<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-12798
------------------------
CHIRON CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2754624
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
4560 HORTON STREET, EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip code)
(510) 655-8730
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
TITLE OF CLASS OUTSTANDING AT JULY 31, 2000
<S> <C>
Common Stock, $0.01 par value 182,761,388
</TABLE>
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<PAGE>
CHIRON CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30,
2000 and December 31, 1999 (Unaudited)................. 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999
(Unaudited)............................................ 5
Condensed Consolidated Statements of Comprehensive
Income for the three and six months ended June 30, 2000
and 1999 (Unaudited)................................... 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 (Unaudited).... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................. 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................. 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................. 38
SIGNATURES.................................................. 39
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHIRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 474,450 $ 363,865
Short-term investments in marketable debt securities...... 657,722 640,027
Short-term investments in equity securities............... 4,183 3,315
---------- ----------
Total cash and short-term investments................... 1,136,355 1,007,207
Accounts receivable, net.................................. 183,858 161,883
Current portion of note receivable........................ 3,461 3,233
Inventories............................................... 102,894 84,724
Other current assets...................................... 86,541 82,253
---------- ----------
Total current assets.................................... 1,513,109 1,339,300
Noncurrent investments in marketable debt securities........ 290,308 547,580
Property, plant, equipment and leasehold improvements, at
cost:
Land and buildings........................................ 132,129 132,861
Laboratory, production and office equipment............... 309,817 291,503
Leasehold improvements.................................... 75,483 73,143
Construction-in-progress.................................. 21,311 23,894
---------- ----------
538,740 521,401
Less accumulated depreciation and amortization............ (242,646) (222,566)
---------- ----------
Property, plant, equipment and leasehold improvements,
net................................................... 296,094 298,835
Purchased technology, net................................... 6,710 11,722
Other intangible assets, net................................ 136,287 143,320
Investments in equity securities and affiliated companies... 120,287 63,021
Notes receivable............................................ 15,600 13,967
Other assets................................................ 50,039 41,024
---------- ----------
$2,428,434 $2,458,769
========== ==========
</TABLE>
3
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 48,311 $ 46,187
Accrued compensation and related expenses................. 37,085 45,102
Short-term borrowings..................................... 2,135 20,300
Current portion of long-term debt......................... 252,077 249,534
Note payable to Novartis.................................. -- 67,791
Current portion of unearned revenue....................... 36,490 42,524
Taxes payable............................................. 33,566 19,118
Other current liabilities................................. 127,766 122,375
---------- ----------
Total current liabilities............................... 537,430 612,931
Long-term debt.............................................. 695 96,958
Other noncurrent liabilities................................ 48,267 56,043
Minority interest........................................... 2,742 --
---------- ----------
Total liabilities....................................... 589,134 765,932
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock.............................................. 1,828 1,819
Additional paid-in capital................................ 2,115,177 2,057,418
Accumulated deficit....................................... (316,198) (323,037)
Accumulated other comprehensive income.................... 51,266 3,351
Treasury stock, at cost (358,000 and 1,230,000 shares at
June 30, 2000 and December 31, 1999, respectively)...... (12,773) (46,714)
---------- ----------
Total stockholders' equity.............................. 1,839,300 1,692,837
---------- ----------
$2,428,434 $2,458,769
========== ==========
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THIS STATEMENT.
