U.S. health officials outlined an informal rationing of flu vaccine after

Chiron

( CHIR) was forced to withhold about half the country's supply because of manufacturing concerns.

The Centers for Disease Control published a list of priority recipients that includes, among others, children between 6 months and 23 months old, adults 65 years old and older, anyone with chronic medical conditions, health care workers, and women who will be pregnant this winter.

The CDC estimated that about 54 million doses of the

Sanofi-Aventis

(SNY) - Get Report

vaccine Fluzone will be available this season, plus about 1.1 million doses of

MedImmune's

( MEDI) Flumist. It recommended the latter for healthy people between 5 and 49 years old who aren't pregnant, as well as people caring for children 6 months old and younger.

Chiron stunned health care circles and Wall Street Tuesday by saying it won't distribute any flu vaccine this winter after British authorities suspended its manufacturing license. The company drastically slashed earnings guidance and saw its stock lose 16% of its value.

The shares were down another 63 cents, or 1.7%, to $37.35 Wednesday morning.

"Clearly, the loss of the Chiron flu vaccine poses a serious challenge to our vaccine supply for the upcoming flu season," the Department of Health and Human Services said. "The department has begun pursuing contingencies for this loss of supply."

Several companies that distribute the vaccine were also feeling pain Wednesday morning.

Henry Schein

(HSIC) - Get Report

, the treatment's main distributor, cut its third-quarter earnings estimate to 69 cents to 71 cents a share, well below the consensus analyst estimate of $1.01 a share.

PSS World Medical

( PSSI) said the withdrawal will reduce revenue by about $44 million, although it expects a legal settlement to keep profit in line.

The response by Chiron bond and equity analysts was swift and severe. At least two investment banking firms cut their ratings on Chiron's stock, while other analysts revised their earnings predictions and stock price targets. Standard & Poor's said it placed Chiron on its CreditWatch with negative implications.

The Health Department also said it is "exploring whether more flu vaccine can be manufactured for this flu season, which means working with Aventis Pasteur." At this point, however, it is not known whether it's possible to get more vaccine, the government said.

The vaccine shortage also will provoke questions as to why so few companies -- there are only three flu vaccine makers -- provide such an important product. "This will require a considerable amount of deliberation" among public policy makers, Howard Pien, chief executive of Chiron, said at a Tuesday press conference.

Because it takes five months to develop, prepare and package flu vaccine, Pien said Tuesday that even an immediate resolution of the license suspension issue would be too late for the current flu season. "This manufacturing season is over," he said. "Three months from now, the U.S. flu season will be essentially over. This season is gone."

Chiron provides about half the vaccine used annually in the U.S. Health regulators had been expecting more than 100 million doses of flu vaccine to be available from three suppliers, including Aventis Pasteur and MedImmune.

Last year, a total of 87 million flu vaccine doses were sold.

Financial Damage

The financial fallout from Chiron's decision provoked extreme comments from analysts. Mark E. Augustine of Credit Suisse First Boston called Chiron a broken stock as he downgraded the stock to underperform from neutral. The vaccine debacle plus "an unimpressive pipeline" makes Chiron unattractive, Augustine said in a research note to clients.

"We recommended Chiron in 2003 as our top 'flu vaccine idea' at a time when many pundits favored MedImmune," he wrote. "This season, we have not recommended either stock." (He doesn't own shares of Chiron; his firm has had an investment banking relationship with Chiron.) "Few stock catalysts lie ahead," he said.

UBS analyst David Molowa called the manufacturing suspension "the worst case scenario" for this year. He already has a reduce rating on the stock.

"If Chiron is able to fix manufacturing issues, this could be a one-season issue," he told clients in a research note. "However, if regulatory authorities find larger issues, this may affect future influenza seasons." (He doesn't own shares; his firm has had an investment banking relationship with Chiron.)

S&P said it was putting $965 million of Chiron's debt under review. "The effect on 2004 financial measures will be dramatic, as flu vaccines contributed about 20% of 2003 sales and a higher proportion of earnings," said David Lugg, an S&P credit analyst.

Trail of Trouble

Distribution of Chiron's flu vaccine was blocked by Britain's Medicines and Healthcare Products Regulatory Agency (MHRA), which barred Chiron from selling the drug for three months, citing manufacturing concerns that first came to light in August. The company said it has yet to release any of its vaccine, called Fluvirin, anywhere, meaning no recall will be necessary.

Just last week, Pien told a Senate committee that this year's vaccine would be safe and on time. "We expect that in the next few days we can make shipment plans," Pien told the Senate Committee on Aging Sept. 28, repeating a 48 million-dose target that the company had identified in August.

"However, MHRA has asserted that Chiron's manufacturing process does not comply with U.K. good manufacturing practices regulations and has suspended the company's Liverpool facility license to manufacture influenza vaccine for three months," Chiron said Tuesday. Chiron said it initiated discussions with the agency to map out corrective measures.

At a press conference Tuesday, Pien said his company had identified "the probable cause" as "human error" during a "relatively late step" in the manufacturing process. He didn't provide details, adding that the company and British regulators would discuss all of the suspected reasons leading to Chiron's license suspension.

"Our manufacturing and quality staff have worked hard to resolve what we viewed as a problem limited in scope to a few batches, and we believe our quality assurance confirmatory testing demonstrates that the Fluvirin doses we anticipated releasing are safe," said John Lambert, president of Chiron Vaccines. "While the MHRA's conclusions are unexpected, we respect the regulatory authority's judgment, we apologize unreservedly to the public and our customers for being unable to meet our commitments this year."

Pien added Tuesday that Chiron intends "to utilize every day of this season so we can be a reliable supplier for the next season."

On Aug. 26, Chiron announced that it had found problems with the production of its Fluvirin influenza virus vaccine and said the product's market release would be delayed until early October. A quality control program detected "a small number" of products that failed to meet sterility specifications, Chiron said.

"Assuming satisfactory results from ongoing release testing," the company said at that time, Chiron expected to deliver between 46 million and 48 million Fluvirin doses to the U.S. market beginning in October. That was down from its estimate in July, when Chiron said it was on schedule to deliver 50 million doses of Fluvirin to the U.S. market this season and that it had delivered its first 1 million doses to U.S. distributors.