By Mary Welch
Chiron Corp.'s plan to become a leaner, more-profitable company seems to be taking shape, if the company's reported 1998 income of $524 million, or $2.90 per share, is an accurate indicator.
But the figures include a third-quarter gain by the Emeryville, Calif.-based firm of $46 million, related to the recognition of deferred tax assets on the sale of Chiron Diagnostics Corp., of Walpole, Mass., to Bayer Corp., of Pittsburgh, and a first-quarter gain of $65 million from the sale of Chiron Vision.
"There's [also] a lot of one-time charges this year, which makes it a bit more difficult to actually arrive at the numbers," said Eric Schmidt, vice president at SG Cowen Securities Corp., in New York. "When you figure it all out, they reported a 32 percent gain in 1997 over 1996, and a 48 percent increase for 1998. But a majority of that is derived from consolidating the numbers with Chiron Behring Vaccines. So, it's actually far less growth."
In the second quarter of 1998, Chiron - which owned 49 percent of Chiron Behring GmbH, of Marburg, Germany - bought the remaining 51 percent of the German firm for $115 million from Hoechst AG, of Frankfurt. Chiron added the operation to its vaccines division. (See BioWorld Today, April 2, 1998, p. 1.)
Mike King, senior analyst with BancBoston Robertson Stephens Inc., in New York, said 1998 for Chiron was not "a terribly remarkable year. It was a good [fourth] quarter."
Joel Jung, director of investor relations for Chiron, said the company "saw top-line revenue growth, particularly in therapeutics products, and [we] feel good progress is being made in building an earnings momentum for 1999."
Jung acknowledges that Chiron Behring contributed substantially to the bottom line, but pointed out the company showed "very good revenue growth" from several products: Proleukin (aldesleukin), Betaseron (interferon beta-1b), and Regranex (becaplermin; platelet-derived growth factor, or PDGF).
For the fourth quarter, Chiron reported income from continuing operations of $25 million, or $0.14 per share. Excluded from these numbers is about $15 million of pre-tax restructuring and reorganization charges primarily related to the rationalization of its vaccines business in Germany and Italy, and reorganization costs accrued for Chiron's Emeryville operations. On an as-reported basis (that is, after any exceptional charges or revenues), Chiron's income from continuing operations totaled $14 million, or $0.08 per share. For the fourth quarter of 1997, income from continuing operations was $24.4 million.
For the 1998 year, Chiron reported income from continuing operations of $87 million, or $0.48 per share, excluding restructuring and reorganization charges; the write-off of purchased "in-process" technologies; and the gain on the sale of the Puerto Rico and St. Louis, facilities that year. Last year, Chiron cut more than 400 positions, largely by streamlining the diagnostic business and closing its St. Louis manufacturing facility.
Included in the total income is a license fee of $24 million received for certain technology used in human vaccine products, and a $13 million license fee included in other revenues related to informatics technology received in the fourth quarter. On an as-reported basis, income from continuing operations was $76 million, or $0.42 per share, compared to $25.7 million, or $0.14 per share, for 1997.
In the fourth quarter, Chiron reaped the benefit of higher-than-expected royalty and licensing revenue, stemming in part from a collaboration signed with Bayer AG, of Leverkusen, Germany, for HIV/HCV probe technology. These benefits pushed total quarter revenue to $225 million, which is $27 million higher than some analysts' estimates.
Schmidt said the fourth was "a good, solid quarter, probably as good as we've seen in the last two to three years. Overall, [Chiron] is still struggling. Management has skillfully executed a series of restructuring efforts, but we expect Chiron will struggle over the next one to two years to meet our revenue and earnings per share estimates. It takes a long time to steer a large ship like Chiron around."
Schmidt said he believes Chiron's new management team, led by CEO Sean Lance, who joined the company in March, has made meaningful changes. "[But] they don't have anything in their pipeline or late-stage development to get excited about," he said.
Chiron's marketed pharmaceuticals and vaccines "still appear incapable of generating break-out revenues," Schmidt said.
Peter Ginsberg, senior research analyst with Piper Jaffray Inc., in Minneapolis, said he was "happy to see strong royalty and licensing revenues, but those were offset by sharp increases in research and development expenditures. We're keeping our 'buy' rating."
Chiron's therapeutics and technologies divisions, as a combined biopharmaceutical business, reported product sales of $58 million in the fourth quarter, compared to $45 million for the same time period in 1997.
Among the lead products were Proleukin, a recombinant interleukin-2, which posted fourth quarter sales of $27 million; Betaseron, which netted $17 million in sales to Berlex Laboratories Inc., of Wayne N.J., for marketing and resale; and $11 million from sales of PDGF to Ortho-McNeil, a Johnson & Johnson company, for formulation and sales of Regranex Gel.
Royalties resulting from Berlin-based Schering AG's European sales of Betaferon increased to $8 million in the fourth quarter, up $1 million from 1997's fourth quarter.
On an annual basis, biopharmaceutical sales totaled $202 million, compared to $151 million in 1997. Proleukin sales were up $32 million, to $93 million; Betaseron product sales jumped 16 percent, to $63 million; and PDGF's sales doubled to $36 million.
One of the big questions hanging over Chiron is the fate of its vaccines business, Schmidt said. Fourth-quarter sales reached $58 million, up from $30 million in 1997, the gain mainly a result of the acquisition of Chiron Behring in the second quarter of 1998. The vaccines division's gross profit margin decreased by 63 percent in the fourth quarter of 1997, dropping to a margin of 44 percent in 1998, largely due to lower margins on the products manufactured and sold by Chiron Behring.
For the year, vaccine product sales increased by $95 million to $177 million in 1998, thanks primarily to the Chiron Behring consolidation, which contributed $92 million to 1998 product sales.
"There still is some restructuring to go," Schmidt said. "They must decide what to do with vaccines - become a serious player, or divest. The market is frustrated that it's being strung out."
King said Chiron has much potential. "I keep hoping [it] will unleash something, so we all can get excited and get on board," he said. "I haven't seen it. It might come from the blood testing side, but they're not there yet."
Blood-testing revenues for the quarter increased slightly, to $29 million compared to $28 million in 1997's fourth quarter. For the year, blood-testing revenues totaled $99 million, down from $120 million in 1997. Jung said that, despite the lackluster 1998 performance in this area, he sees "a lot of opportunity there" in 1999. Chiron's management predicted earnings-per-share growth of 25 percent for this year, or about $0.60 per share.
Schmidt said Chiron "still lacks a product that will generate significant revenue growth forward. This is a three-to-five year story. But if you consider their stock was $15 or $16 a year ago, with a market cap of $1 billion, you see that management has made good changes and it's getting credit."
Chiron's stock (NASDAQ:CHIR) closed Wednesday at $22.687, up $0.437.