4
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................................ $161,021 $101,322 $318,627 $194,289
Equity in earnings of unconsolidated joint
businesses...................................... 22,404 17,048 38,122 35,134
Collaborative agreement revenues.................. 7,301 18,736 14,095 41,161
Royalty and license fee revenues.................. 36,962 27,335 67,951 59,768
Other revenues.................................... 13,167 24,669 18,805 34,318
-------- -------- -------- --------
Total revenues.................................. 240,855 189,110 457,600 364,670
-------- -------- -------- --------
Operating expenses:
Cost of sales..................................... 48,279 40,759 99,530 84,635
Research and development.......................... 71,178 73,806 142,168 141,259
Selling, general and administrative............... 46,286 45,153 97,197 86,815
Restructuring and reorganization (benefits)
charges (Note 3)................................ (76) -- (447) 3,352
Other operating expenses.......................... 6,176 510 10,998 4,693
-------- -------- -------- --------
Total operating expenses........................ 171,843 160,228 349,446 320,754
-------- -------- -------- --------
Income from operations.............................. 69,012 28,882 108,154 43,916
Loss on sale of assets.............................. -- -- (224) --
Interest expense.................................... (4,333) (5,863) (9,359) (11,708)
Other income, net................................... 18,610 20,816 43,080 43,376
Minority interest................................... (200) -- (401) --
-------- -------- -------- --------
Income from continuing operations before income
taxes............................................. 83,089 43,835 141,250 75,584
Provision for income taxes.......................... 25,677 10,101 43,754 18,112
-------- -------- -------- --------
Income from continuing operations................... 57,412 33,734 97,496 57,472
Gain on disposal of discontinued operations (Note
2)................................................ 2,190 3,009 2,342 3,009
-------- -------- -------- --------
Net income.......................................... $ 59,602 $ 36,743 $ 99,838 $ 60,481
======== ======== ======== ========
Basic earnings per share (Note 1):
Income from continuing operations................. $ 0.32 $ 0.19 $ 0.54 $ 0.32
======== ======== ======== ========
Net income........................................ $ 0.33 $ 0.20 $ 0.55 $ 0.33
======== ======== ======== ========
Diluted earnings per share (Note 1):
Income from continuing operations................. $ 0.30 $ 0.18 $ 0.51 $ 0.31
======== ======== ======== ========
Net income........................................ $ 0.31 $ 0.20 $ 0.52 $ 0.33
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THIS STATEMENT.
5
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income.......................................... $ 59,602 $ 36,743 $ 99,838 $ 60,481
-------- -------- --------- --------
Other comprehensive income (loss):
Change in foreign currency translation adjustment
during the period............................... (239) (5,371) (10,521) (22,246)
Unrealized gains from investments:
Unrealized holding gains arising during the
period........................................ 17,215 5,639 53,589 6,422
Reclassification adjustment for net losses
(gains) included in net income, net of tax
benefit (provision) of $2,434 and $238 for the
three months ended June 30, 2000 and 1999,
respectively, and $2,178 and ($557) for the
six months ended June 30, 2000 and 1999,
respectively.................................. 5,418 423 4,847 (990)
-------- -------- --------- --------
Net unrealized gains from investments........... 22,633 6,062 58,436 5,432
-------- -------- --------- --------
Other comprehensive income (loss)................... 22,394 691 47,915 (16,814)
-------- -------- --------- --------
Comprehensive income................................ $ 81,996 $ 37,434 $ 147,753 $ 43,667
======== ======== ========= ========
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THIS STATEMENT.
6
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities......... $ 137,168 $ (125,246)
----------- -----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.... (2,470,807) (1,034,474)
Proceeds from sale and maturity of investments in
marketable debt securities.............................. 2,703,640 684,708
Capital expenditures...................................... (21,983) (42,350)
Proceeds from sale of assets.............................. 1,000 --
Purchases of equity securities and interests in affiliated
companies............................................... (8,750) --
Proceeds from sale of equity securities and interests in
affiliated companies.................................... 3,098 --
Proceeds from disposal of discontinued operations......... -- 35,425
Other, net................................................ 595 (15,538)
----------- -----------
Net cash provided by (used in) investing activities..... 206,793 (372,229)
----------- -----------
Cash flows from financing activities:
Net (repayment of) proceeds from short-term borrowings.... (22,413) 8,115
Repayment of debt and capital leases...................... (69,430) (1,193)
Payments to acquire treasury stock........................ (192,343) (6,746)
Proceeds from reissuance of treasury stock................ 49,890 --
Proceeds from issuance of common stock.................... 920 31,518
----------- -----------
Net cash (used in) provided by financing activities..... (233,376) 31,694
----------- -----------
Net increase (decrease) in cash and cash equivalents.... 110,585 (465,781)
Cash and cash equivalents at beginning of the period........ 363,865 513,315
----------- -----------
Cash and cash equivalents at end of the period.............. $ 474,450 $ 47,534
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THIS STATEMENT.
7
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information presented in the Condensed Consolidated Financial Statements
at June 30, 2000, and for the three and six months ended June 30, 2000 and 1999,
is unaudited but includes all normal recurring adjustments which the management
of Chiron Corporation ("Chiron" or the "Company") believes to be necessary for
fair presentation of the periods presented.
