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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 0-12798
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CHIRON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2754624
(State of Incorporation) (IRS Employer Identification No.)
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4560 HORTON STREET
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (510) 655-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: /X/ No: / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 29, 2000, was $5.1 billion.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 29, 2000:
TITLE OF CLASS NUMBER OF SHARES
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Common Stock, $0.01 par value 180,590,023
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed in connection with the
solicitation of proxies for the Annual Meeting of Stockholders to be held on
May 25, 2000 are incorporated by reference into Part III of this Report.
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ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE STATEMENTS
CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE EVENTS OR PERFORMANCE
AND ALL OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS OF HISTORICAL FACT,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS SUCH AS "BELIEVES,
"ANTICIPATES," "EXPECTS," "ESTIMATES," "PROJECTS," "WILL," "MAY," "MIGHT" AND
WORDS OF A SIMILAR NATURE. THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
REPORT REFLECT MANAGEMENT'S CURRENT BELIEFS AND EXPECTATIONS ON THE DATE OF THIS
REPORT. ACTUAL RESULTS, PERFORMANCE OR OUTCOMES MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. SOME OF THE IMPORTANT FACTORS
WHICH, IN THE VIEW OF CHIRON CORPORATION ("CHIRON" OR THE "COMPANY"), COULD
CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS ARE DISCUSSED IN ITEM 7 OF THIS REPORT, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY ANNOUNCE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT FACTS OR CIRCUMSTANCES OF WHICH MANAGEMENT BECOMES AWARE AFTER THE DATE
HEREOF.
OVERVIEW AND CERTAIN RECENT DEVELOPMENTS
Chiron is a biotechnology company that participates in three global
healthcare businesses: biopharmaceuticals, vaccines and blood testing. The
Company is applying a broad and integrated scientific approach to the
development of innovative products for preventing and treating cancer,
infectious diseases and cardiovascular disease.
The Company's products include Proleukin-Registered Trademark-
(aldesleukin), a recombinant form of interleukin-2, which the Company markets as
a treatment for metastatic renal cell carcinoma and metastatic melanoma. The
Company manufactures recombinant human platelet-derived growth factor, the
active ingredient in Regranex-Registered Trademark- (becaplermin) Gel, which is
marketed by Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil"), a Johnson &
Johnson ("J&J") company, as a treatment for diabetic foot ulcers. Chiron also
manufactures Betaseron-Registered Trademark- (interferon beta-1b) for Berlex
Laboratories, Inc. ("Berlex") and its parent company, Schering AG, which is
marketed by Berlex and Schering AG as a treatment for multiple sclerosis. In
addition, the Company sells a line of traditional pediatric and adult vaccines.
The Company has an interest in a number of other products through collaborations
and joint businesses, including a joint immunodiagnostics business with
Ortho-Clinical Diagnostics, Inc., a J&J company, which sells a full line of
tests required to screen blood for hepatitis viruses and retroviruses, and a
separate collaboration with Gen-Probe Incorporated, which is developing products
using nucleic acid testing technology to screen blood in blood banks and plasma
in the plasma industry for infection by viruses.
Chiron has a strong commitment to research as an essential component of its
product development effort. The Company focuses its research and development
activities primarily on areas in which it has particular strengths, including
cancer, infectious diseases and cardiovascular diseases. An important part of
the Company's research and development effort is undertaken through
collaborations with third parties who are able to contribute significant
enabling technologies and other resources to the development and
commercialization of the product, including in some cases, marketing and sales
expertise.
In January 1995, the Company established an alliance with Novartis AG
("Novartis"), a life sciences company headquartered in Basel, Switzerland. As of
February 1, 2000, Novartis held shares representing approximately 44% of the
outstanding common stock of the Company. For more on the Novartis alliance, see
"Relationship With Novartis" below.
The Company was incorporated in California in 1981 and was merged into a
Delaware corporation in November 1986. The Company's principal executive offices
are located at 4560 Horton Street, Emeryville, California 94608, and its
telephone number at that address is (510) 655-8730.
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PRODUCTS
BIOPHARMACEUTICALS
The Company's leading therapeutic product is Proleukin-Registered Trademark-
(aldesleukin), a recombinant form of interleukin-2 ("IL-2"). IL-2 is a protein
produced naturally in the body in very small quantities. IL-2 stimulates the
immune system to increase the production and function of immune cells, including
lymphocytes (white blood cells) that help fight certain cancers and may help
fight viral infections. While the precise anti-tumor mechanism of
Proleukin-Registered Trademark- is unknown, research has demonstrated that it
induces the proliferation of immune cells, including natural killer and
cytotoxic T cells that can recognize and mobilize against tumor-specific
antigens on the surface of malignant cells. Proleukin-Registered Trademark- is
marketed by the Company directly or through distributors in the United States
and over 40 other countries in North America, Europe and South America for the
treatment of metastatic renal cell carcinoma (a type of kidney cancer) and, in
the United States and Canada, for the treatment of metastatic melanoma (a form
of skin cancer).
Chiron manufactures recombinant human platelet-derived growth factor
(rhPDGF-BB), the active ingredient in Regranex-Registered Trademark-
(becaplermin) Gel, developed with Ortho-McNeil through a collaboration in growth
factor research that began in 1984. Ortho-McNeil markets Regranex-Registered
Trademark- in the United States as a treatment for diabetic foot ulcers.
Regranex-Registered Trademark- works by enhancing the body's natural wound
healing processes. It stimulates the migration of cells to the site of the
ulcer, encouraging the patient's body to grow new tissue that helps heal these
open wounds. Regranex-Registered Trademark- was the first product demonstrated
to assist in the healing of diabetic foot ulcers. Regranex-Registered Trademark-
also has been approved for marketing in Canada, Europe, Asia and other regions
of the world.
Chiron manufactures Betaseron-Registered Trademark- (interferon beta-1b) for
Berlex and its parent company, Schering AG of Germany. Berlex markets
Betaseron-Registered Trademark- primarily in the United States and Canada to
treat patients with relapsing remitting multiple sclerosis and in Canada to
treat patients with secondary progressive multiple sclerosis. Multiple sclerosis
is an autoimmune disease in which the patient's immune system attacks and
destroys an element of the patient's own central nervous system. The Company
also receives royalties from the sale of a similar product in Europe,
Betaferon-Registered Trademark-, which is manufactured by Boehringer Ingelheim
and marketed by Schering AG for the treatment of patients with relapsing
remitting or secondary progressive multiple sclerosis.
In April 1999, the FDA approved DepoCyt-Registered Trademark- for treatment
of lymphomatous meningitis, subject to a post-approval (phase IV) clinical
study. DepoCyt-Registered Trademark- consists of cytarabine (a generic
chemotherapy product) encapsulated in a novel delivery system, called
Depofoam-Registered Trademark-. The Company developed DepoCyt-Registered
Trademark- in the United States in a collaboration with SkyePharma, Inc.
(formerly DepoTech Corporation) ("SkyePharma"). SkyePharma manufactures
DepoCyt-Registered Trademark- and the Company markets it in the United States.
In October 1999, SkyePharma discovered two lots that did not meet manufacturing
specifications and, as a result, vials from these lots were recalled. Sale of
this product is on hold while the Company and SkyePharma work with the Food and
Drug Administration ("FDA") to resolve various manufacturing issues.
Sales of Proleukin-Registered Trademark- (IL-2) accounted for approximately
15%, 13% and 12% of consolidated total revenues in 1999, 1998 and 1997,
respectively. Sales of Betaseron-Registered Trademark- (interferon beta-1b),
which include product sales to Berlex and Schering AG and royalties earned on
Schering AG's European sales of Betaferon-Registered Trademark- (interferon
beta-1b), accounted for approximately 13% (9% product sales and 4% royalties),
13% (9% product sales and 4% royalties) and 14% (10% product sales and 4%
royalties) of total revenues in 1999, 1998 and 1997, respectively. No other
single therapeutic product or class of therapeutic products accounted for 10% or
more of consolidated total revenues of the Company in any of the last three
fiscal years.
VACCINES
Through its subsidiary Chiron S.p.A., based in Siena, Italy, the Company
manufactures and markets in Italy vaccines for diphtheria, tetanus, pertussis,
meningococcus, haemophilus influenzae, flu, measles,
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mumps, rubella, hepatitis A and an oral polio vaccine and, under license,
markets a vaccine for typhoid fever. Through its subsidiary Chiron Behring
GmbH & Co ("Chiron Behring"), based in Marburg, Germany, the Company
manufactures and markets in Germany vaccines for diphtheria, tetanus, pertussis,
flu, rabies, tick-borne encephalitis, tuberculosis, cholera and an oral polio
vaccine and, under distribution agreements with other manufacturers, markets
vaccines for hepatitis A, measles, mumps, rubella, typhoid fever, pneumococcal
disease, haemophilus influenzae type b, an inactivated polio vaccine, an
acellular pertussis vaccine and a recombinant vaccine for hepatitis B. Certain
of these vaccines are marketed in other European countries and in the Middle
East, the Far East, Africa and South America, and to international health
agencies such as the World Health Organization. The Company markets its rabies
vaccine in the United States.
The Company also has developed an adjuvanted flu vaccine, which currently is
marketed in Italy. The Company is seeking approval to market the adjuvanted flu
vaccine elsewhere in Europe through the European mutual recognition procedure.
See "Government Regulation" below.
The Company has developed a genetically engineered acellular vaccine for
pertussis (whooping cough), which currently is marketed in Italy both as a
monovalent vaccine and in combination with diphtheria and tetanus ("DTaP"). The
Company has received approval from the European Medicines Evaluation Agency to
market its DTaP vaccine for infants and toddlers in Europe.
The Company has developed a conjugate vaccine (Menjugate-TM-) against
meningococcal C disease. Invasive infection with the bacteria N. meningitidis
can lead to meningitis and septicemia (blood poisoning). Meningococcal
meningitis, which can be caused by multiple serogroups (A, B, C, Y and others),
is associated with a high mortality rate. In March 2000, the Medicines Control
Agency approved Menjugate-TM- for sale in the United Kingdom. The National
Health Service in the United Kingdom has accepted the Company's tender to supply
Menjugate-TM- in 2000.
In addition to revenues from the sale of the vaccine products described
above, the Company receives royalties from the sale of vaccines against
hepatitis B developed, manufactured and marketed by Merck & Co., Inc. ("Merck")
and SmithKline Beecham Biologics ("SmithKline"), using technology developed by
Chiron. Merck's hepatitis B vaccine was the first vaccine produced using genetic
engineering licensed by the FDA for human use.
No single vaccines product or class of vaccines products accounted for 10%
or more of consolidated total revenues of the Company in any of the last three
fiscal years.
BLOOD TESTING
Chiron's blood testing business comprises two separate collaborations: a
joint business with Ortho-Clinical Diagnostics, Inc. ("Ortho"), an affiliate of
J&J, and an alliance with Gen-Probe Incorporated ("Gen-Probe").
Chiron's joint business with Ortho was formed in 1989, based largely on the
screening, using immunodiagnostic technology, of blood in blood banks and other
similar settings for the potential presence of human immunodeficiency virus
("HIV") and hepatitis viruses. The joint business sells a full line of tests
required for hepatitis viruses and retroviruses and provides supplemental tests
and microplate-based instrument systems to automate test performance and data
collection. Chiron performs certain research and manufactures viral antigens and
supplemental hepatitis tests, while Ortho manufactures and sells assays and
instrument systems. Chiron and Ortho share equally in the pretax operating
earnings generated by the joint business. The joint business holds the
immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and
receives royalties from the sale of hepatitis C virus ("HCV") and HIV tests by
Abbott Laboratories ("Abbott") and from sales of HCV tests by Bio-Rad
Laboratories, Inc. and certain other licensees.
