

The company reported pro-forma income from continuing operations of $49 million, or 26 cents per share, for the quarter. The consensus estimate was 6 cents per share, and Schmidt had 15 cents a share figured with SG Cowen, all estimates having taken into account the missed revenue from the spoiled Fluvirin batches. Chiron said that the loss of the vaccine resulted in a $91 million write-down in the third quarter to the cost-of-sales line, which resulted in a 36 cent decrease in both pro-forma and GAAP earnings per share.

The higher than expected EPS partially was due to a settlement with F. Hoffmann-La Roche Ltd., of Basel, Switzerland, related to Chiron's HIV patent covering nucleic acid-testing methods. Chiron was paid a lump sum of $78 million from Roche, of which $14 million was recognized in the third quarter. Also, Chiron received $32 million of previously deferred royalty and license fee payments, which hit the third-quarter books, as well. Those one-time factors added 18 cents to both pro-forma and GAAP EPS. Throw in "higher sales out of Europe, ironically, of their flu vaccine," Schmidt said, and the financial blow of the roughly 48 million ruined Fluvirin doses was softened. (See BioWorld Today, Sept. 14, 2004.)

Chiron Focused, But No Real Guidance Yet

In the company's call, President and CEO Howard Pien said that "without question, the past two weeks have been difficult," adding that "all of us are keenly aware of how we must continue to improve our ability to uphold our commitment to protect health."

Chiron, Pien said, is "determined, dedicated and resolute" in its attempt to "return to the U.S. market as a reliable supplier of flu vaccine."

That reliability was called into question when Chiron fell short by 100 percent in its promise to supply about 48 million flu vaccine doses to the U.S. Investors, upon learning on Oct. 5 of the production suspension at the Liverpool, UK, facility, sold off Chiron stock, which ended at $37.98 the day the news was made public, down $7.44, or 16.4 percent. Uncertainty about Chiron's future in the flu vaccine market has lingered, though, and the stock on Thursday closed at $30.95, down 18 cents.

Pien told listeners the company was intent on regaining lost credibility.

"We are now focusing on the design of our redemption plan, aimed at bringing us back into production for the next flu season, and we also started to engage in discussions with [the Medicines and Healthcare products Regulatory Agency in the UK] to seek its input," he told listeners, adding that only by conferring with the MHRA on the remediation plan, could Chiron "be in a position to project with greater confidence" the ability to meet its goal of "returning for the '05 flu season."

Hamstrung by legal concerns, Pien wasn't able to say much else.

"In the current litigious environment in which we find ourselves, we do not believe that it is [prudent] at this time to jump to conclusions or otherwise characterize how we got to where we are now," he said. "We hope you will respect this." The firm did not take questions on the call regarding the Liverpool shut-down.

Schmidt wasn't anticipating much on the call anyway, he said.

"Our expectations weren't all that high," he told BioWorld Today. "He's only two weeks into troubleshooting this issue. [Manufacturing problems] do take at least months, in some cases years, to sort out."

The production suspension is due to be lifted early in 2005, if all goes well. Schmidt suggested that those waiting for more from Chiron on the issue "could be hearing very little until January."

Finding Chiron's Trough

Chiron is benefited by its three-pronged business approach: blood testing, biopharmaceuticals and vaccines. There is plenty of value in the company beneath the highly public Fluvirin meltdown. With the stock devalued, Schmidt cautiously sees a potential for return.

In his note, he wrote that "Chiron could see additional fallout from its 2004 flu season debacle, including shareholder litigation and multiple public spankings." He added that while the company has not said what caused the mishap, "we believe the water supply could be to blame." And he warned that "confidence that Chiron can return for the 2005-2006 flu season will be lacking for some time."

Regardless, the company now is trading below what it sold for when Chiron acquired Oxford, UK-based PowderJect Pharmaceuticals plc, which brought Fluvirin to Chiron. If Chiron manages to right the listing ship, there's investor money to be made. (See BioWorld Today, May 20, 2003.)

"It's all about Fluvirin," Schmidt said. "The company's credibility and management's credibility took a hit, but those are the types of things that you can recapture if you have success in the future."

Before the PowderJect acquisition, Chiron was trading in the low-$40 range. It now sits well under that mark.

"It's a very cheap stock," he said. "For a value account, I think this stock is probably worth $35 to $40 a share, even with no Fluvirin contribution."

He acknowledged Chiron's "public crucifixion" currently under way and said the continued negative press will keep Chiron "under a cloud," but there is value that just needs time to be unlocked.

"If they turn things around," he said, "I think there is tremendous upside."

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