The Condensed Consolidated Balance Sheet amounts at December 31, 1999 have
been derived from audited financial statements. Interim results are not
necessarily indicative of results for a full year. This information should be
read in conjunction with Chiron's audited Consolidated Financial Statements for
the year ended December 31, 1999, which are included in the Annual Report on
Form 10-K filed by the Company with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The Condensed Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. For consolidated majority-owned
subsidiaries in which the Company owns less than 100%, the Company records
"Minority interest" in the Condensed Consolidated Financial Statements to
account for the ownership interest of the minority owner. Investments in joint
ventures, partnerships and interests in which the Company has an equity interest
of 50% or less are accounted for using either the equity or cost method. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In 2000, the Company began consolidating, and recording minority interest
related to, its 51% owned joint venture, Chiron Behring Vaccines Limited.
INVENTORIES
Inventories are stated at the lower of cost or market using the moving
weighted-average cost method. Inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Finished goods........................................ $ 13,247 $16,614
Work-in-process....................................... 68,140 49,193
Raw materials......................................... 21,507 18,917
-------- -------
$102,894 $84,724
======== =======
</TABLE>
CONVERSION OF SUBORDINATED DEBENTURES
On April 4, 2000, the Company's Board of Directors authorized management to
call, for redemption in common stock, the outstanding $100.0 million 5.25%
convertible subordinated debentures prior to the next interest payment date of
May 21, 2000. Through June 30, 2000, debentures with a face value of
$98.4 million, and an amortized cost of $94.2 million, were converted into
3.2 million shares of the Company's common stock, at a conversion price of
$30.83 per share. The unamortized discount of $4.2 million and the related
deferred tax liability of $2.0 million were recorded in additional paid-in
capital.
8
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The $4.8 million of interest accrued through the conversion date, net of income
taxes of $1.8 million, was also recorded in additional paid-in capital.
INCOME TAXES
The 2000 effective tax rate is estimated to be approximately 31% of pretax
income from continuing operations. The effective tax rate may be affected in
future periods by changes in management's estimates with respect to the
Company's deferred tax assets and other items affecting the overall tax rate.
Income tax expense for the three and six months ended June 30, 1999 was based on
an estimated annual effective tax rate on pretax income from continuing
operations of approximately 24%. The actual 1999 annual effective tax rate of
18% reflects the utilization of state deferred tax assets that were recognized
during the second half of 1999 through a reduction in the valuation allowance
associated with such assets.
TREASURY STOCK
Treasury stock is stated at cost. Gains on reissuance of treasury stock are
credited to additional paid-in capital. Losses on reissuance of treasury stock
are charged to additional paid-in capital to the extent of available net gains
on reissuance of treasury stock. Otherwise, losses are charged to accumulated
deficit. For the three and six months ended June 30, 2000, the Company charged
losses to accumulated deficit of $39.5 million and $88.5 million, respectively.
PER SHARE DATA
Basic earnings per share is based upon the weighted-average number of common
shares outstanding. Diluted earnings per share is based upon the
weighted-average number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares could result from (i) the assumed
exercise of outstanding stock options, warrants and equivalents, which are
included under the treasury-stock method; (ii) performance units to the extent
that dilutive shares are assumed issuable; and (iii) convertible debentures,
which are included under the if-converted method.
9
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computations for basic and diluted
earnings per share on income from continuing operations (in thousands, except
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (Numerator):
Income from continuing operations available to
common stockholders............................. $57,412 $ 33,734 $ 97,496 $ 57,472
Plus: Interest on 1.90% convertible debentures,
net of taxes.................................... 1,827 -- 3,657 --
Plus: Interest on 5.25% convertible debentures,
net of taxes.................................... 440 -- 440 --
-------- -------- -------- --------
Income available to common stockholders, plus
assumed conversions............................. $59,679 $ 33,734 $101,593 $ 57,472
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding........ 181,022 181,585 180,779 181,064
Effect of dilutive securities:
Options and equivalents......................... 5,761 2,996 6,423 3,578
Warrants........................................ 411 223 421 239
1.90% convertible debentures.................... 8,772 -- 8,778 --
5.25% convertible debentures.................... 1,577 -- 789 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions............................. 197,543 184,804 197,190 184,881
-------- -------- -------- --------
Basic earnings per share............................ $ 0.32 $ 0.19 $ 0.54 $ 0.32
======== ======== ======== ========
Diluted earnings per share.......................... $ 0.30 $ 0.18 $ 0.51 $ 0.31
======== ======== ======== ========
</TABLE>
10
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computations for basic and diluted earnings
per share on net income (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (Numerator):
Net income available to common stockholders....... $59,602 $ 36,743 $ 99,838 $ 60,481
Plus: Interest on 1.90% convertible debentures,
net of taxes.................................... 1,827 -- 3,657 --
Plus: Interest on 5.25% convertible debentures,
net of taxes.................................... 440 -- 440 --
-------- -------- -------- --------
Income available to common stockholders, plus
assumed conversions............................. $61,869 $ 36,743 $103,935 $ 60,481
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding........ 181,022 181,585 180,779 181,064
Effect of dilutive securities:
Options and equivalents......................... 5,761 2,996 6,423 3,578
Warrants........................................ 411 223 421 239
1.90% convertible debentures.................... 8,772 -- 8,778 --
5.25% convertible debentures.................... 1,577 -- 789 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions............................. 197,543 184,804 197,190 184,881
-------- -------- -------- --------
Basic earnings per share............................ $ 0.33 $ 0.20 $ 0.55 $ 0.33
======== ======== ======== ========
Diluted earnings per share.......................... $ 0.31 $ 0.20 $ 0.52 $ 0.33
======== ======== ======== ========
</TABLE>
For the three months ended June 30, 2000 and 1999, options to purchase
4.4 million and 6.7 million shares, respectively, and for the six months ended
June 30, 2000 and 1999, options to purchase 1.1 million and 3.8 million shares,
respectively, with exercise prices greater than the average market price of
common stock, were excluded from the respective computations of diluted earnings
per share as their inclusion would be antidilutive.
