Pink Sheet is part of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC’s registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

This copy is for your personal, non-commercial use. For high-quality copies or electronic reprints for distribution to colleagues or customers, please call +44 (0) 20 3377 3183

Printed By



Executive Summary

Chiron is offering approximately $ 360 mil. to acquire Cetus' therapeutics business once the sale of Cetus' PCR technology to Roche is factored into the deal. The $ 360 mil. price tag for Cetus' R&D and generics cancer business is in the same ballpark as other acquisitions of R&D- stage biotech firms. In 1986, Lilly paid $ 350 mil. for Hybritech and Bristol-Myers paid $ 300 mil. for Genetic Systems. Under terms of the merger agreement, announced July 22 and subject to shareholder approval, Chiron would acquire its Emeryville, Calif. neighbor Cetus in a stock swap valued at approximately $ 660 mil. based on Chiron's market value at the time the merger was announced. The deal also includes the sale of Cetus' PCR gene amplification business to Roche for $ 300 mil. Because the Chiron offer does not include much of a price premium on top of Cetus' stock market price prior to the merger announcement, Wall Street's initial reaction to the proposal has been negative. In the week following the announcement Chiron shares dropped $ 7.75 and Cetus was down $ 2.88. The purchase price for Cetus also seems meager when compared to the roughly $ 3 bil. purchase valuation Roche put on Genentech last year; however, with two products generating over $ 100 mil. in sales, demonstrated R&D capabilities, and a large and well- trained hospital sales force, Genentech is a fully-integrated pharmaceutical firm and not an unproven R&D firm. Both Chiron and Cetus are maintaining that an initial stock decline was expected. However, the steep drop in Chiron's stock price may jeopardize the deal. The merger agreement calls for Cetus shareholders to receive .3 shares of Chiron stock in exchange for each share of Cetus stock. If Chiron's stock falls below $ 49, Cetus can terminate the deal unless the stock exchange rate is renegotiated. The agreement also calls for lowering the exchange rate if Chiron stock rises above $ 67 a share. Chiron stock was at $ 60.75 when the market closed on Friday, July 19, the last trading day before the announcement of the merger and closed the week of July 26 at $ 53. Shareholders will vote on the deal at a special meeting in November, the companies said. One factor driving Chiron's stock down was the company's statement that the merger will result in "a loss for calendar 1992." Chiron, however, predicted that it would return to profitability in 1993. Chiron will be assuming $ 145.5 mil. of Cetus debt in the merger. But Chiron's balance sheet after the merger will still be strong, with $ 600 mil. in cash on hand, the company said. In addition, once Chiron returns to profitability, it should benefit from Cetus' loss carryforward, which was at $ 108 mil. at the end of 1990. The Chiron/Cetus merger will create one of the deepest pipelines in the biotechnology industry. "Together, the two companies and their corporate partners have 22 products in various stages of human clinical trials, and 16 products in earlier stages of development," the two firms said. (For a list of the 22 compounds in clinicals, see chart.) The merger will fuse two pipelines focused broadly on cancer and immunology. Cetus' lead product, Proleukin (interleukin-2) for the treatment of metastatic renal cell carcinoma, has a PLA pending and is under study for a number of other indications. A polyethylene glycosylated IL-2 is in Phase I. Macrophage-colony stimulating factor (M-CSF) is in Phase I as an antifungal treatment in immunocompromised patients, Cetus said. Trials in bone marrow transplant patients have begun, and the company expects to begin trials in other patient groups, including AIDS patients, in the near future. Cetus' preclinical research includes an anti-tumor necrosis factor (TNF) program and C-101, a small molecule being studied for graft-v.-host disease and arthritis. Cetus also brings with it an oncology sales force of 25 reps in the U.S. and 26 in Europe. The company has a line of six generic chemotherapy products (doxorubicin, cytarabine, vinblastine, leucovorin calcium, methotrexate, and fluorouracil) that it markets through a joint venture with Ben Venue Laboratories. Cetus-Ben Venue also has rights to Cytogen's OncoScint cancer imaging agents. Chiron has 15 sales reps in its ophthalmic division. Cetus will operate as a cancer therapeutics division of Chiron, the two companies said. The deal also will help Chiron establish an overseas presence: Cetus' EuroCetus subsidiary markets Proleukin in nine countries. Chiron, through its Biocine joint venture with Ciba-Geigy, is negotiating to purchase the vaccine business of the Italian firm Sclavo ("The Pink Sheet" April 15, T&G-2). Chiron's only European presence currently is through its ophthalmics division, which has a French subsidiary and recently acquired a German firm, Adatomed. Chiron has a pipeline based largely on vaccines and diagnostics. The company's hepatitis B vaccine technology is licensed by Merck, and its Riba hepatitis C test is sold through a joint venture with Ortho. Through the Biocine joint venture, Chiron is developing a genital herpes vaccine and an AIDS vaccine. Chiron and Ciba-Geigy also collaborate on the development of an insulin-like growth factor for treatment of Type II diabetes. Chiron Ophthalmics is developing an intraocular lens and epidermal growth factor. Finally, Chiron has an anti-tumor necrosis factor monoclonal antibody in Phase III for treating septic shock. In preclinicals, it has a number of other vaccine candidates, fibroblast growth factor and bone growth factors. Commenting on the varied pipeline, Chiron Chairman William Rutter, PhD, said, "The combination of Chiron and Cetus creates a powerful healthcare company with substantial technology, product diversity and resources to capitalize on opportunities in four important markets: diagnostics, biopharmaceuticals with an emphasis on cancer therapeutics, vaccines and ophthalmics." The basic synergy of the two companies, Rutter