Chiron's collaboration with Gen-Probe is focused on developing and
commercializing products using nucleic acid testing technology to screen blood
in blood banks and plasma in the plasma industry for infection by viruses.
Compared to immunodiagnostic testing, testing directly for the presence of viral
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nucleic acid improves the sensitivity of detection and enables infection to be
detected earlier following infection. Under the terms of the collaboration
agreement, Gen-Probe performs certain product development and assay and
instrument manufacturing functions while Chiron and Gen-Probe jointly
participate in new assay and instrument research and development. Chiron will
sell the collaboration's products. Gen-Probe will receive a fixed percentage of
Chiron's sales revenues. The commercial market for nucleic acid testing products
in the blood banking and plasma industries is developing very rapidly as
regulatory agencies worldwide began in 1999 to develop policies or mandates for
future implementation of nucleic acid testing in blood banks and plasma centers.
The Chiron/Gen-Probe collaboration's first product, a combined test for HIV-1
and HCV using a semi-automated instrument system, is being used to screen blood
under an Investigational New Drug ("IND") clinical study in the United States.
See "Research and Development--Blood Testing."
No single blood testing product or class of blood testing products accounted
for 10% or more of consolidated total revenues of the Company in any of the last
three fiscal years.
RESEARCH AND DEVELOPMENT
Chiron has a strong commitment to research as an essential component of its
product development effort. Technologies developed in collaborations with third
parties, as well as technologies licensed from outside parties, also are sources
of potential products.
BIOPHARMACEUTICALS
Chiron has utilized a variety of approaches for developing biopharmaceutical
products. In 1999, the Company narrowed its R&D efforts to focus on those
platforms which management believes are more likely to generate new product
candidates. Going forward, Chiron expects to concentrate on two primary product
engines: recombinant proteins and small molecules, supported by biological
discovery. The Company is seeking a corporate partner for its gene therapy
program.
GENE/BIOLOGICAL DISCOVERY. Genomics and other technologies are used to
discover new genes and to determine their role and the role of the encoded
proteins in a target disease. With this information, the Company then identifies
and develops potential products, including therapeutics for treatment of disease
and vaccines for prevention of disease.
RECOMBINANT PROTEINS. Proteins produced naturally by the human body play a
variety of roles in controlling disease. When administered as therapeutic
agents, certain proteins or specific antibodies against them can enhance the
patient's natural ability to fight disease. However, traditional methods of
isolating or producing proteins can be cost-prohibitive, particularly in the
quantities needed for pharmaceutical use. Through genetic engineering, certain
proteins which might not otherwise be available can be produced in relatively
large quantities at reasonable cost.
The Company and its collaborators have a number of recombinant proteins in
clinical development. Proleukin-Registered Trademark- (IL-2), already approved
for marketing as a treatment for certain forms of kidney and skin cancer, is
being clinically evaluated for other indications, including treatment of
patients with HIV infection, treatment of acute myelogenous leukemia and as a
treatment for non-Hodgkin's lymphoma in conjunction with an approved antibody
therapeutic. Fibroblast Growth Factor ("FGF"), a growth factor which can
stimulate the formation of new blood vessels, is in clinical studies for use as
a treatment for coronary artery disease and peripheral artery disease. Tissue
Factor Pathway Inhibitor ("TFPI"), a coagulation inhibitor, is being developed
in collaboration with G.D. Searle & Co. ("Searle"), a subsidiary of the Monsanto
Company. The Company and Searle are conducting clinical studies on the use of
TFPI as a treatment for patients with severe sepsis. Insulin-Like Growth Factor
("IGF"), a growth factor which can stimulate the formulation of cartilage, is in
clinical development for the treatment of osteoarthritis. Chiron and Cephalon,
Inc. ("Cephalon") have discontinued their joint collaboration to develop
Myotrophin-Registered Trademark-(mecasermin) (IGF-I) as a treatment for
amyotrophic lateral sclerosis (also known as ALS or Lou Gehrig's disease). In
1997, an FDA advisory committee found that there was not sufficient evidence of
efficacy of
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Myotrophin-Registered Trademark- as a treatment for ALS to warrant approval. In
May 1998, Chiron and Cephalon received a letter from the FDA indicating that
Myotrophin-Registered Trademark- is potentially approvable, contingent upon
additional evidence of efficacy and safety. While the new drug application
("NDA") for Myotrophin-Registered Trademark- remains pending at the FDA, Chiron
and Cephalon have no present plans to submit additional data in response to the
FDA's request. Each company has borne its own costs of this program since July
1998. In September 1998, Chiron and Cephalon withdrew their application to
market Myotrophin-Registered Trademark- (IGF-I) in Europe.
SMALL MOLECULE DRUG DISCOVERY. Chiron's small molecule drug discovery
program combines multiple disciplines, including combinatorial and computational
chemistry, robotic screening and selection and molecular biology, to screen,
identify and refine compounds which may be used as drugs for treating medical
conditions or disorders. In addition to drug discovery against specific disease
targets of interest to the Company, from time to time the Company enters into
collaboration agreements with third parties under which the Company utilizes its
proprietary technologies to identify drug candidates directed at specific
disease targets of interest to the partner. Certain compounds which may be of
interest have been identified and are being further optimized and tested prior
to moving into clinical development.
GENE THERAPY. Traditional recombinant protein therapeutics are produced
outside the patient's body and administered to the patient, typically through
injection. Gene therapy enables the patient's own body to produce a desired
protein by inserting the gene for that protein into the patient's cells.
Currently there are no gene therapy products on the market. Many studies suggest
that the technology is promising but considerable further study is required to
determine whether this technology can be safely and effectively utilized to
treat disease. An example of a potential application of gene therapy currently
in clinical development at the Company is Factor VIII. Factor VIII is a protein
that causes blood to clot. Hemophiliacs, as a result of a hereditary defect, are
born with faulty copies of the gene that produces Factor VIII. Through gene
therapy, it may be possible to insert into a hemophiliac's cells the normal
Factor VIII gene, so that the patient's own cells can produce the blood clotting
protein. A key component of any gene therapy treatment will be the mechanism for
"inserting" the gene into the patient's cells. The Company is developing several
gene transfer systems, including retroviral and other viral vectors.
VACCINES
PROPHYLACTIC VACCINES. Chiron is developing a new generation of vaccines
for the prevention of disease utilizing genetic engineering and other techniques
of modern biotechnology, including vaccines based on recombinant antigens. The
Company currently is conducting preclinical studies on vaccines for a number of
targets. The Company also is developing novel adjuvants. Adjuvants are compounds
that amplify the immune response generated by vaccine antigens. One of Chiron's
adjuvants, MF-59, is a component of Chiron's new flu vaccine, which currently is
marketed in Italy. In addition, Chiron is conducting preclinical investigations
of alternative delivery systems for vaccines that may be used in lieu of
injection, such as nasally or orally delivered vaccines.
THERAPEUTIC VACCINES. The Company is investigating the potential use of
vaccines for therapeutic purposes, in which antigens are used to stimulate an
immune response against established infections and cancer. The Company's
therapeutic vaccine for treatment of chronic hepatitis B infection is in
clinical development.
BLOOD TESTING
Ortho is developing a range of hepatitis and retrovirus assays for IN-VITRO
clinical diagnostics use on its immunodiagnostics instrument system.
The Chiron/Gen-Probe collaboration has two instrument systems in
development, both of which are designed to be used with the HIV-1 and HCV
nucleic acid assay to test human plasma. The semi-automated system is currently
operating under IND in the United States while the fully automated
Procleix-TM-Tigris-Registered Trademark- system is under development. Chiron and
Gen-Probe are widening the menu from
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HIV-1/HCV to include other transfusion transmitted agents, and Gen-Probe is
continuing development of the fully automated Procleix-TM-Tigris-Registered
Trademark- system.
RESEARCH REVENUES AND EXPENSES
Collaborative arrangements with third parties are also a source of revenue
for the Company. In general, collaboration revenues include fees for research
services as they are performed or completed and milestone payments upon
attainment of specified benchmarks.
Novartis and the Company have entered into an agreement under which Novartis
has agreed to provide research funding for certain projects. The funded projects
currently consist of certain adult and pediatric vaccines, Insulin-Like Growth
Factor-I, Factor VIII and HSV-tk. The agreement provides that, through December
2000, at Chiron's request, Novartis will fund up to 100% of the development
costs incurred between January 1, 1995 and December 31, 1999 on the funded
projects. The amount of funding that Novartis is obligated to provide is subject
to an aggregate limit of $265.0 million. As of December 31, 1999, the Company
had used $252.9 million of the funding. In exchange for providing this funding,
Novartis has certain co-promotion rights for certain vaccines as well as an
interest in certain royalties on sales of certain products resulting from the
funded research.
Research and development expense for the years ended December 31, 1999, 1998
and 1997 for Company-sponsored research, including payments to collaboration
partners, was $303.4 million, $286.6 million and $256.6 million, respectively.
Of that, $49.7 million, $61.9 million and $79.5 million in 1999, 1998 and 1997,
respectively, was reimbursed by third parties.
COMMERCIALIZATION
Technologies arising out of the Company's research and development efforts
are commercialized in a variety of ways. Certain products are marketed and
distributed by the Company, either directly or through distributors. See
"Distribution" below. Other technologies are developed by the Company in
collaboration with third parties, and under the collaboration agreement,
marketing rights may be allocated to the Company or to the collaborator or
shared by both parties. In the event marketing rights are allocated to the
collaborator, the Company generally retains the right to manufacture and supply
key raw materials to the collaborator. Still other technologies are licensed by
the Company to third parties, with the licensee assuming responsibility for
further development and the Company receiving royalties on sales of the
resulting product. Agreements under which the Company currently derives revenues
for technologies licensed to third parties include an agreement with Bayer
relating to, among other things, use of the Company's HCV and HIV technologies
for IN VITRO diagnostics; an agreement with F. Hoffman La-Roche Limited and
Hoffman La-Roche, Inc. ("Roche"), relating to polymerase chain reaction ("PCR")
technology; an agreement with Merck relating to hepatitis B vaccines, an
agreement with SmithKline relating to recombinant vaccine manufacturing
technology and an agreement with Novo Nordisk A/S relating to technology used in
the manufacture of recombinant human insulin. In September 1999, Chiron granted
a license to Abbott under its HCV patents for use in nucleic acid amplification
in clinical diagnostics, excluding blood screening.
DISTRIBUTION
To remain competitive in an intensely competitive environment, Chiron
maintains several specialized marketing and sales forces that concentrate on
individual classes of customers.
The Company's vaccine marketing organization is based in Siena, Italy and
Marburg, Germany. Direct sales efforts are focused on pediatricians and general
practitioners. Products are also sold to the public sector through tenders and
to private sector pharmacies through wholesalers and distributors.
Chiron's biopharmaceuticals marketing, sales and distribution organization
for the U.S. is based in Emeryville, California and for Europe is headquartered
in Amsterdam, The Netherlands. Sales efforts are
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focused on specialist physicians, principally oncologists, who are based in
hospitals and large clinics. In general, products are sold to wholesalers,
distributors and hospital pharmacies.
RAW MATERIALS
Raw materials and other supplies used in the manufacture of the Company's
products (both commercial and investigational) generally are available from
multiple commercial sources. Certain processes, however, use materials that are
available from sole sources or that are in short supply or that are difficult
for the supplier to produce and certify in accordance with the Company's
specifications. The Company's biopharmaceutical products are biologics. From
time to time, concerns are raised with respect to potential contamination of
biological materials that are supplied to the Company for use in various
production processes. These concerns can further tighten market conditions for
materials that may be in short supply or available from limited sources.
Moreover, regulatory approvals to market the Company's products may be
conditioned upon obtaining certain materials from specified sources. The
Company's ability to substitute material from an alternate source may be subject
to delay pending regulatory approval of such alternate source. Although the
Company monitors the ability of certain suppliers to meet the Company's needs
and the market conditions for these materials, there is a risk that material
shortages could impact production.
