Novartis to buy controlling stake in Chiron

Making a big move into the vaccine business, the Swiss pharmaceutical giant Novartis said on Monday that it would acquire control of the Chiron Corp, a manufacturer of flu shots that has been beset by quality control problems.

Novartis, which already owns 42 percent of Chiron, will pay US$45 a share, or a total of US$5.1 billion, for the 113 million shares of Chiron it does not already own.

The price, which has been approved by the Chiron directors who are not affiliated with Novartis, is US$5 a share higher than a previous offer those directors rejected as inadequate.

The acquisition will mean the end of Chiron, founded in 1981. The firm is one of the oldest and most successful US biotechnology companies.

The acquisition is the latest sign that pharmaceutical companies are seeing a new attractiveness in the vaccine business, which has often been characterized as offering low profits and slow growth.

The new interest stems in part from the fear of a flu pandemic. Some newer vaccines also sell for higher prices than vaccines in the past.

Vaccines are an "attractive new growth platform" for Novartis, the company's chief executive, Daniel Vasella, told securities analysts.

"We see that there are innovative targets which can be attacked," he added. "We see innovative new technologies."

Recently, GlaxoSmithKline, which has long been in the vaccine business, offered to buy ID Biomedical, a Canadian manufacturer of flu shots.

Vasella vowed to turn around Chiron's vaccine business. Chiron's factory in Liverpool was closed last year by British regulators because of sanitary problems, causing a big flu shot shortage in the US last winter. This year, the Liverpool factory is operating at reduced capacity, but another Chiron flu vaccine factory in Germany has been closed because of contamination.

In addition to vaccines, Chiron sells some drugs and has a fast-growing business for tests of donated blood for viruses like HIV and hepatitis C.

The acquisition is subject to the approval of a majority of Chiron's shareholders.

Novartis executives said the company was confident the transaction would be cleared by regulators in the US and Europe and close in the first half of next year.

One potential antitrust issue is that Novartis owns about 30 percent of Roche Holding, Chiron's main rival in blood testing. But Novartis is likely to argue that it has no control over Roche's business.

Another issue, said Geoffrey Porges, an analyst at Sanford C. Bernstein & Co, is that Chiron is the only major US manufacturer of flu vaccines and it would become foreign-owned.

US federal officials have been pushing for a domestic supply of flu vaccines and drugs because in a pandemic, governments could nationalize manufacturers or ban exports in order to protect their own populations.

Washington pushed Roche, for example, to make its antiflu drug Tamiflu in the US. The risk of relying on foreign manufacturers was highlighted last year when the British government's shutdown of Chiron's factory caught the US by surprise.

Still, while Chiron is American, its flu vaccine factories, which it acquired from other companies, are in Europe. The lone US flu vaccine factory, in Swiftwater, Pennsylvania, is owned by a French company, Sanofi-Aventis.

Novartis is likely to make the case that with its greater resources, it would be a more reliable supplier to the US than Chiron.

In addition, Vasella said Novartis would consider building a flu vaccine factory in the US if the government made it attractive enough.

Chiron, which had revenue of US$1.7 billion and income from continuing operations of US$60 million last year, is perhaps best known for discovering the virus that causes hepatitis C. But it has been far less successful at developing drugs than some other early biotechnology companies like Genentech and Amgen.

Ciba-Geigy, which later merged with Sandoz to form Novartis, acquired its stake in Chiron about 10 years ago. Novartis's business never benefited from that relationship, in contrast to Roche, which has obtained many of its best-selling drugs from its investment in Genentech.

Novartis said it hoped to achieve US$200 million in cost savings from the merger. It did not say whether there would be layoffs.