Chiron's Planning for a Shopping Trip

ChironCHIR is putting more wampum in the war chest, arming itself for another corporate shopping spree.

That's the motivation behind Wednesday night's announcement from the biotech company that it will raise between $400 million and $500 million in convertible bonds, according to biotech industry observers.

The Emeryville, Calif.-based company acquired Pathogenesis last year for about $720 million. With biotech valuations down from previous stratospheric levels, it's time to buy again.

"It's no secret that Chiron has been looking for possible acquisitions, so what today's [financing] tells me is that the company has found one or more deals that look promising and they need a bit more money," says Jim McCamant, founder and editor of the Medical Technology Stock Letter. McCamant is long Chiron.

Even after the Pathogenesis deal, Chiron already had about $800 million in cash. Today, the company said it would sell up to $500 million in 30-year, zero-coupon convertible bonds. The bonds are actually a fairly sophisticated, and seldom used debt instrument known as a Liquid Yield Option Notes, or LYONs.

Shares in Chiron lost $2.27, or 4%, to $53.01 in Wednesday trading, before news of the financing deal was announced. The stock then fell to $51.80 after hours.

If all the convertible bonds are sold, including the $100 million over-allotment, Chiron will have about $1.3 billion in cash in its coffers. That puts them on par with the fattest cats in the biotech sector. AmgenAMGN has about $2 billion in its bank account, while CeleraCRA, Human Genome SciencesHGSI, ImmunexIMNX and Millennium Pharmaceuticals MLNM have about $1 billion.

"Maybe compared to some of these other smaller biotech companies, a big biotech company like Chiron seems undercapitalized," says SG Cowen analyst Eric Schmidt. "You can't begrudge them for filling up the tanks." Schmidt rates Chiron neutral and his firm hasn't done underwriting for the company.

Chiron spokeswoman Jennifer Wycoff says the company's official line is that the cash will be used for "general corporate purposes," but she acknowledges that acquisitions are a possibility.

"Someone is always knocking on the door," she says, "and with valuations down a little bit, everyone is stepping up their mergers and acquisition activity."

So who's a target for Chiron? McCamant believes the company is looking to purchase biotech companies with products on the market, or close to approval, in three main areas: Cardiovascular, cancer and infectious disease. (Pathogenesis was an antibiotics company focused on infectious diseases.)

"Chiron has several good drugs on the market and many more still in the research lab, so they need to acquire a company that fills in their [drug development] pipeline," he says.

One possible target: Texas BiotechTXB. "It's a small, relatively undervalued cardiovascular company with one product on the market," he says. McCamant is long Texas Biotech.

McCamant also believes that Chiron once held talks with Corr TherapeuticsCORR, another successful cardiovascular company, but that Corr's lofty valuation put the kibosh on a deal.