Also excluded from the computations of diluted earnings per share were
12.0 million shares for each of the three and six months ended June 30, 1999 of
common stock issuable upon conversion of the Company's convertible subordinated
debentures as the interest, net of tax, per common share obtainable on
conversion exceeded basic earnings per share.
NOTE 2--DISCONTINUED OPERATIONS
On November 30, 1998, Chiron completed the sale of its IN VITRO diagnostics
business to Bayer for $1,013.8 million in cash, subject to certain post-closing
adjustments. The sale was completed under the terms of a Stock Purchase
Agreement (the "Bayer Agreement"), dated as of September 17, 1998, between
11
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)
Chiron and Bayer. The results of operations for Chiron Diagnostics are reported
as a discontinued operation for all periods presented in the Condensed
Consolidated Statements of Operations. Chiron has provided customary indemnities
under the terms of the Bayer Agreement.
On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision to Bausch & Lomb ("B&L") for approximately
$300.0 million in cash, subject to certain post-closing adjustments. The sale
was completed under the terms of a Stock Purchase Agreement (the "B&L
Agreement"), dated as of October 21, 1997, between Chiron and B&L. The Company
retained Chiron Vision's cash and cash equivalents, certain Chiron Vision real
estate assets (the "real estate assets") and Chiron Vision's future
noncancelable operating lease costs upon the completion of the sale. The Company
has provided customary indemnities under the terms of the B&L Agreement. For
each of the three and six months ended June 30, 2000, the Company reversed
approximately $2.2 million reserved for contractual obligations to indemnify B&L
against certain potential claims as such obligations had expired. This was
recorded as a component of "Gain on disposal of discontinued operations."
For a period of three years following the completion of the sale, Chiron
Vision has the right to use a portion of the real estate assets, which were
occupied at closing, on a rent-free basis. As of June 30, 2000 and December 31,
1999, the real estate assets of $1.9 million, which represent all of the
remaining net assets of Chiron's discontinued operations, were recorded in the
Condensed Consolidated Balance Sheets as "Other current assets."
For each of the three and six months ended June 30, 2000 and for each of the
three and six months ended June 30, 1999, "Gain on disposal of discontinued
operations" included income tax benefits of $0.1 million and $0.7 million,
respectively.
For each of the three and six months ended June 30, 2000, basic and diluted
earnings per share from discontinued operations were $0.01. For each of the
three and six months ended June 30, 1999, basic and diluted earnings per share
from discontinued operations were $0.01 and $0.02, respectively.
NOTE 3--RESTRUCTURING AND REORGANIZATION
The Company recorded restructuring and reorganization charges related to the
integration of its worldwide vaccines operations and the ongoing rationalization
of its business operations. The integration of its worldwide vaccines operations
consisted of termination and other employee-related costs recognized in
connection with the elimination of 28 positions in the Company's Italian
manufacturing facility and facility-related costs. As of June 30, 2000, 27 of
these 28 positions had been eliminated. The ongoing rationalization of its
business operations consisted of termination and other employee-related costs
recognized in connection with the elimination of 382 positions in manufacturing,
research and development, sales, marketing and other administrative functions,
and facility-related costs. During 2000, the Company decided to retain 11 of
those 382 positions to support future contract manufacturing activities and,
therefore, adjusted the number of positions for elimination to 371. Included in
this amount were 36 positions at the Company's Amsterdam facility, which was
sold in December 1999. These positions were transferred to the buyer in
January 2000.
