Chiron Fans Sweat It Out

Will the first quarter point toward more vaccine problems or a happier future for the biotech?
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Some people think

Chiron

(CHIR) - Get Report

is still struggling to get over that nasty flu bug.

The Emeryville, Calif., biotech outfit was laid low last fall when British health regulators shut down its Liverpool, England, flu vaccine plant. The Brits have since cleared Chiron to resume making Fluvirin, and Wall Street has warmed to the company, which is due to post earnings after the close Wednesday.

Analysts surveyed by Thomson First Call expect Chiron to make 17 cents a share on sales of $411 million, compared with 22 cents a share on $380 million in sales a year ago. Chiron shares are up more than 10% on last October's lows, up 78 cents Monday to $34.94.

But some skeptics say Chiron just isn't the same company.

"In our opinion, the market has not recognized that the expense structure of Chiron has materially changed since the suspension of the Fluvirin manufacturing license in 2004," writes UBS analyst David Molowa, who rates the stock reduce. "Future sales and earnings growth will be largely dependent on Fluvirin," he adds, noting that the Food and Drug Administration hasn't cleared the company to resume manufacturing the vaccine.

Accordingly, Molowa sees Chiron's full-year earnings at 98 cents a share, compared to the consensus estimate of $1.49. He forecasts first-quarter earnings of 8 cents a share.

Last year, half the U.S. flu shot supply was lost when human error led to the Chiron vaccine's contamination. The company wrote off its entire Fluvirin inventory, taking a $91.3 million charge, and pledged to improve manufacturing processes and facilities.

But Molowa says the company's not done tallying up the costs on the mishap. Even if the FDA gives Liverpool a clean bill of health, Molowa foresees big expenses -- including a hefty research-and-development tab -- and lower volume.

In the fourth quarter, for instance, Chiron recorded $11 million in legal expenses related to the suspension. The company is currently embroiled in five class-action suits, and Chiron's distributors might yet hold it liable for loss of revenue, says Molowa, whose firm seeks to do business with the companies it covers.

That's not all. "We may experience loss of market share in the U.S. flu vaccine market as competitors seek to introduce their influenza products into the United States and as governmental authorities and agencies face increased pressure to diversify their sources of flu vaccine and find and approve alternative suppliers of flu vaccine," Chiron warns in a recent filing.

There's no shortage of possible competition.

Sanofi-aventis

(SNY) - Get Report

of France and nasal vaccine maker

MedImmune

(MEDI)

also provide flu vaccines in the U.S., and Canada's

ID Biomedical

(IDBE)

is looking to enter the U.S. market. Last month, the FDA granted ID Biomedical's vaccine priority review status.

In its earnings release for the fourth quarter of last year, Chiron refrained from issuing 2005 full-year guidance, but it did issue guidance for certain businesses.

Biopharmaceuticals revenue is expected to experience mid-single-digit percentage growth in 2005, up from $512 million in 2004, thanks to the Tobi inhalation solution for cystic fibrosis. Cystic fibrosis is a chronic progressive disease that causes thickening of mucus in the lungs and pancreas, leading to breathing problems and malnutrition.

Chiron expects blood-testing revenue to show a high-single-digit growth rate from $278 million last year.

In the pipeline are lung infection drug tifacogin, in phase III trials; meningococcal vaccine MenACWY, in phase III trials; Tobi inhalation powder, in phase III trials; and meningococcal vaccine MenB, in phase II trials. Results from an interim analysis of the phase III tifacogin trials are expected in August.

"Despite Chiron's intent to invest heavily in its R&D pipeline, investment is no guarantee of success and biopharmaceutical research is a high-risk venture," says Quintin Lai of Baird U.S. Equity Research. Baird seeks to receive compensation from the companies it covers.

Lai maintains his neutral rating on the stock, citing Chiron's new contract with the South African National Blood Service. The agency will test blood donations for HIV and hepatitis B and C using Chiron's Procleix Tigris System with the Procleix Ultrio Assay beginning in September. Lai also cites the positive reception of Tigris/Ultrio in Europe, and says the devices are on track for FDA approval and launch in 2006. The screening devices were co-developed by Chiron and

Gen-Probe

(GPRO) - Get Report

.

Lai expects blood-screening growth of 12.4% in 2005 and 35% in 2006. He sees the flu franchise growing 5% to 20% per year, with increased profitability through pricing and increased manufacturing efficiency. He expects to hear an update on the flu vaccine remediation process in the company's earnings call on Wednesday.