PATENTS
Patents are very important to the business of the Company. Chiron has a
policy of seeking patents on inventions arising from its extensive research and
development activities. The time and expense required to develop and obtain
regulatory approval to market human healthcare products is significant. Without
the protection of patents or trade secrets, competitors may be able to use the
Company's inventions to manufacture and market competing products without being
required to undertake the lengthy and expensive development efforts made by
Chiron. Chiron has a substantial number of granted patents and pending patent
applications in the United States and other important markets, and a number of
patents and patent applications owned by third parties have been licensed to
Chiron.
There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the United States and
other important markets. It is not known how many of the Company's pending
patent applications will be granted, nor the effective coverage of those that
will be granted. In the United States and other important markets, the issuance
of a patent is not conclusive as to its validity or the enforceable scope of its
claims. The Company has engaged in significant litigation to determine the scope
and validity of certain of its patents and expects to continue to do so in the
future.
Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection.
Third parties may be able to design around the patents and develop competitive
products that do not use the inventions covered by the patents. Many countries,
including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties (for
example, the third party's product is needed to meet a threat to public health
or safety in that country, or the patent owner has failed to "work" the
invention in that country, or the third party has patented improvements), and
most countries limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement, which could
materially diminish the value of the patent. Furthermore, most countries do not
provide discovery so the Company may not be able to meet its burden of proving
infringement; nor can it be guaranteed that the Company will even become aware
of infringement of its patents.
To a lesser extent, trade secrets and confidential information are important
to Chiron's commercial success. Although the Company seeks to protect trade
secrets and confidential information, there can be no assurance that others will
not obtain access to such information or develop the same or similar
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information independently, or that third parties will not obtain patent
protection that precludes Chiron from using its trade secrets or confidential
information.
Chiron is aware that third parties, including competitors, educational
institutions and governmental organizations, have patents and patent
applications in the United States and other significant markets that may be
useful or necessary for the manufacture, use or sale of certain of the Company's
products (commercial and investigational). There may be other such patents and
patent applications of which the Company is not currently aware. It is likely
that third parties will obtain other such patents in the future. Certain of
these patents may be sufficiently broad to prevent or delay Chiron from
practicing necessary technology, including manufacturing or marketing products
important to the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which Chiron may wish
or need to obtain licenses to such patents and the cost and availability of such
licenses cannot be accurately predicted. If Chiron does not obtain such
licenses, products may be withdrawn from the market or delays could be
encountered in market introduction while an attempt is made to design around
such patents. Alternatively, Chiron could find that the development, manufacture
or sale of such products is foreclosed. Chiron could also incur substantial
costs in challenging the validity and scope of such patents.
TRADEMARKS
Proleukin-Registered Trademark- is a registered trademark of the Company and
its subsidiaries. ELVS-TM-, Polioral-TM-, Triacelluvax-TM- and Procleix-TM- are
trademarks of the Company and its subsidiaries. DepoCyt-TM- is a trademark owned
by Chiron and SkyPharma. The following registered trademarks are owned by the
indicated companies: Betaseron-Registered Trademark- and Betaferon-Registered
Trademark- (Schering AG), Myotrophin-Registered Trademark- (Cephalon),
Regranex-Registered Trademark- (J&J), Apligraf-Registered Trademark- (Novartis),
Dermagraf-Registered Trademark- (Advanced Tissue Sciences, Inc.),
Copaxone-Registered Trademark- (Teva Pharmaceutical Industries, Ltd.),
Avonex-Registered Trademark- (Biogen, Inc.), Aredia-Registered Trademark-
(Novartis), Amplicor-Registered Trademark- (Roche) and Novantrone-Registered
Trademark-(Immunex). Tigris-Registered Trademark- is a trademark owned by
Gen-Probe.
SEASONALITY
Sales of certain of the Company's vaccine products, in particular flu
vaccine, are seasonal, with higher sales in the third and fourth quarters of the
year.
The Company receives royalties on sales of PCR products by Roche. Under the
terms of the Company's agreement with Roche, royalties are payable after Roche's
annual net sales of PCR products exceed $200.0 million. This $200.0 million
threshold resets at the beginning of each year. Accordingly, the Company does
not expect to receive any royalties on Roche's PCR sales until the last half of
each year. Roche's royalty obligation will expire upon the earlier of
December 31, 2000 or when Chiron recognizes royalties with an aggregate net
present value of $30.0 million as of the date of the agreement. As of
December 31, 1999, Chiron had recognized royalties with a net present value of
$13.2 million.
MAJOR CUSTOMERS
The Company has a strategic alliance with Novartis and in connection
therewith has entered into a series of arrangements with Novartis. See
"Relationship With Novartis" below. These arrangements contributed 8%, 12% and
21% of total revenues in 1999, 1998 and 1997, respectively. The Company has a
joint immunodiagnostics business with Ortho. See "Products--Blood Testing"
above. The Ortho joint business, together with certain other arrangements with
J&J and its affiliates, contributed 14%, 18% and 24% of total revenues in 1999,
1998 and 1997, respectively. The Company has a supply agreement with Berlex and
its parent company, Schering AG of Germany. Revenues recognized under this
agreement contributed 13%, 13% and 14% to total revenues in 1999, 1998 and 1997,
respectively.
8
COMPETITION
Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
blood testing companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and blood testing companies, have
greater resources than the Company. The technologies applied by the Company and
its competitors are rapidly evolving, and new developments frequently result in
price competition and product obsolescence. Substantial consolidation is
underway in the global healthcare industry and is expected to produce greater
efficiencies and even more intense competition.
To compete effectively, Chiron invests heavily in research and development,
maintains specialized sales forces that concentrate on individual classes of
customers and spends significant amounts on advertising, promotion and selling.
Important biotechnology research is performed in universities and nonprofit
research organizations. These entities are becoming more active in seeking
patent protection and licensing revenues for their discoveries. The competition
among large pharmaceutical companies and smaller biotechnology companies to
acquire technologies from these entities also is intensifying. While Chiron
actively collaborates with such entities in research, and has and will continue
to license their technologies for further development, these institutions also
compete with Chiron to recruit scientific personnel and to establish proprietary
positions in technology.
BIOPHARMACEUTICALS
Proleukin-Registered Trademark- competes with alpha interferon sold by
Schering Plough Corporation and by Roche as a treatment for metastatic kidney
cancer and metastatic melanoma, although many patients are treated with both
products. The Company estimates that Proleukin-Registered Trademark- has
approximately a 50% market share for metastatic kidney cancer and a 25% market
share for metastatic melanoma. The principal method of competition is product
performance. Several other companies are developing immune-system-based
therapies for cancers and infectious diseases, including Roche, Genentech, Inc.,
Amgen, Inc., Immunex and Immune Response/Agouron.
Regranex-Registered Trademark- was the first product approved by the FDA for
treatment of diabetic foot ulcers. Products that it indirectly competes with
include Dermagraft-Registered Trademark-, a product from Advanced Tissue
Sciences & Smith and Nephew, and Apligraf-Registered Trademark-, a product from
Novartis which has been approved by the FDA for treatment of venous leg ulcers
and is in clinical trials for treatment of diabetic foot ulcers.
Betaseron-Registered Trademark-, as a treatment for multiple sclerosis,
competes with Avonex-Registered Trademark-, a recombinant interferon beta sold
by Biogen, Inc., and with Copaxone-Registered Trademark- from Teva
Pharmaceuticals. In March 2000, the FDA issued an approvable letter for
Novantrone-Registered Trademark- from Immunex for the treatment of secondary
progressive multiple sclerosis. In Europe, Schering AG's product,
Betaferon-Registered Trademark-, faces competition from Ares Serono, which sells
another form of beta interferon that is used for, among other purposes,
treatment of multiple sclerosis. Other companies have treatments for multiple
sclerosis in clinical development.
VACCINES
Four large companies hold the greatest share of the worldwide vaccine
market: Merck, SmithKline, Wyeth Lederle Vaccines & Pediatrics, a division of
American Home Products Corporation ("Lederle"), and Aventis Pasteur (formerly
Pasteur Merieux Connaught). Aventis Pasteur separately has a strategic alliance
with Merck. All four of these companies, as well as other biotechnology
companies, have substantial research and development programs. The Company
estimates that it has approximately a 31% and 35% market share in Germany and
Italy, respectively, and an aggregate market share of approximately 11% outside
of the United States, Europe and Japan. The principal methods of competition in
vaccines are price and introduction of new products, including vaccines against
diseases for which no vaccine was
9
previously available as well as new combination vaccines that combine existing
vaccines for several diseases into a single product. Combination vaccines
frequently are favored by public health authorities, medical practitioners and
patients, particularly in the case of pediatric vaccines, because they eliminate
the need for multiple injections and may increase overall compliance with
recommended vaccination schedules. As new combination vaccines are introduced,
older combinations and single products often become obsolete. The Company may be
limited in its ability to develop and market certain combination vaccines if one
of the vaccines which would otherwise be included in the combination is covered
by valid and enforceable patent or other proprietary rights held by third
parties.
BLOOD TESTING
Chiron is the sole manufacturer of HCV antigens for use in immunodiagnostic
assays of the Chiron-Ortho joint businesses and also manufactures HCV antigens
for Abbott's immunodiagnostic assays. In the immunoassay blood testing market,
the Chiron-Ortho joint business competes with Abbott. The joint business
anticipates increased competitive pressures from Abbott with the introduction of
the Abbott PRISM-Registered Trademark- instrument system. The joint business is
also developing immunodiagnostic instruments and assays to detect hepatitis,
retrovirus and other agents in clinical diagnostic applications. Many other
companies, including Roche, Abbott and Bayer Corporation, have substantial
positions in the market segment.
Currently, there are no approved, nucleic acid-based tests for commercial
use in blood testing, other than the Chiron/Gen-Probe test for HIV-1/HCV, which
has received approval in France. The Chiron/Gen-Probe test for HIV/HCV currently
is being used under an IND in the United States, and it is estimated that
approximately 70% of the U.S. blood supply is tested with this product. The
Chiron/Gen-Probe products are expected to compete primarily with PCR-based
products supplied by Roche or developed in-house by customers (homebrew) and, in
some markets, the HCV antigen test under development by the Chiron-Ortho joint
business. The commercial market for nucleic acid testing products in the blood
banking and plasma industries is developing very rapidly as regulatory agencies
began in 1999 to develop policies and mandates that require this new technology
to be implemented as an additional measure to improve blood safety.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
important markets is a significant factor in the manufacture and sale of the
Company's products and in its research and development activities.
BIOPHARMACEUTICALS AND VACCINES. In the United States, Chiron's therapeutic
and vaccine products (both commercial and investigational) are regulated
primarily under federal law and are subject to rigorous FDA approval procedures.
No product can be marketed in the United States until an appropriate application
is approved by the FDA. The approval procedures are applied on a
product-by-product basis and typically require, among other things, an extensive
three-phase human clinical testing program. In phase 1, studies are conducted
with a relatively small number of subjects to assess the safety of the product.
In phase 2, the product is evaluated in a larger group of subjects to begin to
assess efficacy. Phase 3 studies are conducted in the target population with a
number of subjects that is large enough to provide sufficient data to establish
statistically the safety and efficacy of the product. FDA approval of a product
is limited to treatment for specified medical conditions or disorders, and
further studies would be required to market the product for other indications.
All facilities used to manufacture, fill, test and distribute biologic products
are required to be inspected and approved by the FDA. If any change is made in
manufacturing facilities or processes after FDA approval is obtained, additional
regulatory review and possibly additional clinical studies may be required.
10
Licensing procedures in Europe are comparable to those in the United States.
