Until Swiss pharmaceutical giant Novartis
With the bid of $4.5 billion, $40 a share having been rejected by Chiron's board, the question that looms is this: Just what is the pharmaceutical company worth? Prior to the contamination issues that shut down its flu vaccine facility, the company was trading around $46 a share and had a market value of around $8.6 billion. Thus, while Novartis' bid represented an approximate 12% premium to what the stock had been selling for just prior to the bid, it was still a 13% discount to what it had been at about this time last year.
Was Novartis' offer really a lowball bid, just a starting point for further negotiations? Most analysts seem to think so, and they were not surprised when Chiron's board said the offer was "inadequate." They expect Novartis to up the ante to somewhere around $45 a share, but is Chiron worth it?
While Chiron's flu vaccine capabilities have received the most attention of late, the company is about more than just protection from the flu. It also earns money from cancer therapeutics, blood testing, and royalty and licensing fees. Revenues surged 39% in the latest quarter in the latter category, along with strong gains in blood testing. Even though Chiron took a $27 million hit in its flu vaccine segment, revenues still rose 10% overall to $419 million. Analysts have also estimated that Chiron's diagnostics segment is worth at least $5 billion alone.
Yet the vaccine maker is still going to be the second-largest supplier of flu vaccine this season, providing some 18 million to 26 million doses. That's well below the almost 50 million doses it was supposed to supply last year, but ahead of its next nearest competitor GlaxoSmithKline
Glaxo sees the flu vaccine market doubling in size to $3.6 billion by 2010, while Lehman Brothers analysts foresee a total vaccine market valued at more than $10 billion by 2007. Those numbers, and the fact that it's trying to keep pace against the larger Glaxo, spurred Novartis to make the offer.
Glaxo just purchased a vaccine research and production facility from Wyeth
Conversely, though, it was Chiron that was hitting up Novartis to make a decision about the remaining 58% of stock it doesn't already own. In regulatory filings, Novartis disclosed that Chiron approached them as a result of the difficulties they recently faced, to which Novartis replied, "We'll get back to you." After performing its due diligence, it arrived at the $40-a-share offer. It was certainly a gutsy move on the part of Chiron's board to reject the offer, since the stock has not been above $40 a share for nearly a year, and there's not likely to be anyone else riding in to counter the offer. Novartis' 42% stake would in all probability scare off another suitor.
In all likelihood, it seems as though Novartis not only can, but should raise its offer, and I would imagine it would end up in the range of $44 to $46 per share, meaning the total deal would be valued somewhere between $5 billion and $5.2 billion.
Chiron's stock has already been bid up to more than $42 a share in anticipation of a sweetened deal, and the additional costs associated with the higher price tag could be readily realized should the pharma regain its stride in the vaccine field. The natural fit between Chiron's cancer therapeutics and Novartis' own products suggest it has a lot to gain by the acquisition. Add in the strong performance Chiron's other sectors have experienced and a new, higher bid by Novartis seems to be a certainty.
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