12
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 3--RESTRUCTURING AND REORGANIZATION (CONTINUED)
In the first half of 2000, the Company recorded restructuring and
reorganization benefits of $0.4 million related to revised estimates of
termination and other employee-related costs recorded in connection with the
elimination of the 371 positions. As of June 30, 2000, 356 of these 371
positions had been eliminated.
In the first half of 1999, the Company recorded net restructuring and
reorganization charges of $3.4 million related to the integration of its
worldwide vaccines operations.
The current status of the restructuring and reorganization accruals is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT AMOUNT TO
ACCRUAL AT TOTAL TOTAL UTILIZED BE UTILIZED
DECEMBER 31, RESTRUCTURING RESTRUCTURING THROUGH IN FUTURE
1999 CHARGE BENEFIT JUNE 30, 2000 PERIODS
------------ ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Employee-related costs............ $3,772 $ -- $(607) $(1,007) $2,158
Other facility-related costs...... 1,631 160 -- (730) 1,061
------ ---- ----- ------- ------
5,403 160 (607) (1,737) 3,219
Discontinued operations........... 285 -- (109) -- 176
------ ---- ----- ------- ------
$5,688 $160 $(716) $(1,737) $3,395
====== ==== ===== ======= ======
</TABLE>
The restructuring and reorganization accruals, of which $2.2 million and
$1.2 million were included in "Other current liabilities" and "Other noncurrent
liabilities," respectively, in the Condensed Consolidated Balance Sheets, are
expected to be substantially settled within one to six years of accruing the
related charges.
NOTE 4--SALE OF AUSTRALIAN SUBSIDIARY
In February 2000, the Company sold substantially all assets of its
Australian subsidiary ("the Australian assets") to Mimotopes Pty. Ltd.
("Mimotopes"), a wholly-owned subsidiary of MitoKor, for $1.0 million in cash,
$1.6 million in non-interest bearing promissory notes and 500,000 shares of
MitoKor Series E convertible preferred stock, to which the Company assigned no
fair value due to the early-stage nature of MitoKor. The promissory notes are
due on August 7, 2001 and February 7, 2003 and were included in "Other assets"
in the Condensed Consolidated Balance Sheets, with a face amount of
$2.0 million and net of an unamortized discount of $0.4 million at an imputed
interest rate of 9%, at June 30, 2000. Mimotopes also assumed substantially all
liabilities of the Company's Australian subsidiary. In connection with the sale,
the Company wrote off $1.3 million in leasehold improvements, which became the
property of the landlord upon termination of the Australian subsidiary's
building lease, and incurred selling costs of $0.4 million. Both amounts were
included in "Loss on sale of assets" in the Condensed Consolidated Statements of
Operations. The Australian subsidiary was part of the Company's
biopharmaceuticals segment. The sale of the Australian assets, net of
liabilities assumed, resulted in a net loss of $0.2 million, which was included
in "Loss on sale of assets" in the Condensed Consolidated Statements of
Operations.
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CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 4--SALE OF AUSTRALIAN SUBSIDIARY (CONTINUED)
At the time of the sale, the carrying amount of the Australian assets, net
of liabilities assumed, was approximately $1.1 million. As of December 31, 1999,
the carrying amount of the Australian assets, net of liabilities to be assumed,
approximated the carrying amount at the time of the sale and was recorded in the
Condensed Consolidated Balance Sheets as "Other current assets." Chiron
recognized operating expenses related to the Australian subsidiary of
$0.2 million for the six months ended June 30, 2000 and $1.1 million and
$2.3 million for the three and six months ended June 30, 1999, respectively.
The Company intends to liquidate the remaining assets and liabilities of the
Australian subsidiary in the third quarter of 2000.
In connection with the sale, the Company and Mimotopes entered into an
agreement, under which Mimotopes would perform the research and development for
the remaining term of an agreement with Novartis, which ends in November 2000.
The Company paid Mimotopes $0.7 million for the research and development
services, which it will amortize over the period during which the services are
performed.
