The saying normally goes, "No news is good news," but for onetime biotech highflier Chiron
Most investors became acutely aware of Chiron last year when it failed to deliver 50 million doses of its Fluvirin flu vaccine to the U.S. However, Chiron is much more than a one-product company.
In addition to Fluvirin, the pharmaceutical company develops, manufactures, and distributes more than 20 other vaccines. In fact, it's the fifth-largest vaccine business in the world. Moreover, with annual revenues of more than $494 million, its blood-testing segment actually represents a larger source of income for the firm. Chiron also has a third segment, biopharmaceuticals, which develops treatments for cancer and other diseases. There's no doubt that, at 12% of consolidated revenues, Fluvirin is a significant source of money for the company. However, S&P's downgrade really had nothing to do with the vaccine.
Indeed, despite throwing this country's health-care system into crisis mode at the height of the flu season last year, the company has responded admirably to shore up the damage it caused -- and it hopes to begin producing the vaccine again. It cleaned up the contamination at its Liverpool, England, facility. It won approval from British authorities to begin manufacturing the Fluvirin vaccine again. And it is only awaiting FDA approval later this summer to produce it for the U.S. -- something even S&P thinks will happen. So what's the agency's beef? Let's take a look.
Reading the news reports, though, one would have thought Novartis had made a big announcement that it was all but severing ties with Chiron. In fact, there has been no action at all between the two that wasn't known previously -- and things are actually beginning to look up for the biotech company.
Novartis bought just under 50% of Chiron back in 1994 -- when it was still Ciba-Geigy -- and paid slightly more than $1.3 billion for that stake. Considering that as long as five years ago Novartis had a 44% stake in Chiron, it doesn't seem like much of a retreat. And while the company hasn't shown any indication it wants to do so, Novartis still has the option of increasing its position to as much as 55% of the company or otherwise acquire it. Novartis also has three members on Chiron's board, the maximum it is permitted.
Furthermore, when Novartis acquired its stake in Chiron, it agreed to guarantee as much as $700 million in debt. Thus far it has guaranteed $100 million under a U.S. credit facility, but there are no borrowings outstanding against it. And while Novartis doesn't fund Chiron's R&D anymore, it still guarantees more than $173 million from a lease agreement for a Chiron R&D facility. Yet, this isn't a new development for Chiron either: The R&D agreement expired at the end of 2001. With nearly $200 million in cash on its balance sheet, there hardly seems to be any cause for concern regarding its ability to continue operations -- and there doesn't appear to have been any shift in sentiment that would explain S&P's move.
Receipt of FDA approval for Fluvirin manufacture would be more of a catalyst to review Chiron's credit worthiness -- but, then, the S&P analyst has already said he expects that to occur. Certainly the company won't be generating the same revenues it once did, when Chiron and Sanofi-Aventis
Regardless, the market had discounted those revenues when it knocked Chiron's stock down more than 30% last year after it revealed the extent of the vaccine contamination problem. Any revenues it gets from vaccines would appear to be a godsend, considering that it was once possible that its license to manufacture vaccines would be permanently revoked. That doesn't change the fact that I think the company is still overvalued these days, but I don't think that impinges on its creditworthiness.
No doubt, the vaccine debacle should never have happened in the first place, and investors might have been warned sooner about the potential damage the company was facing. But the catalysts moving S&P at this time don't seem worthy of the attention they've received, when there could, in fact, be some silver linings on Chiron's clouds.
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Philip Durell is always looking for downtrodden companies in Motley Fool Inside Value . If this type of investing appeals to you, consider a free trial . There's no obligation to buy, and you'll have access to all of the past issues, plus the most recent one.