It's one thing to report drug production problems and suffer a stock drop - that happens often in the biotech sector - but it's quite another to push the entire U.S. toward a public health crisis. Last week, Chiron Corp. had the distinct dishonor of doing both.
The news on Tuesday from Chiron that the Medicines and Healthcare Products Regulatory Agency (MHRA) in the UK had suspended production for three months of Fluvirin, Chiron's influenza vaccine, at the company's factory in Liverpool struck a staggering blow to the U.S. government's vaccination plans for the 2004-2005 flu season. Chiron was expected to supply 46 million to 48 million doses of the roughly 100 million flu vaccines the government wanted to help prevent the spread of the flu this winter. With the facility in Liverpool serving as Chiron's only plant approved to produce the Fluvirin vaccine for the U.S. market, the 90-day production suspension made those doses evaporate.
After a harsh flu season in 2003-2004, the threat that severe acute respiratory syndrome (SARS) might reappear, and a rising fear that the avian flu will mutate and make human-to-human transmission a reality, the Centers for Disease Control and Prevention in Atlanta had broadened its guidelines for vaccination to include, for the first time, healthy children aged 6 to 23 months. But with the shortage, the CDC was forced to release new interim guidelines for this season, which now can be found on its website, www.cdc.gov.
After Chiron's blunder, the country now has just more than half of what it wanted, leaving federal health services scrambling. It is unclear what effect the suspension ultimately will have on the nation's health.
But for Chiron, there was an immediate effect - the company's stock fell 16.4 percent when the news went public, or $7.44, to close at $37.98. It sank further Wednesday and ended the week at $36.50. The lost revenue forced the company to revise 2004's pro-forma guidance, lowering it from $1.80 to $1.90 a share down to 70 cents to 80 cents per share. While those figures can be calculated - subtract the missed revenue from the model and there it is - the long-term effects for Chiron are harder to quantify.
Chiron CEO and President Howard Pien fielded questions Tuesday during the conference call. Although clearly facing long days ahead, he took the time to indulge callers posing questions of "what if." Yes, he said, perhaps there might be a scenario in which a horrific flu season in the U.S. persuades UK regulators to clear product currently considered wasted. But all that was out of his control, and he recommended just one thing.
"You should assume that the entirety of the 2004-2005 flu season is gone," he said. "We will have no basis to disagree with a regulatory agency's finding that the products are unfit for release."
Heads Could Roll' At Chiron
As last week went on, Chiron began the process of digging out. By Wednesday, Chiron senior management already was meeting with the MHRA so it could "better understand the agency's concerns about the Liverpool facility" and then address them. The company on Friday said Pien had submitted written testimony for that day's Government Reform Committee Hearing, called to discuss the country's newfound flu shortage. The testimony was meant to show Chiron was being "open and transparent" with authorities and to reassure the country that Chiron is "a reliable supplier of influenza vaccine" to the U.S.
Perhaps what is most unsettling for Chiron investors is that the company reported in late August a sterility problem in a "small number" of Fluvirin lots coming from the Liverpool facility. The event dropped Chiron's stock $4, or 8.6 percent, the day it was made public, but management assured the government and company followers that the problem was in hand. In fact, although Chiron lowered its estimated production to 46 million to 48 million doses, instead of the 50 million it had estimated in July, it said it still expected to have the doses available "in early October" and expected to "provide even more Fluvirin doses this season than last season."
Then came the news of the total loss.
It is that huge difference - a few small lots vs. nearly 50 million doses - that has analysts downgrading Chiron and waiting to see if there's more trouble ahead.
"It's still unfolding," said Jennifer Chao, analyst with Deutsche Bank Securities Inc. "On a high level, it's damaging to management's credibility, in terms of its ability to set [production timelines] and its ability to provide vaccine. The letdown on the manufacturing is going to result in major collateral damage and have reverberating effects for some time to come."
Chiron management is working to "resolve the issue as expediently as possible," Chao told BioWorld Financial Watch, but when the mushroom cloud dissipates, Chao wouldn't be shocked if there was fallout.
"I would not be surprised to see some heads roll on this," she said. "This is a major misstep. It is unclear what took place, but we do know that only days ago, senior management made public statements that Fluvirin would be distributed in the early October time frame." Referencing August's sterility issue, she added, "How you go from resolving a situation that seemed to be limited to a few small lots to wasting 46 million to 48 million doses - it's almost unthinkable."
Downgrading Chiron to "hold," Chao dropped her 12-month target price from $50 to $41. After Tuesday's bleeding, some might consider the trough as a buying opportunity, but Chao suggested the sideline.
"I would anticipate overhang on Chiron shares until we see some sort of clear resolution concerning the three-month suspension," she said. Although she admitted the stock could be "close to basement floors," she said if the problem - whatever it is, exactly - isn't solved in Liverpool and the 2005 product "really is at risk, we could see the stock go down another 10 or 15 percent."
Damage Could Stretch Beyond Revenue Loss
Besides shaking confidence in investors, the loss of product could weaken Chiron in other ways - when dealing with distributors, for example. Distributors are relatively easy to please: They want a sufficient amount of safe product handed over in a timely manner. There now has to be questions surrounding Chiron.
"Chiron has clearly undermined their own ability to meet those demands," Chao said. "Prior to the debacle, we would have expected Chiron to have leverage at the negotiating table [with distributors]. But the suspension has certainly given Aventis Pasteur an edge."
And what of Aventis Pasteur, the No. 1 vaccine provider in the world? A division of Sanofi-Aventis Group, at this point Aventis Pasteur appears nearly heroic for merely doing what it promised to do - supply the U.S. with flu vaccine. It said last week it already had shipped more than 30 million doses of Fluzone for the upcoming season and is expected to provide 54 million doses to the States. The government is expecting another 1 million to 2 million doses of the nasal flu vaccine, FluMist, from MedImmune Inc.
Chiron's gaffe would appear to be an opportunity for others to step in and fill the void, but with the season so close, it seems that companies simply aren't able to up production in time. Jamie Lacey, director of media and public relations at MedImmune, told BioWorld Financial Watch the company is "doing everything we can do to work with federal health officials," and has "completed manufacturing for 1.1 million doses for this season." But while it is evaluating if it can fill and finish more than that, for now it still expects to be in the 1 million to 2 million dose range. FluMist, approved in June 2003 for individuals 5 to 49 years of age, pulled in $31 million during the 2003-2004 flu season.
Chao said several companies with stock of Aventis' Fluzone have voluntarily redirected some supply to the CDC. But no one is required to do that, of course, and facts still mainly suggest just the 54 million vaccines from Aventis, and MedImmune's potential 2 million doses for the U.S.
"We're running at about 55 percent of what is minimally required for this year," she said. "We have a public health crisis in the U.S."
There still might be ways out of the quagmire: Although last year's flu was strong, perhaps this season's will not be; maybe the UK and U.S. governments will come to an agreement that somehow frees the Liverpool vaccines for use; or it might be that other vaccine producers shuffle global supply, add to the U.S. stocks and the country limps through the season.
For Chiron, the quagmire might be more serious. Right now the flu season looms as particularly unpleasant for Chiron - feverish people everywhere serving as a reminder of a misplay so large it's made the company a household name for the wrong reasons. Having unhappily digested Tuesday's news, investors now look toward Oct. 20, when the company is scheduled to report third-quarter results.
"The Street will be focused on how responsive, direct and precise they are on that Oct. 20 earnings call," Chao said. "Because we did not feel satisfied with the response provided on the news break [Tuesday]."