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Vaccine Debacle

Chiron is the fifth largest biotechnology company, with businesses in biopharmaceuticals, vaccines and blood testing. In 2002, its vaccine business accounted for about 30% of the company's total revenues and was ranked number five behind those of Merck, GlaxoSmithKline, Wyeth and Aventis Pasteur. Its vaccines were sold primarily in Germany, Italy, and the UK.

In 2003 Chiron's flu vaccines achieved worldwide sales of $332 million, a growth of 20% per year from 2000 to 2003. This sharp growth was attributed to being first to market in Germany, increased sales to new countries, such as China, and expanded sales to existing countries due to increased awareness in the need for influenza vaccines. The company recognized the importance of geographic expansion to drive growth, not only for its vaccine business, but also to boost the earnings of the company as a whole. As such, the company was looking for ways to rapidly extend its vaccine franchise to other countries. In May 2003, Chiron agreed to buy PowderJect Pharmaceuticals, a vaccine maker based in Liverpool, England, for approximately US$900 million. The boards of directors from both companies unanimously approved this transaction.

"We consider PowderJect to be an excellent strategic fit for Chiron," said Howard Pien, the chief executive officer and president of Chiron. "This deal will help us to achieve our goal of expanding our global business quickly in the United States while building on our platform for new products…. We look forward to working with the people of PowderJect to create a stronger global player in the vaccines business …"

The combined companies would become the world's second largest provider of flu vaccines. PowderJect's product Fluvirin®, is a leading flu vaccine in the United Kingdom and is one of only two available injectable vaccines in the United States. For 2004, US public officials were counting on a record 100 million vaccine doses for the winter season from Chiron and Aventis-Pasteur. As such, Fluvirin® was expected to generate $300 million in US sales for Chiron, up from $219 million in 2003.

However, all hopes of achieving a record sales year quickly vanished. On October 4, 2004, British regulators withdrew Chiron's license to produce Fluvirin® over concerns about its manufacturing practices at the Liverpool site. The plant shutdown produced a shortage of almost half of the US's anticipated supply, sending the government scouring the world for an alternate supplier. There were numerous regulatory violations in current Good Manufacturing Practices. Specifically, there were incidences of contaminated lots, problems with the plant manufacturing procedures and general concerns about the product’s sterility. Every firm that develops, manufactures and markets drug products are required by law to comply with current Good Manufacturing Practices (also know as cGMPs). cGMPs are a set of regulations requiring that quality, safety and effectiveness be built into drugs, medical devices and biological products. Its goal is consumer protection. Manufacturing and Quality Assurance must comply with cGMPs as they carries the full force of the law.

Further details about the Liverpool plant were later detailed by USA Today. It turns out that this plant had a history of lax cGMPs . In 1999, the FDA gave the then-owner of the plant, Medeva Pharmaceuticals, a warning letter for violating GMP’s. Among FDA's concerns: some of the plant's partially processed vaccine contained high levels of microbial contaminants. In March 2001, FDA reinspected the plant, which was then owned by PowderJect. However, that inspection report was not made public. FDA again inspected the plant in mid-2003, a month before Chiron bought the plant from PowderJect. In FDA's 2003 report, which became public in the fall of 2004 during Congressional probe of the vaccine shortage, it said that in 2001 FDA inspectors told plant operators that refiltering and reprocessing were not appropriate for US vaccines. These quality control concerns should have been a clear red flag warning to any prospective buyer.

Meanwhile, from its 2003 inspection, FDA's concerns included:
· High levels of microorganisms found in partially processed vaccine, requiring refiltering
· Inadequate data proving refiltering did not harm the vaccine's quality
· Inadequate probe into why some vaccine failed sterility tests.

In any event, FDA did not issue a warning letter as a result of its inspection in either 2001 or 2003. Since the suspension of its license last fall, while Chiron did replace several of the plant's top managers, two of them were at the plant in 2003, with one dating back to at least 1999.

Significant Financial Repercussions

· Chiron stock fell 30% to $29, at the low point
· The entire Fluvirin inventory was written off, resulting in a $91 million charge to cost of sales.
· Chiron spent about $3 million on remediating the Liverpool plant
· Its vaccine net product sales fell to $481 million in 2004, versus $678 million in 2003
· Gross profit margin on vaccines decreased to 25% in 2004 compared with 53% in 2003
· The company's proforma income from continuing operations dropped to $133 million in 2004, versus $297 million in 2003

Public Relations Nightmare

· Chiron and FDA's oversight came under scrutiny as Congress, the Justice Department and the Securities and Exchange Commission investigated what led up to the nation's biggest flu vaccine shortage.
· Multiple shareholders lawsuits have been filed.

Uncertain Future
On March 3, 2005, British officials informed Chiron that the Liverpool site could resume full manufacture of the flu vaccine. However, it remains doubtful whether Chiron can regain the 50% market share it previously had.