In 1995, the European Union ("EU") established a centralized procedure for
licensing of products derived from the use of high technology/biotechnology
processes. This procedure leads to the grant of a single license for the entire
EU. Effective January 1, 1998, the EU has also adopted a decentralized procedure
under which a license granted in one member state is mutually recognized by the
other member states, leading to a grant of licenses in member states recognizing
the original license. This procedure is expected to replace independent national
licensing of products in the EU. In addition, each product must receive
individual country pricing approvals before it can be marketed in that country.
BLOOD TESTING. Blood testing products, whether based upon immunodiagnostics
or nucleic acid testing technologies, may only be used pursuant to the terms of
approval of specific license applications in which the product's safety and
effectiveness must be demonstrated based upon well controlled studies. Upon
approval of the license application, the product may be marketed for the
specific indications of use, which were identified in the approval. Facilities,
processes and operations used for the manufacture, testing, storage and
distribution of Chiron's blood testing products in the U.S. are subject to FDA
approval and periodic inspection.
For blood testing and, in particular, biopharmaceutical products, the time
and expense needed to complete the required clinical studies, prepare and submit
the required applications and supporting documentation and respond to inquiries
generated by regulatory review can far exceed the time and expense of the
research initially required to create the product. These factors largely
determine the speed with which a successful research program is translated into
a marketed product.
ENVIRONMENT
Expenses for compliance with environmental laws have not had and are not
expected to have a material impact upon the Company's capital expenditures,
earnings or competitive position.
EMPLOYEES
On December 31, 1999, Chiron and its subsidiaries had 3,110 employees.
RELATIONSHIP WITH NOVARTIS
As noted above, the Company has an alliance with Novartis. Novartis is a
life sciences company headquartered in Basel, Switzerland which was formed as a
result of the December 1996 merger between Ciba-Geigy Limited ("Ciba") and
Sandoz Limited. Through a series of transactions that became effective in
January 1995, Ciba acquired shares of the Company's common stock which, when
combined with shares already held by Ciba, represented 49.9% of the
then-outstanding common stock of the Company. As a result of dilution stemming
primarily from the issuance of common stock under the Company's employee stock
option and stock purchase plans and in connection with certain acquisitions, as
of February 1, 2000, Novartis held shares representing approximately 44% of the
Company's outstanding common stock.
In connection with these transactions, Chiron and Novartis entered into a
series of agreements which provide, among other things and subject to certain
conditions and exceptions, that Novartis will not increase its ownership
interest in the Company above 55% before January 5, 2001 and thereafter will not
increase its ownership above 55% unless it acquires all of the outstanding
capital stock of the Company in a "buy-out" transaction; that Novartis may not
propose or consummate a "buy-out transaction" before January 5, 2001; that
Novartis may exceed these standstill amounts and increase its ownership interest
up to 79.9% if the transaction is approved by a majority of the independent
members of the Company's Board of Directors; that Novartis has the right to
nominate three members to Chiron's twelve member Board of Directors; that
Novartis will provide certain funding to the Company for research services (see
"Research and Development--Research Revenues and Expenses" above) and will
guarantee certain bank lines of credit on behalf of the Company; that Chiron may
require Novartis to purchase shares of the Company's
11
common stock directly from the Company at fair market value, up to a maximum
subscription amount (initially $500 million, subject to adjustment); that
Novartis has an option to purchase newly issued shares of the Company's common
stock directly from the Company at fair market value, subject to the standstill
restrictions described above; and that Chiron and Novartis will cooperate in
research, development, manufacturing and marketing of biotechnology products on
an arm's-length basis while remaining independent to pursue other opportunities.
ITEM 2. PROPERTIES
EMERYVILLE CAMPUS. Chiron's principal executive offices are located in
Emeryville, California. The campus consists of 26 buildings, of which 14 are
leased and 12 are owned. The leased facilities include the research and
development facility in Emeryville, which is under an operating lease
arrangement. The Emeryville facilities include research and development,
manufacturing and administrative facilities for the Company's biopharmaceutical,
vaccine and blood testing businesses.
OTHER R&D AND MANUFACTURING FACILITIES. The Company also owns a
manufacturing facility in Vacaville, California used principally in connection
with the Company's biopharmaceutical and vaccine businesses. This facility has
available capacity due to lower than expected demand for certain of the
Company's products and improved production yields from other facilities. As a
result, the Company has entered into contract manufacturing agreements to
utilize this available capacity (see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below). In December
1999, the Company sold its Amsterdam facility and is leasing back office and
warehouse space for some operational and administrative activities.
The Company has research and development, manufacturing and administrative
facilities in Siena, Italy and Marburg, Germany and manufacturing facilities in
Rosia, Italy relating to its vaccine operations. The Siena and Rosia facilities
are owned and the Marburg facility is leased.
The Company leases research and development facilities in San Diego,
California in connection with its gene therapy activities.
The Company owns research and development, manufacturing and administrative
facilities in Claremont, California. The facilities were used principally in
connection with the Company's former ophthalmic products business, which was
sold to Bausch & Lomb in December 1997. Bausch & Lomb occupies a significant
portion of the facilities under a three-year lease which expires in December
2000. A portion of the Claremont campus was sold in July 1999, with the
remaining portion being currently marketed for sale.
The Company leases a number of other facilities in North America, Europe,
Asia and Australia, primarily for sales and service offices.
The Company believes that its facilities are in good operating condition and
are adequate for its current needs. The Company continually evaluates future
requirements for its facilities.
ITEM 3. LEGAL PROCEEDINGS
FEDERAL EXPRESS
On September 3, 1999, Federal Express Corporation ("Federal Express") filed
suit in the Supreme Court of the State of New York, County of Orange against
Perseptive Biosystems, Inc., Perkin-Elmer Corporation, PE Biosystems Group, and
PE Corporation (together, the "PE Defendants") and Chiron. The matter was
removed to the United States District Court for the Southern District of New
York on motion by Chiron. The Federal Express complaint relates to a fire that
allegedly destroyed a Federal Express aircraft and the majority of its cargo in
September 1996. Federal Express claims breach of contract, negligence and
product liability with regard to equipment owned and shipped by Chiron and
designed, manufactured, packaged and prepared for shipping by the PE Defendants
and seeks damages,
12
interest, costs and fees. Federal Express alleges that improper packing and
shipping procedures proximately caused destruction of the plane. The National
Transportation Safety Board, an agency of the federal government investigated
the circumstances surrounding the incident and in 1999, issued a letter of no
determination as to the cause of the fire. It is not known when nor on what
basis this litigation will be concluded.
CONNAUGHT LABORATORIES, LIMITED
Chiron was involved in litigation in Italy and The Netherlands with
Connaught Laboratories, Limited ("Connaught") relating to TriAcelluvax-TM- and
the Company's diphtheria/tetanus/acellular pertussis vaccine.
Chiron S.p.A. manufactures and sells TriAcelluvax-TM- in Italy. Connaught
alleges that TriAcelluvax-TM- infringes the Italian counterpart of its European
Patent 0 527 753 (the "'753 patent"). The '753 patent contains claims which
relate to the pertactin protein of BORDETELLA PERTUSSIS. In June 1997, Chiron
S.p.A. filed an action against Connaught in the Tribunale di Milano, Italy,
challenging the validity of the Italian counterpart of the '753 patent.
On February 25, 1998, Chiron filed suit against Connaught in Italy seeking a
declaration of invalidity of Connaught's European Patent 0 322 115 (the "'115
patent"). The '115 patent contains claims allegedly relating to pertussis toxin
mutant.
In December 1997, Chiron filed an action in the District Court of The Hague,
The Netherlands, against Connaught to revoke the Dutch counterpart of the '115
patent on grounds of invalidity. Connaught filed a motion to stay proceedings
which was denied in November 1998.
In January 2000, all of these disputes were settled by agreement of the
parties.
F. HOFFMAN LA-ROCHE A.G.
Chiron is involved in certain litigation in the United States, The
Netherlands, Japan, Germany and other countries with F. Hoffman-LaRoche AG and
several of its affiliated companies concerning infringement and/or validity of
certain patents related to HCV technology.
In January 1998, Chiron initiated an action against F. Hoffman-LaRoche,
Ltd., several of its affiliated companies (collectively, "Roche") and Daniel
Bradley in the United States District Court for the Northern District of
California. The Company asserts that Roche's manufacture and sale of
Amplicor-Registered Trademark- HCV Test and Amplicor-Registered Trademark- HCV
Monitor Test infringes Chiron's U.S. Patent Nos. 5,712,088 (the "'088 patent"),
5,714,596 (the "'596 patent") and 5,863,719 (the "'719 patent") The action also
asserts that Bradley breached a 1990 settlement agreement with Chiron, that
Roche wrongfully induced this breach, and that Bradley committed slander of
title with respect to Chiron's HCV technology. The action seeks damages,
injunctive relief and a declaratory judgment that Chiron is the sole and
exclusive owner of its HCV technology. Roche filed a counterclaim requesting a
declaratory judgment of non-infringement and invalidity and also alleging
infringement of U.S. Patent No. 5,580,718 (the "'718 patent"), owned by
Hoffman-LaRoche, Inc., which allegedly relates to nucleic acid-based assays for
the detection of HCV. The counterclaim of infringement seeks damages and
injunctive relief. Chiron is defending on the basis of invalidity and
non-infringement of the '718 patent and seeks a declaration of invalidity of
U.S. Patent No. 5,527,669 (the "'669 patent"), a related patent also owned by
Hoffman-LaRoche. The parties' cross-motions for summary judgment on Roche's
license based defenses were resolved in Chiron's favor by a Court order dated
June 23, 1999. The order, which is subject to appeal, holds that Roche has
neither express nor implied license rights to Chiron's HCV technology. The Court
found that foreign and domestic rights were assigned by Bradley to Chiron under
the 1990 settlement, that Bradley's earlier litigation against Chiron was RES
JUDICATA as to foreign rights, and that Bradley's assignment of such rights to
Roche breached his settlement agreement with Chiron. In October 1999, Roche
filed counterclaims against Chiron which challenge the validity and
enforceability of the patents in suit. Roche also seeks to recover
13
treble damages and an injunction against Chiron for alleged breaches of state
and federal antitrust statutes relating to Chiron's HCV licensing practices.
Discovery is ongoing.
In April 1998, Chiron filed suit against Nippon Roche K.K. in the Tokyo
District Court in Japan for infringement of Japanese patent number 2,656,995
(the "'995 patent"), relating to HCV nucleic acid technology. The suit seeks
injunctive relief preventing the sale of Roche AG's Amplicor-Registered
Trademark- HCV Test and Amplicor-Registered Trademark- HCV Monitor Test by
Nippon Roche and damages. Roche has filed a counterclaim for invalidity. Roche
has also challenged the validity of the '995 patent in the Japanese Patent
Office.
In February 1998, Chiron filed an action in The District Court of The Hague,
The Netherlands against F. Hoffman-LaRoche AG, several of its affiliated
companies (collectively, "Roche AG"), and one of Roche AG's Dutch customers
asserting Roche AG's infringement of the Company's European Patent 0 318 216
(the "'216 patent") relating to HCV nucleic acid technology. Chiron sought a
cross-border injunction with effect in a number of European countries,
prohibiting the sale of Roche AG's Amplicor-Registered Trademark-HCV Test and
Amplicor-Registered Trademark- HCV Monitor Test. Roche AG has asserted certain
defenses and counterclaims in this matter. Following a trial in October 1998,
the Court declined to exercise jurisdiction outside The Netherlands and,
therefore, dismissed certain defendants from the case. For procedural reasons,
the Court limited its consideration to the Amplicor-Registered Trademark- HCV
Monitor Test. Also, the Court requested expert advice from the Het International
Jurisch Instituut regarding interpretation under U.S. law of certain contractual
issues raised as an affirmative defense by Roche AG. Those issues relate to
Roche AG's 1991 purchase of certain Cetus Corporation assets. The expert's
report, which was submitted in January 2000 and tended to support Roche's
interpretation of those contractual issues, will be the subject of further
briefing to the Court in the spring of 2000. In December 1998, the Company filed
a parallel, new action before the Dutch Court concerning the Amplicor-Registered
Trademark- HCV Test. In a separate proceeding, Roche AG and Chiron are appealing
the European Patent Office's Opposition Division's decision upholding the '216
patent in amended form.
