Note: All New and Revised Material Since Last Report Is Highlighted
Note: All new and revised material since last report is highlighted.
Reason for Report: Pre earnings update. Prev. Ed.: March 28, 2006
Overview
California based Chiron Corporation (CHIR) is a biopharmaceutical company that develops, manufactures, and globally markets therapeutic products for the prevention and treatment of infectious diseases. The company operates through three segments: Blood Testing, Adult and Pediatric Vaccines, and Biopharmaceuticals. The company’s website is http://www.chiron.com.
Key Positive Arguments / Key Negative ArgumentsThe company is the world’s second largest producer of pediatric, travel, flu, and novel vaccines. / Higher sales of lower margin NAT products to affect margins in the near term.
Firms believe the Procleix system has a potential large usage around the world. / Firms have also voiced their concern over future Fluvirin sales given the competitive vaccine market.
Management’s strategy and commitment to expand R&D and build out the pipeline should support the LTG rate. / Betaseron faces increased competition from Rebif (PFE/SRA) and market leader Avonex (BGEN).
Potential expanded label for oncology drug Proleukin with Genentech’s Rituxan could reaccelerate growth. / Some firms question the LTG rate given the competitive vaccine market and lack of new products that are likely to drive operating margins.
Fluvirin has returned to the market during 4Q05 and the company expects to produce 40M doses in 2006/2007.
The acquisition of PowderJect in mid-2003 allowed CHIR to significantly strengthen the firm’s global operations in flu, smallpox, cholera, and yellow fever vaccines. That, along with a rapidly growing meningitis and pediatric vaccine business, makes CHIR the worldwide No. 2 player. Yet, concern over Fluvirin manufacture, and certain negative aspects of the vaccine business (carries lower margin) have forced many firms to take a cautious stance.
Note: The company’s fiscal year ends on December 31; fiscal year references coincide with the calendar year.
Revenue
Betaseron
Indications: Multiple Sclerosis
Stage of development: Mature
Partners: CHIR manufactures Betaseron and markets it through Schering AG and its associates worldwide. The collaboration is valid till October 2008.
Importance: Betaseron (interferon beta-1b) for multiple sclerosis is the company’s leading therapeutic product. Yet brokerage firms are pessimistic about its growth due to a tough competitive environment in the multiple sclerosis market. The drug is currently approved for relapsing/remitting multiple sclerosis as well as for secondary progressive multiple sclerosis in major countries including the U.S.
Revenue: Betaseron revenues were $40.5 M (up 19.3% year-over-year) in 4Q05 above the digest estimate of $37M primarily due to price increases and a shift from third-party to in-house production. This was partially offset by a reduction in shipments to Berlex and inventory ordering patterns. Annual sales were $142.2M (up 8.6% year-on-year) and above the digest estimate of $139.0M.
Regulatory issues: During late 2003 and early 2004, CHIR had introduced a modified version of Betaseron in the U.S. and the Japanese market to further enhance the drug’s ease of use and to strengthen the drug’s presence in the $3B multiple sclerosis market. CHIR began shipping a pre-filled syringe of Betaseron (the modified version) to allow a greater convenience in dosing.
Competitors: The firms (MorganStanley, Prudential, Merrill, UnionBankSwitz.) see little increase in sales due to tough competition from marketed products like Rebif (PFE/SRA), Copaxone (TEVA), and Avonex (BIIB).
Others: In the European market, Betaseron is sold under the brand name Betaferon, supplied by Boehringer Ingelheim, for which CHIR receives royalty payments.
On February 24, 2006, Chiron announced that Schering AG has intended to exercise its option under the collaboration agreement with Chiron to purchase or lease all assets used by Chiron in the manufacture of Betaseron interferon beta-1b products and all contractual rights at their fair market or lease value. The purchase/lease option, as stipulated in a change-in-control clause in the agreement, is subject to the closing of the proposed acquisition of Chiron by Novartis.
2005A / 2006E / 2007E / 2008E / Est. GrowthBetaseron Sales / $142.2M / $156.7M / $154.1M / $153.0M / 5.6%
TOBI
Indications: Pseudomonas aeruginosa
Stage of development: Mature
Importance: TOBI (a formulation of tobramycin) looks positioned for growth over the next few years. The product is the first and only approved inhaled solution in the U.S. for the treatment of pseudomonas aeruginosa lung infection in cystic fibrosis patients. It is currently being approved for sale in the European Union, Canada, Switzerland, Norway, Israel, Argentina and Brazil. The product’s ease of use (inhaled solution) has allowed it to increase its penetration in the mild cystic fibrosis (CF) market.