NOTE 5--SEGMENT INFORMATION
Chiron is organized based on the products and services that it offers. Under
this organizational structure, the Company has the following three reportable
segments: (i) biopharmaceuticals, (ii) vaccines and (iii) blood testing. The
biopharmaceuticals segment consists of therapeutic products and services, with
an emphasis on the treatment of cancer, infectious diseases and cardiovascular
disease, as well as the development and acquisition of technologies related to
recombinant proteins, small molecules and genomics. The vaccines segment
consists principally of products and services related to adult and pediatric
vaccines sold primarily in Germany, Italy, the United Kingdom and other
international markets, as well as the development of technologies related to
vaccines. 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 to detect hepatitis viruses and retroviruses and
provides supplemental tests and microplate-based instrument systems to automate
test performance and data 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 transfused
blood and plasma products for viral infection.
Certain other revenues and expenses, particularly Novartis research and
development funding, certain royalty revenues and unallocated corporate
expenses, are not viewed by management as belonging to any one reportable
segment. As a result, these items have been aggregated into an "Other" segment,
as permitted by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131").
The accounting policies of the Company's reportable segments are the same as
those described in Note 1--The Company and Summary of Significant Accounting
Policies. Chiron evaluates the performance of its segments based on each
segment's income (loss) from continuing operations, excluding certain special
items, such as restructuring and reorganization charges, which are shown as
reconciling items in the table below.
14
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CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 5--SEGMENT INFORMATION (CONTINUED)
The following segment information excludes all significant intersegment
transactions as these transactions are eliminated for management reporting
purposes (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Biopharmaceuticals................................ $85,635 $ 87,914 $147,127 $155,655
Vaccines, includes equity in earnings of
unconsolidated joint businesses of $401 and $644
for the three and six months ended June 30,
1999, respectively.............................. 99,520 47,707 216,981 104,181
Blood testing, includes equity in earnings of
unconsolidated joint businesses of $22,404 and
$16,647 for the three months ended June 30, 2000
and 1999, respectively, and $38,122 and $34,490
for the six months ended June 30, 2000 and 1999,
respectively.................................... 35,052 26,021 61,448 50,651
Other............................................. 20,648 27,468 32,044 54,183
-------- -------- -------- --------
Total revenues.................................. $240,855 $189,110 $457,600 $364,670
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals................................ $ 3,541 $ (75) $(12,009) $ (4,767)
Vaccines.......................................... 39,772 (9,972) 89,795 (16,280)
Blood testing..................................... 20,849 12,083 32,367 26,598
Other............................................. 4,774 26,846 (2,446) 41,717
-------- -------- -------- --------
Segment income from operations.................. 68,936 28,882 107,707 47,268
Operating income (expense) reconciling items:
Restructuring and reorganization benefits
(charges)..................................... 76 -- 447 (3,352)
-------- -------- -------- --------
Income from operations............................ 69,012 28,882 108,154 43,916
Loss on sale of assets.......................... -- -- (224) --
Interest expense................................ (4,333) (5,863) (9,359) (11,708)
Other income, net............................... 18,610 20,816 43,080 43,376
Minority interest............................... (200) -- (401) --
-------- -------- -------- --------
Income from continuing operations before income
taxes............................................. $83,089 $ 43,835 $141,250 $ 75,584
======== ======== ======== ========
</TABLE>
In 2000, the Company changed its method of allocating certain legal costs to
segments due to a change in the Executive Committee's evaluation of the
performance of the Company's segments. In 2000, the Company allocated certain
legal costs to the "Other" segment, whereas in 1999, the Company allocated these
certain legal costs to all segments. The effect of this change in methodology
was not material to the financial statements.
15
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
NOTE 6--CONTINGENCIES
The Company is party to various claims, investigations and legal proceedings
arising in the ordinary course of business. These claims, investigations and
legal proceedings relate to intellectual property rights, contractual rights and
obligations, employment matters, claims of product liability and other issues.
While there is no assurance that an adverse determination of any of such matters
could not have a material adverse impact in any future period, management does
not believe, based upon information known to it, that the final resolution of
any of these matters will have a material adverse effect upon the Company's
consolidated financial position and annual results of operations and cash flows.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THIS QUARTERLY REPORT ON FORM 10-Q 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 ARE DISCUSSED 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
THEREOF.
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I., ITEM
1.,"FINANCIAL STATEMENTS," OF THIS QUARTERLY REPORT ON FORM 10-Q AND PART II.
ITEMS 7., 7A., AND 8., "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK" AND "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,"
RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999.