In January 1997, Chiron, together with Ortho-Clinical Diagnostics, Inc.
(formerly known as "Ortho Diagnostics Systems, Inc."), filed suit against
F. Hoffman-LaRoche AG ("Roche Germany") in the Regional Court, 4th Civil
Division, Dusseldorf, Germany, for infringement of immunoassay technology under
the '216 patent. The suit seeks damages and injunctive relief preventing further
manufacture or sale in Germany of infringing HCV immunoassay kits. Roche Germany
asserted certain claims and defenses in this matter. In April 1999, following a
trial, the Court issued a decision granting Chiron's application and entered an
injunction. Roche has appealed the decision.
Chiron also filed a suit against Roche in Dusseldorf, Germany, for
infringement of Chiron's European Patent 0 181 150 relating to HIV probes
technology. The suit seeks injunctive relief and damages. Trial of this matter
took place in February 2000 and a judgment is expected in May 2000.
A suit filed in October 1998 by Roche AG against Chiron and Ortho is pending
in the Federal Court of Australia, New South Wales District Registry, seeking
revocation of Australian patent number 624105, relating to HCV technology.
Discovery is ongoing.
In May 1999, Chiron and Gen-Probe, Incorporated ("Gen-Probe") initiated
action in the Tribunal of Milan, Italy, against Roche AG and several of its
European affiliates (together, "Roche"). The lawsuit seeks a cross-border
declaration that Gen-Probe's Transcription Mediated Amplification System
("TMA"), which is used in Chiron/Gen-Probe blood screening kits, does not
infringe Roche's European Patent 0 505 012 (the "'012 patent"), which relates to
PCR technology. The plaintiffs also seek an assessment of the '012 patent and a
declaration of nullity of the Italian counterpart of the '012 patent.
ORTHO-CLINICAL DIAGNOSTICS, INC.
On February 17, 1998, Chiron filed a lawsuit against Ortho-Clinical
Diagnostics, Inc. ("Ortho") in the United States District Court for the Northern
District of California. The suit sought to compel arbitration of certain issues
relating to the conduct of the parties' joint business. Chiron's motion to
compel
14
arbitration was granted by the Court in December 1998. Ortho appealed that order
to the Ninth Circuit Court of Appeals and oral argument occurred in February
2000. Thereafter, Ortho refused Chiron's demand to arbitrate in accordance with
the District Court's order. On March 31, 1999, Chiron filed a second petition in
the United States District Court for the Northern District of California to
compel arbitration. On November 1, 1999, the Court entered judgment in Chiron's
favor, ordering Ortho to submit the underlying issues to arbitration. It is not
known when nor on what basis this matter will be concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of Chiron's stockholders in the quarter
ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who serve at the discretion of the
Board of Directors, are as follows, in alphabetical order:
NAME AGE TITLE
- ---- -------- ------------------------------------------
Rajen K. Dalal............................ 46 Vice President; President, Chiron Blood
Testing
William G. Green, Esq..................... 55 Senior Vice President, General Counsel and
Secretary
Paul J. Hastings.......................... 40 Vice President; President, Chiron
Biopharmaceuticals
Sean P. Lance............................. 52 Chairman of the Board; President and Chief
Executive Officer
Linda W. Short............................ 54 Vice President, Corporate Resources
David V. Smith............................ 40 Vice President, Controller
James R. Sulat............................ 49 Vice President, Chief Financial Officer
Lewis T. Williams, M.D., Ph.D............. 50 Chief Scientific Officer; President,
Chiron Research & Development; Director
MR. DALAL joined the Company in December 1991 as Vice President, Corporate
Development. In 1998, he was appointed President of Chiron Blood Testing. From
1983 until joining the Company, he was employed by the international consulting
firm of McKinsey & Company, where he performed general management consulting in
the firm's pharmaceuticals, medical devices and diagnostics industries practice.
MR. GREEN joined the Company as Vice President and General Counsel in
October 1990, having served as Secretary or Assistant Secretary since the
Company's inception in 1981. In February 1992, he became Senior Vice President,
General Counsel and Secretary. From 1981 to 1990, he was a partner in the San
Francisco law firm of Brobeck, Phleger & Harrison.
MR. HASTINGS joined the Company as Vice President, and President of Chiron
Biopharmaceuticals effective June 1999, responsible for sales, marketing and
strategic planning, both in the United States and internationally,
manufacturing, quality assurance and compliance and process development and
financial operations. Most recently, Mr. Hastings was the President, Chief
Executive Officer and a member of the board of LXR Biotechnology, a small,
early-stage, publicly-traded biotechnology company. From 1993 to 1998,
Mr. Hastings spent five years at Genzyme Corporation in Cambridge,
Massachusetts, as President of Genzyme Therapeutics, with operating
responsibility for the business, overseeing marketing, sales, business
development, patient services, finance and human resources. While at Genzyme, he
also served in various executive capacities, as President of Genzyme
Therapeutics Europe, and Vice President of Global Marketing, where he was
responsible for worldwide market planning. From 1989 to 1993, Mr. Hastings
15
held a number of marketing and sales positions with Synergen, Inc., where he was
responsible for worldwide marketing and sales, both in the United States and in
Europe.
MR. LANCE joined the Company as President and Chief Executive Officer in May
1998, and became Chairman of the Board in May 1999 upon the resignation of
Dr. William J. Rutter. During the previous thirteen years, Mr. Lance held
various executive positions with Glaxo Holdings plc, London, England. In October
1996, he was appointed Managing Director of Glaxo Wellcome plc, and in January
1997, he was appointed Chief Operating Officer and Chief Executive Designate of
Glaxo Wellcome plc. From 1993 to 1996, Mr. Lance was Executive Director of Glaxo
Holdings, responsible for commercial operations in the Middle East, Africa,
Europe and Latin America. Mr. Lance was also President of the International
Federation of Pharmaceutical Manufacturers Associations from October 1996 to
February 1998, an Executive Member of the International Committee of
Pharmaceutical Research and Manufacturers of America and a director of the
British Pharma Group. He also served on the Steering Committee of Healthcare
2000.
MS. SHORT joined the Company in November 1997 as Vice President, Human
Resources. In May 1999, she was promoted to Vice President, Corporate Resources
with increased responsibilities overseeing human resources, facilities planning,
information management, organizational learning, payroll and benefits,
compensation and stock administration. Prior to joining the Company, she was the
Director of Human Resources of Industrial Indemnity from 1994 to 1997. From 1983
to 1994, Ms. Short held various managerial positions with the Bank of America.
MR. SMITH joined the Company as Vice President, Controller in February 1999
and was designated the Company's principal financial accounting officer.
Mr. Smith served as the Vice President, Finance and Chief Financial Officer of
Anergen, Inc. from 1997 until he joined the Company. From 1988 to 1997,
Mr. Smith held various financial management positions with Genentech, Inc., in
both the United States and Europe, most recently as Director of Accounting.
MR. SULAT joined the Company as Vice President, Chief Financial Officer in
April 1998. He was the Chief Financial Officer of Stanford Health Services, the
clinical healthcare delivery arm of the Stanford University Medical Center, from
1993 to October 1997. In November 1997, Stanford Health Services merged with the
hospital facilities of the University of California, San Francisco, and
Mr. Sulat served as the Treasurer of the merged entity, UCSF Stanford Health
Care, until joining the Company. From 1990 to 1993, Mr. Sulat was the Chief
Financial Officer and Vice President, Operations of Esprit de Corp, a
privately-owned apparel manufacturer. Mr. Sulat is also a director of Vans,
Inc., a shoe manufacturer, and several private companies.
DR. WILLIAMS joined the Company in August 1994 as Senior Vice President and
President of Chiron Technologies (now called "Chiron Research and Development").
In 1998, he was promoted to Chief Scientific Officer of the Company. In May
1999, he was appointed a Director of the Company serving for a two-year term
expiring at the Annual Meeting of Stockholders in 2001. From 1988 until joining
the Company, he was a professor of medicine at the University of California, San
Francisco. Prior to joining UCSF, he was on the faculty of Harvard Medical
School. In addition, he was a co-founder and director of COR Therapeutics, Inc.
from 1988 until joining the Company. From 1992 to 1994, Dr. Williams served on
the Scientific Advisory Board of Geron Corporation.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Chiron Corporation is traded in the NASDAQ National
Market System under the symbol CHIR. As of December 31, 1999, there were 5,817
holders of record of Chiron common stock, 14 remaining holders of record of
Cetus Corporation common stock and 6 remaining holders of Viagene Inc. common
stock. The Company has declared no cash dividends since its inception and does
not expect to pay any dividends in the foreseeable future. The quarterly high
and low closing sales price of Chiron common stock for 1999 and 1998 are shown
below.
1999 1998
-------------------------- ---------------------------
HIGH LOW HIGH LOW
------------ ----------- ----------- -------------
First Quarter................................. $23 1/4 $20 7/8 $22 $16 9/16
Second Quarter................................ 22 7/16 20 22 15 11/16
Third Quarter................................. 33 5/16 20 3/4 21 1/16 13 3/4
Fourth Quarter................................ 43 1/4 27 1/2 26 5/8 18 1/16
ITEM 6. SELECTED FINANCIAL DATA
The Company has not paid cash dividends on its common stock and does not
expect to do so in the foreseeable future.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues..................... $ 762,646 $ 736,673 $ 574,599 $ 537,149 $ 393,566
Income (loss) from continuing
operations....................... 128,404 75,998 25,782 45,658 (469,802)
Basic income (loss) per common
share from continuing
operations....................... 0.71 0.43 0.15 0.27 (2.89)
Diluted income (loss) per common
share from continuing
operations....................... 0.69 0.42 0.14 0.26 (2.89)
Total assets....................... 2,458,769 2,524,264 1,768,478 1,688,670 1,489,847
Long-term debt..................... 96,958 338,158 397,217 419,589 413,248
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Chiron is a biotechnology company that participates in three global
healthcare businesses: biopharmaceuticals, vaccines and blood testing. The
biopharmaceuticals segment consists of products and services related to
therapeutics, with an emphasis on cancer, infectious diseases and cardiovascular
diseases as well as the development and acquisition of technologies related to
recombinant proteins, small molecules and genomics. The vaccines segment
consists principally of adult and pediatric vaccines sold primarily in Germany
and Italy, as well as in other international markets. The blood testing segment
consists of Chiron's one-half interest in the pretax operating earnings of its
joint business with Ortho-Clinical Diagnostics, Inc. ("Ortho"), a Johnson &
Johnson company, and an alliance with Gen-Probe Incorporated ("Gen-Probe").
Chiron's joint business with Ortho sells a line of immunodiagnostic tests, other
than nucleic acid tests, required to screen blood for hepatitis viruses and
retroviruses, and provides supplemental tests and microplate-based instrument
systems to automate test performance and data
17
collection. Chiron's alliance with Gen-Probe is focused on developing and
selling nucleic acid testing ("NAT") products using transcription-mediated
amplification ("TMA") technology to screen blood and plasma for infection by
viruses.
On December 29, 1997, Chiron completed the sale of its ophthalmics business
("Chiron Vision") to Bausch & Lomb Incorporated ("B&L"), and on November 30,
1998, Chiron completed the sale of its IN VITRO diagnostics business ("Chiron
Diagnostics") to Bayer Corporation ("Bayer"). The Company's Consolidated
Statements of Operations reflect the after-tax results of Chiron Vision and
Chiron Diagnostics as discontinued operations for all periods presented.