added, is "our shared belief that enhancing the body's own immune response will be an increasingly important factor in controlling infectious diseases and cancer." The merged company will not develop all of Cetus' products. As part of the merger, Cetus will "focus on its strengths in oncology research and marketing," the two companies said. As a preliminary to the merger, Cetus will sell its polymerase chain reaction (PCR) technology to Hoffmann-La Roche for $ 300 mil. PCR, a gene amplification technology that allows rapid multiplication of segments of genetic information, is currently licensed by Cetus to two partners: Roche for human in vitro diagnostic applications and to a joint venture with Perkin-Elmer for development and marketing of instruments and reagents used in research. For the year ended June 30, Cetus' PCR business contributed $ 20.9 mil. in sales to Cetus, and earned the company $ 6.3 mil. Roche will acquire all rights to PCR under terms of the deal. The Cetus/Perkin-Elmer joint venture will be dissolved, but Perkin-Elmer will retain exclusive worldwide distribution rights to instruments and reagents developed for research markets and will have a "preferred" equity position in Roche's PCR business. In addition to the $ 300 mil. payment, Roche will pay Cetus royalties of up to $ 30 mil. on sales from PCR technology. Under its current licensing deal with Cetus, Roche paid a minimum of $ 5 mil. to Cetus and received exclusive worldwide rights to products in exchange for royalties. The PCR divestment likely will not be the last for Cetus. As the company restructures to join Chiron, it will examine the "possible out-licensing of non-cancer products." Likely candidates include the t-88 monoclonal antibody, currently in Phase III as a treatment for septic shock (which will face competition in the septic shock market and may compete with Chiron's anti-TNF product), as well as non-cancer indications for M-CSF, Cetus said. At the same time, Cetus will seek to shore up its business with "new corporate partnerships and an aggressive in-licensing effort to expand its oncology presence." For Cetus, the decision to seek a merger is ultimately a result of the the company's failure to win an approval recommendation for Proleukin at the July 30, 1990 Biological Response Modifiers Advisory Committee meeting ("The Pink Sheet" Aug. 6, p. 6). Following that meeting, the company's president and CEO, Robert Fildes, resigned, Cetus announced that it was laying off 100 of its 980 employees, and it began to search for some sort of alliance ("The Pink Sheet" Aug. 20, T&G-4). Cetus resubmitted its Proleukin data to FDA in December ("The Pink Sheet" Nov. 19, T&G-6). "We are impressed with the quality of new data in Cetus' updated submission to FDA," Chiron's Rutter said. "We are hopeful that it will be approved in this country." The merger apparently was not concluded under immediate financial pressure. Cetus has $ 95 mil. in cash on hand, the company said. At a Jan. 7 Hambrecht & Quist meeting, Hollings Renton, who replaced Fildes as president, told analysts that Cetus had $ 130 mil. in cash on hand after posting a $ 60 mil. loss for the fiscal year. Cetus "can be patient," he said. Discussions with Chiron began in November, the companies said. Cetus' retrenchment will not end with the merger, however. The company will immediately lay off 92 employees, bringing its headcount (after the transfer of 125 employees in the Roche deal) to 650. The combined company will have 1,400 employees, but expects to further reduce personnel levels by 10% through the "elimination of overlapping functions and additional efficiencies in the combined company," the firms said. Chiron management will remain unchanged, with Rutter as chairman, Edward Penhoet, PhD, as CEO, and Gregory Lawless, PhD, as president. Cetus President Renton will continue as day-to-day head of Cetus, although his exact title is undetermined. He will also serve in a new Office of the Chairman of Chiron, along with Rutter, Penhoet, and Lawless. Cetus Chairman Ronald Cape, who founded the company in 1971, will join Chiron's board. Cape, 58, had been serving as CEO of Cetus since Fildes departure, but will not be involved in day-to- day operations following the merger. Based on reported revenues for the two companies' most recent fiscal years, after the merger Chiron should post revenues near $ 120 mil. even without the PCR business. Chiron reported revenues of $ 78.5 mil. in 1990 and expects to report revenues of about $ 100 mil. for 1991. For its fiscal year ended July 1990, Cetus reported revenues of $ 38.9 mil. including $ 20.9 mil. from the PCR business. Cetus' revenues were up to $ 38.1 mil. through the first nine months of fiscal 1991. Chart omitted.

You may also be interested in...

Part D Discount Liability Coming Into Focus: CMS Releases Drug Cost Data

Newly released Medicare Part D data sheds light on the sales hit that branded pharmaceutical manufacturers will face when the coverage gap discount program gets under way in 2011

FDA Skin Infections Guidance Spurs Debate On Endpoint Relevance

FDA appears headed for a showdown with clinicians and the pharmaceutical industry over the proposed new clinical trial endpoints for acute bacterial skin and skin structure infections, the guidance's approach for justifying a non-inferiority margin and proposed changes in the types of patients that should be enrolled in trials

Shire Hopes To Sow Future Deals With $50M Venture Fund

Specialty drug maker Shire has quietly begun scouting deals with a brand-new $50 million venture fund, the latest of several in-house investment arms to launch with their parent company's pipelines, not profits, as the measure of their worth




Ask The Analyst

Ask the Analyst is free for subscribers.  Submit your question and one of our analysts will be in touch.

Your question has been successfully sent to the email address below and we will get back as soon as possible. my@email.address.

All fields are required.

Please make sure all fields are completed.

Please make sure you have filled out all fields

Please make sure you have filled out all fields

Please enter a valid e-mail address

Please enter a valid Phone Number

Ask your question to our analysts