Chiron is a biotechnology company that participates in three global
healthcare markets: biopharmaceuticals, vaccines and blood testing. The
biopharmaceuticals segment consists of therapeutic products and services, with
an emphasis on the treatment of cancer, infectious diseases and cardiovascular
disease, as well as the development and acquisition of technologies related to
recombinant proteins, small molecules and genomics. The biopharmaceuticals
segment also includes collaborations with Berlex Laboratories, Inc. ("Berlex")
and its parent company, Schering AG of Germany, related to
Betaseron-Registered Trademark-, and Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson ("J&J") company, related to PDGF. The vaccines segment
consists principally of adult and pediatric vaccines sold primarily in Germany,
Italy, the United Kingdom and other international markets, as well as the
development of technologies related to vaccines. 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 J&J company,
and an alliance with Gen-Probe Incorporated ("Gen-Probe"). Chiron's joint
business with Ortho sells a line of immunodiagnostic tests to detect hepatitis
viruses and retroviruses and provides supplemental tests and microplate-based
instrument systems to automate test performance and data 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 transfused blood and plasma products for viral infection.
Certain other revenues and expenses are not viewed by management as belonging to
any one segment. As a result, these items have been aggregated into an "Other"
segment.
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 Condensed
Consolidated Statements of Operations reflect the after-tax results of Chiron
Vision and Chiron Diagnostics as discontinued operations.
RESULTS OF OPERATIONS
BIOPHARMACEUTICALS
PRODUCT SALES For the three months ended June 30, 2000 and 1999,
biopharmaceutical product sales were $60.3 million and $55.0 million,
respectively. For the six months ended June 30, 2000 and 1999, biopharmaceutical
product sales were $101.1 million and $98.1 million, respectively. In 2000 and
1999,
17
<PAGE>
biopharmaceutical 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. For the three months ended June 30, 2000 and 1999, sales of
Proleukin-Registered Trademark- were $36.1 million and $37.2 million,
respectively. Consistent with 1999, the Company experienced a shift in U.S.
sales from the third quarter to the second quarter due to changes in wholesaler
inventory management practices. This shift occurred later in the second quarter
2000 as compared with the second quarter 1999. As a result of this shift,
management anticipates that sales of Proleukin-Registered Trademark- in the
third quarter 2000 will be substantially below those in the second quarter 2000.
For the six months ended June 30, 2000 and 1999, sales of
Proleukin-Registered Trademark- were $55.3 million and $63.1 million,
respectively. The decrease in Proleukin-Registered Trademark- product sales in
2000 as compared with 1999 was primarily due to reductions in inventory stocking
levels by certain U.S. wholesalers during the first quarter 2000. Despite the
purchasing patterns of these wholesalers, underlying purchases by end users have
increased in the U.S. There can be no assurance that wholesalers will maintain
inventory stocking levels in 2000 commensurate with those in 1999. If these
levels are not maintained, the Company may experience a corresponding reduction
in Proleukin-Registered Trademark- sales to wholesalers in 2000. The
quarter-to-date and year-to-date decreases in Proleukin-Registered Trademark-
were also affected, to a lesser extent, by a weaker exchange rate of the Euro as
compared with the U.S. dollar. The Company continues to pursue the use of
Proleukin-Registered Trademark- for additional indications, including human
immunodeficiency virus ("HIV").
BETASERON-REGISTERED TRADEMARK- Chiron manufactures
Betaseron-Registered Trademark- for 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. The Company also earns royalties
on Schering AG's European sales of Betaferon-Registered Trademark- (interferon
beta-lb) (see "Royalties and license fee revenues" below) (collectively,
"Betaseron-Registered Trademark- revenues").
For the three months ended June 30, 2000 and 1999,
Betaseron-Registered Trademark- product sales were $16.1 million and
$14.0 million, respectively. For the six months ended June 30, 2000 and 1999,
Betaseron-REGISTERED TRADEMARK- product sales were $34.7 million and
$28.6 million, respectively. Through June 30, 2000, the number of
Betaseron-REGISTERED TRADEMARK- vials, which underlie the sales recorded by
Chiron, shipped by Berlex and Schering AG increased 17% over the same period in
1999, and Chiron's shipments of Betaseron-REGISTERED TRADEMARK- to Berlex and
Schering AG increased 11% for the same periods. As discussed in "Royalties and
license fee revenues" below, Betaferon-Registered Trademark- royalties also
increased in 2000 as compared with 1999. The increase in
Betaseron-Registered Trademark- revenues in 2000 as compared with 1999 was
primarily related to increased utilization of interferon therapy, particularly
in Europe. The year-to-date increase in Betaseron-REGISTERED TRADEMARK- product
sales also included the effects of the second quarter 1999 conclusion of certain
promotional pricing campaigns.