On March 31, 1998, in an acquisition accounted for under the purchase method
of accounting, Chiron acquired the remaining 51% interest in Chiron Behring
GmbH & Co ("Chiron Behring") from Hoechst AG. Beginning in the second quarter of
1998, the results of Chiron Behring were consolidated with those of the Company.
RESULTS OF OPERATIONS
REVENUES
BIOPHARMACEUTICAL PRODUCT SALES Product sales from the biopharmaceuticals
segment were $187.6 million, $201.9 million and $150.6 million in 1999, 1998 and
1997, respectively. In 1999, 1998 and 1997, product sales consisted principally
of Proleukin-Registered Trademark- (aldesleukin, interleukin-2),
Betaseron-Registered Trademark- (interferon beta-1b) and PDGF (recombinant human
platelet-derived growth factor -rhPDGF-BB).
PROLEUKIN-REGISTERED TRADEMARK- Chiron sells Proleukin-Registered
Trademark- directly in the U.S. and certain international markets. Sales of
Proleukin-Registered Trademark- were $111.8 million, $93.2 million and
$70.5 million in 1999, 1998 and 1997, respectively. The overall increase in
sales from year-to-year was due to (i) continued volume growth in existing
indications; (ii) higher prices; and (iii) in 1998, the geographic expansion
into various countries and the expanded use of Proleukin-Registered Trademark-
for the new indication of metastatic melanoma. The Company continues to pursue
additional indications, including human immunodeficiency virus ("HIV"). The
Company also anticipates further geographic expansion of Proleukin-Registered
Trademark- into additional countries.
BETASERON-REGISTERED TRADEMARK- Chiron manufactures Betaseron-Registered
Trademark- for Berlex Laboratories, Inc. ("Berlex") and its parent company
Schering AG of Germany. Chiron earns a payment for Betaseron-Registered
Trademark- upon shipment to Berlex and Schering AG and a subsequent additional
payment upon sales by Berlex and Schering AG. Accordingly, Chiron's revenues
from Betaseron-Registered Trademark- tend to fluctuate based upon the inventory
management practices of Berlex and Schering AG. In October 1998, the contractual
rate upon which Chiron recognizes revenues decreased by 2.5% of Berlex's sales
of Betaseron-Registered Trademark-. In addition, in July 1997, the terms of
payment changed whereby the initial payment received upon shipment decreased and
the additional payment due upon sales to patients increased equivalently. The
revised payment terms resulted in a timing difference whereby Chiron recognized
a decrease in initial revenues in 1997 when compared with 1998.
In 1999, 1998 and 1997, product sales from Betaseron-Registered Trademark-
were $66.0 million, $63.4 million and $54.8 million, respectively. In 1999, the
actual number of Betaseron-Registered Trademark- vials sold by Berlex and
Schering AG to patients increased 20% over 1998, while Chiron's shipments of
Betaseron-Registered Trademark- to Berlex and Schering AG decreased 19% over
1998. The increase in product sales in 1999 as compared with 1998 was primarily
related to the approval in 1999 of Betaseron-Registered Trademark- for secondary
progressive multiple sclerosis in Canada and Australia and overall market
expansion, offset by the decrease in the contractual rate discussed above and
the decrease in shipments of Betaseron-Registered Trademark- to Berlex and
Schering AG. In 1998, Chiron's shipments of Betaseron-Registered Trademark- to
Berlex and Schering AG increased significantly over shipments in 1997, while the
actual number of vials sold by Berlex and Schering AG to patients in 1998
remained relatively constant with the number of vials sold in 1997. The increase
in revenues in 1998 as compared with 1997 was primarily due to replenishing
inventories at Berlex and Schering AG and to the change in payment terms
discussed above.
18
The Company also earns royalties on Schering AG's European sales of
Betaferon-Registered Trademark- (interferon beta-1b). See "Royalty and license
fee revenues--Betaseron-Registered Trademark-" below.
PDGF Chiron manufactures PDGF for Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson ("J&J") company. PDGF is the active ingredient in
Regranex-Registered Trademark-(becaplermin) Gel, a treatment for diabetic foot
ulcers. Regranex-Registered Trademark- Gel was approved by the Food and Drug
Administration ("FDA") in December 1997 and was launched commercially in early
1998. There were no commercial sales of PDGF to J&J in 1999, and sales of PDGF
were $36.4 million and $18.3 million in 1998 and 1997, respectively. Chiron's
sales of PDGF will tend to fluctuate based upon the inventory management
practices of J&J. Regranex-Registered Trademark- Gel was approved for use in the
treatment of diabetic foot ulcers in Canada in December 1998 and Europe in March
1999. However, even with these approvals, Chiron's sales through 1998 have
filled J&J's inventory requirements through 1999, and as a result, no
significant sales of PDGF to J&J are expected until the second quarter of 2000.
As a result, the decline in sales from 1998 to 1999 was due to a lack of orders
from J&J in 1999. In addition, the Company increased its product returns
allowance in 1999. The increase in the product returns allowance was primarily
due to additional historical returns information, now that Regranex-Registered
Trademark- has been in the commercial market for over 12 months. As
Regranex-Registered Trademark- is the first product of its kind, the Company
believes it will take time for the market to fully develop. As Chiron's
shipments of PDGF remained fairly constant in 1998 and 1997, the increase in
revenues between 1998 and 1997 was primarily due to retroactive price increases
recognized in 1998 for shipments made in 1997. The Company does not expect
future price adjustments, if any, to be commensurate with those in 1998.
VACCINE PRODUCT SALES Chiron sells pediatric and adult vaccines in Germany,
Italy and other international markets. Certain of the Company's vaccine
products, particularly its flu vaccine, are seasonal and typically have higher
sales in the third quarter of the year. In 1999, 1998 and 1997, vaccine product
sales were $208.6 million, $176.8 million and $82.0 million, respectively. The
increase in sales in 1999 as compared with 1998 was driven by (i) the Company's
acquisition of the remaining 51% interest in, and consolidation of, Chiron
Behring in the second quarter of 1998 (see Chiron Behring below);
(ii) increased flu vaccine sales due to a one-time $4.2 million sale of adult
influenza vaccine to Argentina in the first quarter 1999 and growth in the flu
vaccine market; and (iii) increased rabies vaccine sales as the Company gained
additional market share. The increase in sales in 1998 as compared with 1997 was
primarily due to Chiron's acquisition of the remaining 51% interest in, and
consolidation of, Chiron Behring in the second quarter of 1998.
In March 2000, the Company received approval in the United Kingdom to market
Menjugate-TM-, its conjugate vaccine against meningococcal meningitis caused by
the bacterium N. MENINGITIDIS serogroup C. The National Health Service ("NHS")
in the United Kingdom has accepted the Company's tender to supply Menjugate-TM-.
Shipments began in March 2000. The Company does not expect shipments in 2001 to
be commensurate with those in 2000.
The Company expects the competitive pressures related to many of its vaccine
products to continue into the foreseeable future as a result of the introduction
of competing products into the market, including new combination vaccines.
BLOOD TESTING PRODUCT SALES During the second quarter 1999, the Company
began recognizing revenues from sales of its nucleic acid tests that are used to
screen blood and plasma under an investigational new drug ("IND") application in
the U.S. Evaluation studies at several non-U.S. sites also began during the
second quarter 1999. Worldwide product sales related to tests and instruments
were $7.1 million for the year ended December 31, 1999.
In September 1999, the Company received regulatory approval in France for
the TMA assay and began selling and providing assays and renting instruments to
several regional blood testing centers. Currently, the French government is
considering the guidelines that it will adopt regarding nucleic acid testing,
and Chiron is participating in a government-sponsored evaluation at four major
testing centers to
19
support this decision. The outcome and impact of this upcoming decision on
future assay sales and instrument rentals to French blood testing centers is not
yet known.
During the fourth quarter 1999, the Company signed an exclusive contract
with the Australian Red Cross Blood Service to provide blood testing products
for NAT screening. Under the contract, Chiron began recognizing product revenue
for sales of its nucleic acid tests in Australia.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES In 1999, 1998 and
1997, Chiron recognized equity in earnings of unconsolidated joint businesses of
$79.3 million, $74.0 million and $106.4 million, respectively. In each of these
years, equity in earnings of unconsolidated joint businesses consisted
substantially of Chiron's 50% share of the pretax operating earnings generated
by Chiron's joint business with Ortho-Clinical Diagnostics, Inc. ("Ortho"), a
Johnson & Johnson company ("Chiron-Ortho joint business"). In 1998 and 1997,
equity in earnings of unconsolidated joint businesses also included one quarter
and four quarters, respectively, of earnings from Chiron's 49% share of the
after-tax operating results of Chiron Behring.
CHIRON-ORTHO JOINT BUSINESS In 1999, 1998 and 1997, Chiron's 50% share of
the pretax operating earnings of the Chiron-Ortho joint business was
$78.1 million, $73.5 million and $92.9 million, respectively. The overall
fluctuations in earnings from the joint business were primarily due to certain
adjustments made during the first quarters of 1999, 1998 and 1997. In the first
quarter of 1999, an annual inventory adjustment resulted in a charge of
$0.7 million as compared with a charge of $4.1 million recognized in the first
quarter 1998. In the first quarter 1998, an annual inventory adjustment resulted
in a charge of $4.1 million as compared with $0.8 million of income in the first
quarter 1997. Other items contributing to the decrease in earnings in 1998 as
compared with 1997 were (i) lower foreign profits of the joint business due to
the adverse impact of changes in foreign currency exchange rates between years
and higher manufacturing costs; (ii) a one-time contract termination fee paid by
the Chiron-Ortho joint business in the first quarter 1998; and (iii) certain
joint business asset write-offs related to the implementation of certain
processes to comply with stricter FDA guidelines mandated throughout the
industry.
CHIRON BEHRING On July 1, 1996, Chiron acquired a 49% interest in Chiron
Behring. On March 31, 1998, Chiron acquired the remaining 51% interest in Chiron
Behring (see Note 5 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). From
July 1, 1996 through the first quarter 1998, equity in earnings of
unconsolidated joint businesses included Chiron's 49% share of the after-tax
operating results of Chiron Behring. Chiron's share of earnings from the joint
business, including amortization of intangibles, was $2.4 million for the three
months ended March 31, 1998 and $13.8 million for the year ended December 31,
1997. Beginning March 31, 1998, Chiron Behring's results were consolidated with
those of the Company.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received for research services as they are performed and fees
received upon the achievement of specified milestones. Collaborative agreement
revenues tend to fluctuate based on the amount of research services performed,
the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenues, results in
any one year are not necessarily indicative of results to be achieved in the
future. The Company's ability to generate additional collaborative agreement
revenues may depend, in part, on its ability to initiate and maintain
relationships with potential and current collaborative partners. There can be no
assurance that such relationships will be established or that current
collaborative agreement revenues will not decline. In particular, the research
funding from Novartis (see below) expires on December 31, 2000, and there can be
no assurance that new relationships will be established. Significant
fluctuations in collaborative agreement revenues from year-to-year are discussed
below.
NOVARTIS AG Chiron and Novartis AG ("Novartis") entered into an agreement
under which Novartis agreed to provide research funding for certain projects.
The funded projects currently consist of adult and pediatric vaccines,
Insulin-Like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine
kinase
20
("HSV-tk"). Novartis has agreed to fund through December 31, 2000, at Chiron's
request and subject to certain annual and aggregate limits, up to 100% of the
development costs incurred between January 1, 1995 and December 31, 1999 on
these projects. In December 1999, Chiron and Novartis amended this agreement to
increase the aggregate maximum amount of funding provided by Novartis from
$250.0 million to $265.0 million. Under this agreement, in 1999, 1998 and 1997,
Chiron recognized collaborative agreement revenues of $46.2 million,
$54.4 million and $53.3 million, respectively.
