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Chiron to Acquire PathoGenesis

Biotech: $700-million deal gets lukewarm reception from Wall St., with Emeryville-based firm's shares falling.

August 15, 2000|From Bloomberg News

Chiron Corp., the world's top maker of a medicine for kidney and skin cancer, said Monday that it will buy PathoGenesis Corp. for about $700 million in cash, giving Emeryville-based Chiron a drug for cystic fibrosis.

Chiron said the acquisition would expand its franchises in biopharmaceuticals, vaccines and blood testing, but the deal was greeted tepidly on Wall Street. Chiron's shares fell $1.94 to close at $46.69 on Nasdaq.

Shares of Seattle-based PathoGenesis rose $5.22, or 16%, to close at $37.97 on Nasdaq, just shy of Chiron's all-cash tender offer of $38.50 per share. PathoGenesis makes the inhaled antibiotic TOBI for cystic fibrosis patients, which accounted for $60 million of the company's $60.8 million in 1999 sales.

Chiron, in which Switzerland's Novartis owns a 44% stake, needs new products after setbacks this year. Under Chief Executive Sean Lance, Chiron built up more than $1 billion in cash for acquisitions by selling medical test and laser eye surgery units. Recent gains in biotechnology stocks lifted some possible targets out of reach, making PathoGenesis more attractive, an analyst said.

"Investors had hoped Chiron would do something larger than this," said Dennis Harp, an analyst with Deutsche Banc Alex. Brown. "People will come to realize that this is a good, solid base hit, although not a home run."

PathoGenesis shares slipped 15% this year before the company said June 5 that it had hired Goldman, Sachs & Co. to explore its options, including the sale of the company. Shares have risen 90% since that announcement.

The PathoGenesis purchase should be completed in this year's third or fourth quarter, Chiron said. The acquisition would reduce 2001 earnings, and then the company would "about break even" in 2002, Jim Sulat, Chiron's chief financial officer, said in an interview. He said that the purchase would add to earnings the following year.

PathoGenesis' star product is its inhaled antibiotic TOBI, though the company is working on a drug that appears to treat tuberculosis in laboratory and animal tests.

TOBI costs about $12,000 a year per patient.

PathoGenesis had 1999 sales of $60.8 million, compared with Chiron's sales of $763 million last year.

Chiron's products include the cancer drug Proleukin, which posted second-quarter sales of $36 million. This interleukin-2 drug is used for kidney and skin cancer, Sulat said. The company said this month that sales and royalties from the multiple sclerosis drug Betaseron, marketed in Europe by Schering as Betaferon, were up 13% to $70 million, and that its vaccine sales more than doubled to $92 million from $39 million.

Chiron has suffered a series of setbacks in developing products in the last year. The company halted development of an experimental arthritis drug in July after studies failed to show any benefit.

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