Sales: TOBI recorded revenues of $65.2M (up 23.0% year-over-year) for 4Q05 and above consensus estimate of $60M primarily due to price increases and increased patient demand in both the United States and Europe, partially offset by wholesaler ordering patterns. The annual sales stood at $232.6M (up 9.2% year-over-year, and from digest average of $231M).
Regulatory issues: TOBI is being evaluated in patients with severe bronchiectasis in a Phase II clinical study. Bronchiectasis is a chronic, destructive lung disease defined by irreversible, abnormal dilation of the airways’ anatomical structure. Approximately 70,000 to 100,000 patients have bronchiectasis in the U.S. The company plans to initiate Phase III studies using this new formulation. The first study, TPI002, will be the pivotal efficacy study conducted on 140 TOBI-naive CF patients. The second study, TPI003, is a supportive safety and efficacy study to be conducted on 330 CF patients. The company indicated that it might start worldwide registration filings for this product in 2007. The company believes that the next generation tobramycin product (Tobramycin inhalation powder, TIP) will return the Cystic Fibrosis (CF) product line to a pattern of growth. Chiron anticipates the introduction of TIP will drive greater CF market penetration in patients with less severe disease.
Chiron and partner Nektar Therapeutics announced the initiation of ASPIRE I, the first of two Phase III trials of Tobramycin inhaled powder (TIP) for treatment of Pseudomonas aeruginosa infection in patients with CF in October 2005. ASPIRE I is an ongoing randomized, double blind, multicenter, multinational, placebo-controlled trial. During the first 28 days only, subjects will be randomized to TIP or placebo followed by two treatment cycles with TIP. The second Phase III trial, ASPIRE II, will assess the safety of TIP versus TOBI in CF patients and is anticipated to initiate in 2006. As a hand-held device with full portability, capsule-based inhaler, TIP could potentially provide increased convenience and a shorter administration time to patients.
Others: TOBI should continue to expand throughout the US and EU based on the following publications. The American Journal of Respiratory and Critical Care Medicine issued an article showing TOBI’s efficacy in treating pseudomonas aeruginosa lung infections in pediatric patients with CF.
2005A / 2006E / 2007E / 2008E / Est. GrowthTOBI Sales / $232.6M / $249.9M / $262.1M / $263.0M / 7.2%
Proleukin
Indications: Metastatic renal cell carcinoma and melanoma drug.
Stage of development: Mature
Importance: Proleukin (aldesleukin) interleukin-2, Chiron’s leading cancer product, has a proven record in the treatment of metastatic melanoma and metastatic renal cell cancer and is being tested in combination with monoclonal antibodies for the treatment of non-Hodgkin’s lymphoma (NHL).
Revenue: Proleukin revenues were $31.3M (up 0.8% year-over-year) and marginally above consensus figure of $31M in 4Q05. The yearly revenues were $123.5M, down 4.0% year-over-year (but above consensus estimate of $123M) owing to decreased patient demand in the United States and Europe, partially offset by price increases.
Regulatory issues: The company is conducting a Phase II study of this regimen in Rituxan-refractory low-grade NHL patients. The company is conducting another Phase II study to explore the combination of Proleukin with Rituxan in chemotherapy-relapsed/refractory follicular lymphoma patients called the PEaRL study (Proleukin Enhances Rituximab in Lymphoma). This large, randomized, controlled international study is being conducted in Rituxan-naïve patients. This study is targeted to enroll 300 patients with a primary efficacy endpoint of overall response rate and a secondary endpoint of time to tumor progression within two years. This trial is being conducted in combination with Genentech/Biogen Idec, with interim results expected in 1Q06. The company plans to genotype patients in order to identify those patients who are most likely to respond to the treatment.
Competitors: The product faces tough competition from recently approved biologics and numerous other products that are being used off label.
2005A / 2006E / 2007E / 2008E / Est. GrowthProleukin Sales / $123.5 / $124.4M / $125.5M / $113.0M / -0.9%
Procleix
Indications: HIV-1 and HCV
Stage of development: Mature
Importance: The blood testing business experienced significant growth in the past since approval of the company’s Procleix system in February 2002. Procleix is a nucleic acid testing (NAT) product used for detecting viruses like HIV-1 and HCV in donated bloods. Chiron received approval for the Procleix West Nile Virus Assay on December 01, 2005. The company expects the WNV assays to convert to commercial pricing in 2006. They plan to submit a U.S. application for the Tigris West Nile Virus Assay by mid-2006.