Under the terms of a November 1995 agreement with Novartis, Chiron granted
Novartis a license to utilize Chiron's combinatorial chemistry techniques. In
exchange for this license, Novartis agreed to pay Chiron $26.0 million over a
five-year period, subject to certain adjustments. In addition, this agreement
provides for research funding by Novartis, and certain upfront milestone and
royalty payments, as well as product commercialization rights for both parties.
In connection with this agreement, Chiron recognized collaborative agreement
revenues of $4.2 million, $6.0 million and $10.2 million in 1999, 1998 and 1997,
respectively.
In November 1996, Chiron and Novartis entered into a consent order with the
Federal Trade Commission pursuant to which Chiron agreed to grant a
royalty-bearing license to Rhone-Poulenc Rorer, Inc. under certain Chiron
patents related to the HSV-tk gene in the field of gene therapy. Chiron and
Novartis entered into a separate agreement which provided, among other things,
for certain cross licenses between Chiron and Novartis, and under which,
Novartis agreed to pay Chiron up to $60.0 million over five years. In connection
with this agreement, Chiron recognized collaborative agreement revenues of
$10.0 million in 1999 and $15.0 million in both 1998 and 1997.
JAPAN TOBACCO In 1996, Japan Tobacco licensed Chiron's combinatorial
chemistry technologies for use in its research and development programs. The
agreement, which was terminated in 1998, included certain funding for Chiron's
effort in transferring the technology. Revenues recognized under this agreement
were $1.0 million and $7.8 million in 1998 and 1997, respectively. The Company
has no continuing obligation under this agreement.
GREEN CROSS OF JAPAN In 1995, Green Cross of Japan agreed to reimburse
Chiron for certain HIV research, product development and clinical trials. In
1998, the clinical trials related to this collaboration were discontinued. In
1998 and 1997, Chiron recognized revenues related to this agreement of
$1.2 million and $5.4 million, respectively. The Company has no continuing
obligation under this agreement.
MEDIVIR AB In 1999, Medivir licensed some of Chiron's combinatorial
technology-based techniques for drug discovery and optimization, for use in the
research and development of pharmaceuticals for human use. Revenue recognized
under this agreement was $2.0 million in 1999. If Medivir commercializes a
product using Chiron's combinatorial technology, Chiron will receive up to an
additional $3.6 million in royalties on product sales. However, there can be no
assurance that Medivir will commercialize a product using Chiron's combinatorial
technology.
ROYALTY AND LICENSE FEE REVENUES The Company receives royalties and license
fees for products or technologies that are manufactured, used or sold by third
parties. In 1999, 1998 and 1997, Chiron recognized royalty and license fee
revenues of $133.2 million, $125.3 million and $50.4 million, respectively.
Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. Results in any one
year are not necessarily indicative of results to be achieved in the future. In
addition, the Company's ability to generate additional royalty and license fee
revenues may depend, in part, on its ability to market and capitalize on its
technologies. Significant fluctuations in royalty and license fee revenue from
year-to-year are discussed below.
BETASERON-REGISTERED TRADEMARK- The Company earns royalties on
Schering AG's European sales of Betaferon-Registered Trademark- (interferon
beta-lb). In 1999, 1998 and 1997, Chiron recognized $29.7 million,
$28.6 million and $24.1 million, respectively, under this arrangement. The
increase in 1999 as compared with 1998 was primarily related to the approval in
1999 of Betaseron-Registered Trademark- for secondary progressive multiple
sclerosis in Europe and
21
overall market expansion, offset by the decrease in the contractual rate
discussed above. The increase in 1998 as compared with 1997 was due to continued
market expansion.
The Company also earns revenues on Betaseron-Registered Trademark- product
sales to Berlex and Schering AG. See "Biopharmaceutical product
sales--Betaseron-Registered Trademark-" above.
ROCHE PCR AGREEMENT In accordance with a July 1991 agreement with F.
Hoffman-LaRoche Ltd. and its affiliates ("Roche"), the Company receives
royalties on sales of polymerase chain reaction ("PCR") products sold by Roche.
In 1999 and 1998, Chiron recognized $15.8 million and $15.2 million,
respectively, of royalty and license fee revenues related to this agreement.
Based on the terms of the agreement, Chiron does not earn royalties on PCR
products until Roche's annual net sales of PCR products and services exceed
$200.0 million (the "threshold amount"). As the threshold amount resets at the
beginning of each year, Roche's annual net sales must exceed $200.0 million
before Chiron will earn any royalties. As a result, the Company does not expect
to recognize royalties under this agreement until the last half of each year.
Roche's royalty obligation expires upon the earlier of December 31, 2000 or when
Chiron recognizes royalties with an aggregate net present value of
$30.0 million as of the date of the agreement (discounted at 14.0%). As of
December 31, 1999, Chiron had recognized royalties with a net present value of
$13.2 million.
BAYER CROSS-LICENSE AGREEMENT In connection with the sale of Chiron
Diagnostics to Bayer, Chiron granted to Bayer rights under certain Chiron
patents, including rights under patents relating to HIV and hepatitis C virus
("HCV"). In exchange for these rights, Bayer paid to Chiron a license fee of
$100.0 million, which is refundable in decreasing amounts over a period of three
years. In 1999 and 1998, Chiron recognized revenues of $39.2 million and
$13.3 million, respectively, which represent the portions of the $100.0 million
payment which became nonrefundable during those years. The Company anticipates
recognizing the remaining revenue over the next two years as follows:
$29.2 million in 2000 and $18.3 million in 2001. In addition, the Company
receives royalties on sales of HIV and HCV products sold by Bayer. In 1999,
Chiron recognized $5.1 million of royalty revenue related to this agreement.
LICENSE FEE REVENUES In January 1998, Chiron recognized $5.0 million
related to a license fee received from Pharmacia & Upjohn Company to research,
develop, manufacture and commercialize therapeutic products for the treatment of
HCV in humans. In August 1998, Chiron recognized $24.0 million related to a
license fee received from SmithKline Beecham to use certain human vaccine
product technologies. The agreement provides for royalties on future product
sales, under which Chiron recognized $7.3 million and $3.7 million of such
royalties in 1999 and 1998, respectively.
OTHER In 1999 and 1998, Chiron recognized $11.3 million and $9.4 million,
respectively, of royalty and license fee revenues due to the acquisition and
consolidation of Chiron Behring in the second quarter of 1998.
OTHER REVENUES In 1999, 1998 and 1997, Chiron recognized other revenues of
$52.2 million, $48.3 million and $50.1 million, respectively. The Company's
other revenues may fluctuate due to the nature of the revenues recognized and
the timing of events giving rise to these revenues. Significant fluctuations in
other revenues from year-to-year are discussed below.
COMMISSION REVENUES In 1999 and 1998, other revenues included
$13.5 million and $10.4 million, respectively, of commission revenues generated
by Chiron Behring, whose operations were consolidated with those of the Company
beginning in the second quarter 1998. These revenues consist of commissions
received on sales made by Chiron Behring of Pasteur Merieux Merck's hepatitis B
virus ("HBV") vaccine products and of Aventis Behring GmbH's (formerly Centeon
Pharma GmbH) immunoglobulin products.
INFORMATICS TECHNOLOGY Chiron recognized net revenues of $12.5 million in
1998 in exchange for granting Bayer a license to use, reproduce and sell certain
technology developed by Chiron's informatics
22
business. The Company ceased all informatics activity in 1998; therefore, the
Company does not anticipate future revenues from this technology.
AREDIA-REGISTERED TRADEMARK- (PAMIDRONATE DISODIUM FOR INJECTION) From 1994
through April 1998, Chiron promoted Aredia-Registered Trademark- on behalf of
Novartis. In April 1998, this arrangement was terminated. In connection with
this arrangement, Chiron recognized other revenues of $9.8 million and
$43.6 million in 1998 and 1997, respectively.
CONTRACT MANUFACTURING REVENUES In 1999 and 1998, other revenues included
$19.2 million ($13.3 million in the biopharmaceuticals segment and $5.9 million
in the vaccines segment) and $9.0 million ($1.4 million in the
biopharmaceuticals segment and $7.6 million in the vaccines segment),
respectively, of contract manufacturing revenues. The increase was a result of
new contract manufacturing agreements, which began in 1999. The Company
anticipates that it will enter into additional contract manufacturing
agreements.
DEPOCYT-REGISTERED TRADEMARK- In 1999, other revenues included a
$9.7 million milestone payment related to the FDA's approval of
DepoCyt-Registered Trademark- in April 1999. In October 1999, SkyePharma, Inc.
("SkyePharma"), the manufacturer of DepoCyt-Registered Trademark-, discovered
two DepoCyt-Registered Trademark- lots that did not meet manufacturing
specifications and, as a result, all DepoCyt-Registered Trademark- vials were
recalled from these lots. The commercial supply of this product is on hold while
the Company and SkyePharma work with the FDA to resolve various issues related
to the manufacture of the product. Management of the Company does not believe
that this event will have a material impact on the results of operations for
fiscal year 2000. The impact of this event on future shipments of
DepoCyt-Registered Trademark- is not yet known.
COSTS AND EXPENSES
GROSS PROFIT Gross profit as a percentage of net product sales was 56.3%,
56.2% and 54.9% in 1999, 1998 and 1997, respectively. Although 1999 gross profit
as a percentage of net product sales remained relatively constant with that in
1998, the Company's 1999 gross profit percentage was impacted by (i) an increase
in biopharmaceutical products gross profit due to manufacturing efficiencies and
the conclusion of certain promotional pricing campaigns; and (ii) a slight
increase in vaccines product gross profit due to manufacturing efficiencies
resulting from increased production and a favorable mix of vaccine product
sales; offset by (iii) an inventory write-off of a portion of the Company's
tick-borne encephalitis vaccine inventory that failed to meet manufacturing
specifications for purity during the first quarter 1999; and (iv) no 1999
commercial sales of PDGF. The Company's 1998 gross profit percentage was
impacted by a reduction in cost of sales of $6.0 million due to a change in
estimated property tax accruals created in prior periods, offset by an
unfavorable mix of vaccine products which, beginning in the second quarter of
1998, included low margin products manufactured and sold by Chiron Behring.
The Company's gross profit percentages may fluctuate significantly in future
periods as the Company's product mix continues to evolve.
RESEARCH AND DEVELOPMENT In 1999, 1998 and 1997, Chiron recognized research
and development expenses of $303.4 million, $286.6 million and $256.6 million,
respectively. The Company's research and development expenses may fluctuate from
year-to-year depending upon the level of clinical trial-related activities.
In 1999, the increase in research and development spending as compared with
1998 was due, in part, to $9.6 million of milestone and research funding
payments related to the Company's collaboration agreements with Medivir AB and
$5.0 million of license fees related to the Company's Fibroblast Growth Factor
("FGF") patent and license agreement with Scios, Inc. Under this agreement, in
1999, the Company also advanced Scios an additional $7.5 million in exchange for
a promissory note, which may be forgiven if certain conditions are met. The
Company may pay an additional $12.0 million in licensing fees if certain
development objectives are met. Also contributing to the increase in research
and development
23
expense was the furtherance of the Company's clinical trials related to
Proleukin-Registered Trademark- for HIV, Insulin-Like Growth Factor-1 ("IGF-1")
for osteoarthritis, FGF for coronary artery disease, Tissue Factor Pathway
Inhibitor ("TFPI") for sepsis and Menjugate-TM-, a conjugate vaccine against
meningococal meningitis caused by the bacterium N. MENINGITIDIS serogroup C. In
1998, the increase in research and development spending as compared with 1997
was primarily related to several of the Company's projects entering into later
stage clinical development. In addition, included in research and development
expense in 1998 was $14.1 million of expense generated by Chiron Behring, which
was acquired and consolidated during the second quarter of 1998. These increases
were partially offset by decreased spending related to Myotrophin-Registered
Trademark- (rhIGF-I or mecasermin [recombinant DNA origin]) due to the
uncertainty surrounding the FDA's approval of this product (see "Item 1.
