Chiron's Shares Too Expensive to Take Drug Failure

The failure of Chiron'sCHIR sepsis drug Wednesday underscores the company's reputation as one of the most expensive and slowest-growing companies in the biotech sector.

Shares of the biopharmaceutical firm fell $4.62, or 9%, to $45.47 in recent trading Wednesday after Chiron said a late-stage test of the sepsis drug, dubbed TFPI, failed to meet its goal of reducing patient deaths after 28 days.

The acknowledgement confirmed rumors about the drug's failure that have dogged Chiron for two weeks.

TFPI always was considered a high-risk bet for Chiron, so few analysts had modeled in revenue for the drug. But with TFPI now officially off the table, Chiron's already-weak drug development pipeline looks even more anemic. Two other Chiron drugs before TFPI -- one to treat osteoarthritis and the other targeting coronary artery disease -- have also failed or produced lackluster results recently.

That narrowing pipeline makes Chiron an expensive stock, according to Robertson Stephens biotech analyst Mike King. Using Chiron's Tuesday closing price of $50.09 per share as a guide, King says Chiron trades at 40 times his estimated 2003 earnings forecast of $1.24 per share -- this for a company that is projected to grow less than 12% between now and 2003.

Chiron's next big growth bet is NAT, a super-sensitive blood test to screen donated blood for hepatitis and HIV. The company is currently awaiting FDA approval for the test, although that approval is actually behind schedule by several months already.

Chiron doesn't have much else cooking except for a few drugs in midstage testing, so earnings growth over the next several years will have to come from NAT and its vaccines business. That's currently strong but tends to fluctuate.

In fact, by King's reckoning, Chiron's growth rate is the lowest among the large-cap (read: profitable) biotech companies. "In our opinion, the low growth rate does not warrant the company's relatively expensive valuation," says King, who rates Chiron market perform. Robertson Stephens doesn't have a banking relationship with the company.

By comparison, AmgenAMGN trades at just 30 times its 2003 earnings, and just yesterday said it expects earnings growth in the low-20% range through 2005.

So, what is fair value for Chiron these days? Salomon Smith Barney analyst Elise Wang says a fundamental analysis of the stock puts it squarely in the upper-$30 range. But the company consistently trades higher because it has a certain Teflon quality about it.

"Chiron seems to defy gravity because it has traded in a range between $40 per share and $50 per share, even though there's a strong argument for the stock going below $40," she says. "Chiron has a certain level of support -- maybe because the company is somewhat closely held and there are value players in the stock who just won't move." Wang rates Chiron neutral and her firm has not done banking for the company.

Swiss pharmaceutical giant NovartisNVS owns 41% of Chiron.

Wang believes one of Chiron's biggest strengths is its balance sheet, with more than $1 billion in cash. For months, Chiron has been expected to use that cash to make an acquisition or license a promising new drug. With the failure of TFPI, now would seem to be the right time for Chiron to pull the trigger. Easier said than done.

"[The cash] gives Chiron a certain flexibility, but it's a very competitive market out there, with lots of companies looking hard to find the right deal," says Wang.