Partners: The company has tied up with Gen-Probe (GPRO) to develop these NAT products. Under the terms of the collaboration, the company is to manufacture and sell these products and pay roughly 45.75% royalty to GPRO for jointly participating in research and development activities. The company, in association with GPRO, is currently developing two NAT products to detect viruses in blood samples using the fully automated TIGRIS instrument and a semi automated instrument system. One is Procleix West Nile Virus Assay (WNVA) for detecting WNV and the other is Procleix Ultrio for detecting HBV, HIV and HCV.
Revenue: Nucleic acid testing revenues were $273.4M (up 9.4% year-over-year) for FY2005, slightly below the digest estimates of $277M. The increase in sales over FY2004 can be attributed to continued geographic expansion and the introduction of the Procleix Ultrio Assay and Procleix Tigris System into a number of markets outside of the United States.
Chiron has achieved its 2005 goals of 50% conversion to the Ultrio assay from the duplex (HIV/HCV) assay in Europe, and the placement of TIGRIS machines in key EU blood centers. Chiron has implemented Procleix Ultrio testing in four new geographic markets (South Africa, Malaysia, Israel and Lithuania) planned for 2005. Testing in South Africa began on October 3, 2005 at three sites and involving eight TIGRIS systems. In addition, testing has been implemented in Lithuania (80,000-100,000 donations annually) and installation has begun in Israel (280,000 donations annually). Procleix routine testing began in South Korea in early February, 2005. In 2006, Chiron has plans to enter four new countries, similar to 2005. One firm (R W. Baird) anticipates NAT business to grow 25% in 2006.
Continued introduction of the fully automated Procleix TIGRIS system, which enables higher throughput and smaller pool blood screening and potential US approval of the TIGRIS system, is expected to fuel growth. At present, 40 TIGRIS systems have been installed worldwide, 13 of which are in the U.S under the West Nile Virus IND.
Regulatory issues: In October 2005, Chiron’s collaborator Gen-Probe announced that the FDA found that Ultrio, run on the TIGRIS platform, was not substantially equivalent to Ultrio running on the semi-automated eSAS platform. Chiron and collaborator Gen-Probe however, announced that they are currently reviewing the application for Ultrio on the TIGRIS system. Chiron remains optimistic that Ultrio on the TIGRIS platform will be approved in 2006.
Management expects U.S. adoption of Procleix Ultrio to follow a similar trajectory as EU adoption, or ~20-30% in the first year, and ~50% in the second year.
CHIR also ships NAT products to Roche for a royalty payment, as well as an HIV-1/HCV assay product to Ortho Diagnostics (a JNJ subsidiary). The company books the Ortho Diagnostic business under the ‘Equity JV’ line on the income statement. Joint business contractual arrangement with Ortho-Clinical Diagnostics recorded increased revenues in 4Q05 primarily due to increased profitability realized by the joint business. It settled a dispute with Roche over the royalty payments issue associated with the NAT product sales. This apart, CHIR will receive $64M, which it will recognize in eight equal installments through 2006. Roche may, however, opt for an 11-19% royalty payment through 2006 instead of the $64M payment.
Overall the digest average predicts a CAGR of 15.0% through 2007 in blood testing and NAT sales. One firm (UnionBankSwitz.) describes this business as the Crown Jewel of Chiron.
2005A / 2006E / 2007E / 2008E / Est. GrowthBlood Tests / NAT / $273.4M / $332.0M / $362.9M / $384.0M / 13.2%
Fluvirin
Indications: Vaccine for pediatric, travel, and novel applications.
Stage of development: Mature, widely sold.
Importance: CHIR is the world’s No. 2 player in the vaccine market for pediatric, travel, flu, and novel (hepatitis, meningitis) applications with leading market share positions in U.K., Germany and Italy.
Revenue: Chiron reported total vaccine sales of $243.5M for the fourth quarter, above consensus estimate of $234M, attributable to the return of Fluvirin vaccine to the U.S. market. The annual sales figure stood at $580.5M (up 21.2% year-over-year and above consensus estimate of $571M). Sales of Fluvirin vaccine were $96M in 2005, compared to $2M in 2004, which related to sales from the 2003-2004 influenza season. The company sold around 13M doses of the vaccine to its customers in 2005.
Sales of other influenza vaccines were $129M in 2005, a decrease of 15% compared to 2004, primarily due to no sales of Begrivac vaccine in 2005, compared to $53M of sales in 2004. However, the company expects a comeback of Begrivac in 2006. The decrease was partially offset by increased sales of other influenza vaccines. Chiron reiterated that the Liverpool manufacturing facility would have capacity to support approximately 40M doses of Fluvirin for the 2006/2007 influenza season, but would not provide guidance on the actual production levels expected for the next season. In addition, the company reiterated its confidence in the strong pricing for Fluvirin going into 2006 and is not concerned about the addition of other influenza manufacturers entering the U.S. market.