Business" above).
SELLING, GENERAL AND ADMINISTRATIVE In 1999, 1998 and 1997, Chiron
recognized selling, general and administrative ("SG&A") expenses of
$180.9 million, $142.6 million and $108.8 million, respectively. The increase in
SG&A expenses in 1999 as compared with 1998 was primarily due to the acquisition
and consolidation of Chiron Behring, which contributed an additional
$10.7 million to SG&A expenses in 1999. SG&A expenses also increased as a result
of the Company's worldwide implementation of its integrated information system
in April 1999, the launch of the nucleic acid testing business of its blood
testing segment and certain patent defense legal costs. The increase in SG&A
expenses in 1998 as compared with 1997 was primarily due to the acquisition and
consolidation of Chiron Behring, which contributed $34.3 million to SG&A
expenses in 1998.
OTHER OPERATING EXPENSES As circumstances dictate, the Company reviews the
carrying amount of its manufacturing facilities by comparing the facilities'
projected undiscounted net cash flows against their respective carrying values.
In 1997, the Company recognized a $31.3 million impairment loss to record the
Puerto Rico facility and related machinery and equipment assets at their
individual estimated fair market values, determined on the basis of independent
appraisals.
In 1999, Chiron recorded net restructuring and reorganization expenses of
$0.2 million, which included a charge of $3.9 million and a benefit of
$3.7 million. The charge of $3.9 million primarily related to termination and
other employee related costs recognized in connection with the elimination of 28
positions at the Company's Italian manufacturing facility. As of December 31,
1999, 24 of these 28 positions had been eliminated. The benefit of $3.7 million
related to revised estimates of property-related accruals recorded in connection
with the Company's ongoing rationalization of its business operations and the
idling of the St. Louis facility, as well as revised estimates of termination
and other employee-related costs recorded in connection with the elimination of
382 positions, including 36 positions at the Company's Amsterdam facility which
were transferred to the buyer in January 2000 (see below). As of December 31,
1999, 319 of these 382 positions had been eliminated. In 1998, the Company
recorded net restructuring and reorganization expenses of $26.8 million, which
included a charge of $30.5 million and a benefit of $3.7 million. The charge of
$30.5 million related to termination, other employee-related costs and facility-
related costs recorded in connection with the elimination of 400 positions. The
benefit of $3.7 million related to revised estimates of property and other
tax-related accruals recorded in connection with the idling of the Puerto Rico
facility. The liabilities related to the restructuring and reorganization
expenses are expected to be substantially settled within one year of accruing
the related charges. Management expects employee and facility-related cost
savings due to these restructuring activities in cost of sales, research and
development expense and selling, general and administrative expense through
2008. As of December 31, 1999, the Company believes that it has begun to achieve
these cost savings in the line items outlined above.
In 1999, Chiron recognized a reduction in other operating expenses of
$13.4 million resulting from a change in estimated tax accruals related to
certain employee payments recorded in 1995 under a series of agreements between
Chiron and Novartis.
24
NON-OPERATING INCOME AND EXPENSE
In December 1999, the Company sold its manufacturing facility in Amsterdam,
resulting in a gain of $0.9 million. In August 1998, Chiron completed the sale
of its manufacturing facility in St. Louis, Missouri, resulting in a gain on
sale of assets of $1.5 million. In addition, in June 1998, the Company sold its
fill and finishing facility in Puerto Rico, resulting in a gain of
$6.2 million.
In December 1999, the Company sold certain assets that it had developed or
acquired in connection with its research and development of a Cytomegalovirus
("CMV") vaccine to Aventis Pasteur and recognized a gain of $7.5 million.
In 1999, 1998 and 1997, Chiron recognized interest expense of
$23.9 million, $24.7 million and $31.6 million, respectively. The decrease in
interest expense in 1999 as compared with 1998 was primarily due to lower
average debt balances. The decrease in interest expense in 1998 as compared with
1997 was primarily due to the repayment of $100.0 million on the Company's lines
of credit in January 1998. The borrowings were outstanding under the Company's
U.S. credit facilities and were repaid with a portion of the proceeds received
from the sale of Chiron Diagnostics.
Other income, net, consists primarily of interest and investment income on
the Company's cash and investment balances and other non-operating gains and
losses. In 1999, 1998 and 1997, Chiron recognized interest and investment income
of $83.8 million, $29.6 million and $12.0 million, respectively. The increase in
interest income in 1999 as compared with 1998 was primarily due to higher
average cash and investment balances attributable to the net cash proceeds
received from the sale of Chiron Vision in the first quarter 1998 and Chiron
Diagnostics in the fourth quarter 1998.
In connection with its research and development collaborations, the Company
may invest in equity securities of its collaborative partners. The price of
these securities is subject to significant volatility. In 1999, 1998 and 1997,
Chiron recognized a loss attributable to the other-than-temporary impairment of
certain of these equity securities of $1.7 million, $8.4 million and
$1.2 million, respectively.
In 1999, 1998 and 1997, Chiron recognized gains of $3.8 million,
$4.5 million and $5.5 million, respectively, related to the sale of certain
equity securities. In addition, in 1999, Chiron recognized an unrealized holding
gain of $3.3 million related to equity securities classified as trading.
On December 31, 1998, Chiron completed the sale of its 30% interest in
General Injectibles & Vaccines, Inc. ("GIV"), a distribution business, to Henry
Schein, Inc. and received payment in full of certain advances made by the
Company to GIV, for a total of $31.7 million in cash. The sale resulted in a net
gain of $1.8 million.
INCOME TAXES
In 1999, the annual tax provision was 26.2% of pretax income from continuing
operations. The reported effective tax rate for 1999 was 18.0% of pretax income
from continuing operations, including the impact of the reversal of a prior year
valuation allowance, which resulted in the recognition of additional domestic
deferred tax benefits of $12.9 million. In 1998, the annual tax provision was
25.8% of pretax income from continuing operations, excluding restructuring and
reorganization charges, a financial reporting gain on the sale of the Puerto
Rico facility and $6.0 million of financial reporting income recognized in 1998
due to a change in estimated property tax accruals. The increase in the
effective tax rate in 1999 as compared with 1998, as adjusted above, is
primarily due to the benefit of certain tax losses and other tax benefits
realized in 1998, substantially offset by a higher proportion of non-U.S. income
subject to tax at lower rates in 1999.
25
In 1997, the annual tax provision was 20.2% of pretax income from continuing
operations, excluding the impact of the impairment loss on the Puerto Rico
facility, which did not create a corresponding income tax benefit in the year
recorded.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, SFAS 133
was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS 133." As a result of this
amendment, SFAS 133 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
In accordance with SFAS 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. The Company is currently evaluating the effect that
implementation of SFAS 133 will have on its results of operations and financial
position and anticipates that it will implement SFAS 133 during the first
quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings, issuance of common stock and
off-balance sheet financing. Chiron's cash, investments in marketable debt
securities and short-term investment in equity securities, which totaled $1.6
billion at December 31, 1999, are invested in a diversified portfolio of
financial instruments, including money market instruments, corporate notes and
bonds, government or government agency securities, and other debt and equity
securities, issued by financial institutions of high credit standing. By policy,
the amount of credit exposure to any one institution is limited; however, these
investments are generally not collateralized and primarily mature within three
years.
SOURCES AND USES OF CASH Chiron had cash and cash equivalents of
$363.9 million and $513.3 million at December 31, 1999 and 1998, respectively.
In 1999, net cash provided by operating activities was $20.9 million as compared
with $231.7 million in 1998. The decrease in cash provided by operating
activities was largely due to $183.4 million in estimated tax payments related
to the sale of Chiron Diagnostics, which was partially offset by $60.2 million
in federal and state tax refunds received and net income of $160.6 million.
In 1999, net cash used in investing activities consisted of purchases of
investments in marketable debt securities of $1.2 billion, capital expenditures
of $64.6 million and other uses of cash of $16.7 million. These uses of cash
were partially offset by proceeds from the sale and maturity of investments in
marketable debt securities of $1.0 billion, proceeds from the disposal of
discontinued operations of $46.9 million and proceeds from the sale of assets,
equity securities and interest in affiliated companies of $25.5 million. In
1998, net cash provided by investing activities consisted of proceeds from the
sale of Chiron Vision and Chiron Diagnostics of $1.3 billion, proceeds from the
sale and maturity of investments in marketable debt securities of
$282.7 million and proceeds from the sale of assets, equity securities and
interest in affiliated companies of $62.7 million. These uses of cash were
partially offset by the purchase of Chiron Behring of $54.8 million (net of cash
acquired), purchases of investments in marketable debt securities of
$1.2 billion and capital expenditures of $126.3 million.
26
In 1999, net cash used in financing activities consisted of $15.3 million
related to short-term borrowings, $2.4 million related to the repayment of debt
and capital leases and $140.8 million related to the acquisition of treasury
stock. These uses of cash were partially offset by proceeds of $98.2 million
from the issuance of common stock and the reissuance of treasury stock related
to stock option exercises and employee stock purchases and $6.9 million in
proceeds from the issuance of long-term debt. In 1998, net cash used in
financing activities consisted of $129.1 million related to short-term
borrowings and $9.1 million related to the repayment of debt and capital leases.
These uses of cash were partially offset by proceeds of $66.6 million from the
issuance of common stock related to stock option exercises and employee stock
purchases.
The Company is currently evaluating a number of business development
opportunities. To the extent that the Company is successful in reaching
agreements with third parties, these transactions may involve the expenditure of
a significant amount of the Company's current investment portfolio.
The Company's 1.9% convertible subordinated debentures are due in November
2000.
BORROWING ARRANGEMENTS Under a revolving, committed, unsecured credit
agreement with a major financial institution, Chiron can borrow up to
$100.0 million in the U.S. This credit facility is guaranteed by Novartis under
a November 1994 Investment Agreement, provides various interest rate options and
matures in February 2003. There were no borrowings outstanding under this credit
facility at December 31, 1999. Chiron also has credit facilities outside the
U.S. which allow for total borrowings of $63.1 million. Under these credit
facilities, $20.3 million of borrowings were outstanding at December 31, 1999.
In December 1999, Chiron and Novartis amended the November 1994 Investment
Agreement. This amendment reduced the maximum amount of Chiron obligations that
Novartis will guarantee from $725.0 million to $702.5 million.
In connection with the sale of Chiron Diagnostics to Bayer, a promissory
note owed by Chiron Diagnostics to Novartis was transferred to and assumed by
the Company. The note payable to Novartis bears interest at a variable rate
based on LIBOR (approximately 5.7% and 5.6% at December 31, 1999 and 1998,
respectively). As of December 31, 1999 and 1998, the outstanding amount was
$67.8 million and $63.9 million, respectively, including accrued interest. The
note and accrued interest were paid in full on January 4, 2000.
LEASES Chiron leases laboratory, office and manufacturing facilities, land
and equipment under noncancelable operating leases, which expire through 2009.
Future minimum lease payments, including those for the leaseback of office and
warehouse space in the Amsterdam facility, are estimated to be approximately
$130.3 million in the aggregate, excluding a residual value guarantee of
$172.6 million due upon termination of an operating lease in 2003. As of
December 31, 1999, Novartis had guaranteed $172.6 million of the Company's
operating lease commitments (refer to Note 8 of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS).
OTHER COMMITMENTS Effective July 1, 1998, Chiron and International Business
Machines Corporation ("IBM") entered into a ten-year information technology
services agreement under which IBM will provide Chiron with a full range of
information services. Chiron can terminate this agreement beginning July 1,
1999, subject to certain termination charges. If Chiron doe