November 1, 2005

After being spurned by Chiron six weeks ago, Novartis has agreed to pay $5.1 billion to acquire full control of the California-based drugmaker -- a move that significantly boosts its presence in the red-hot vaccines market.

Under the terms of the agreement, Novartis, which already owns 42 percent of Chiron, will pay $45 per share for the remaining 58 percent of the vaccine manufacturer. The price represents a 13 percent premium over the offer Novartis made in early September for full control of Chiron. Chiron balked at the earlier price, saying the offer was "inadequate."

Despite the higher price, the acquisition is a smart one for Novartis, financial analysts said. "We view the deal as a sensible strategic move," said Merrill Lynch analyst Graham Parry, who noted the acquisition would give Novartis immediate access to the vaccines market, a sector that has traditionally been a weakness for the Swiss firm.

"The vaccines market is becoming increasingly attractive but has high barriers to entry predominantly due to limited manufacturing capacity," Parry writes in a recent research note. Chiron is the world's fifth-largest vaccines manufacturer, with annual vaccine sales of more than $500 million. Financial analysts have predicted the global vaccines market could reach $10 billion annually by 2007.

Novartis said it would focus on growing Chiron's vaccine operations, which has struggled over the past year to recover from manufacturing problems. "Our plan is to turn around the Chiron vaccines business, which will require investments in R&D and manufacturing to increase quality and capacity, so that we can better meet customer demand and address public health needs," Novartis Chairman and CEO Daniel Vasella said.

Chiron was forced to close its Liverpool, England, manufacturing plant in October 2004 after the UK's Medicines and Healthcare products Regulatory Agency determined the facility did not meet UK current good manufacturing practice regulations. The closing of the plant nearly halved the U.S. supply of flu vaccine last winter, causing shortages at facilities across the country.

Chiron reopened the plant this fall and started shipping lots of its influenza vaccine, Fluvirin, to the U.S. roughly two weeks ago. However, the firm recently announced that it would probably fall short of its anticipated production target of 18 million to 26 million doses of Fluvirin for this year's flu season.