PDGF Chiron manufactures PDGF (recombinant human platelet-derived growth
factor - rhPDGF-BB) for Ortho-McNeil Pharmaceutical, Inc., a J&J company.
Accordingly, Chiron's sales of PDGF fluctuate based upon the inventory
management practices of J&J. 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. 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. For
the three and six months ended June 30, 2000, net sales of PDGF were
$6.5 million and $7.6 million, respectively, which included commercial sales of
PDGF to J&J of $3.6 million and a decrease in the product returns allowance of
$2.9 million for the three months ended June 30, 2000. There were no commercial
sales of PDGF to J&J from the first quarter 1999 through the first quarter 2000.
The decrease in the product returns allowance was primarily due to additional
historical return information, as PDGF has been in the commercial market for
approximately two years.
18
<PAGE>
The Company expects the competitive pressures related to many of its
biopharmaceutical products to continue into the foreseeable future as a result
of the introduction of competing products into the market, as listed in Item 1.,
"Business--Competition" of the Company's Annual Report on Form 10-K for the year
ended December 31, 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. The re-launch of DepoCyt-Registered Trademark- requires FDA approval.
There can be no assurance as to the receipt of FDA approval or the timing of any
such approval. Management of the Company does not believe that this event will
have a material impact on the results of operations for fiscal year 2000.
Shipments of DepoCyt-Registered Trademark- are not expected to resume before the
fourth quarter 2000.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. For the three months ended June 30, 2000 and 1999, the
biopharmaceuticals segment recognized collaborative agreement revenues of
$3.5 million and $3.9 million, respectively. For the six months ended June 30,
2000 and 1999, the biopharmaceuticals segment recognized collaborative agreement
revenues of $6.8 million and $8.9 million, respectively.
The decrease in collaborative agreement revenues in 2000 as compared with
1999 was partially due to decreases in revenue earned by the Company under two
agreements with Novartis (for more information, refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999). The Company's "Other"
segment also earns collaborative agreement revenues under a third Novartis
agreement. See "Other--Collaborative agreement revenues" below.
In the second quarter 2000, the Company formed a Singapore-based joint
venture, S*BIO Pte Ltd ("S*BIO"), to research and develop therapeutic,
diagnostic and vaccine products. The Company also granted to S*BIO certain
rights to the Company's gene expression and combinatorial chemistry
technologies. Under this arrangement, the Company will receive $22.0 million
over two years for technology transfer. In addition, the Company will receive
certain milestone payments and various royalties on future product sales if
S*BIO commercializes a product using the Company's gene expression and
combinatorial chemistry technologies. However, there can be no assurance that
S*BIO will meet such development objectives or commercialize a product using
Chiron's gene expression and combinational chemistry technologies. The Company
expects to begin recognizing revenue under this arrangement in the fourth
quarter 2000.
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 biopharmaceutical
collaborative agreement revenues, results in any one period 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. In particular, the November 1996 consent agreement
between Chiron, Novartis and the Federal Trade Commission expires in the fourth
quarter 2001 (for more information, refer to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999), and the November 1995 agreement
with Novartis expires in the fourth quarter 2000 (for more information, refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
There can be no assurance that new relationships will be established or that
current collaborative agreement revenue will not decline.
ROYALTY AND LICENSE FEE REVENUES The biopharmaceuticals segment earns
royalties on third party sales of several products, including
Betaferon-Registered Trademark- (interferon beta-lb), recombinant insulin and
glucagon products and hepatitis B virus ("HBV") products, as well as license
fees for technologies, such as hepatitis C virus
19
<PAGE>
("HCV") patents, used by third parties. For the three months ended June 30, 2000
and 1999, the biopharmaceuticals segment recognized royalty and license fee
revenues of $13.3 million and $10.5 million, respectively. For the six months
ended June 30, 2000 and 1999, the biopharmaceuticals segment recognized royalty
and license fee revenues of $28.6 million and $27.1 million, respectively.
The Company earns royalties on Schering AG's European sales of
Betaferon-Registered Trademark-. Chiron recognized $9.8 million and
$7.2 million for the three months ended June 30, 2000 and 1999, respectively,
and $17.3 million and $14.1 million for the six months ended June 30, 2000 and
1999, respectively, under this arrangement. As discussed in "Product
sales--Betaseron-Registered Trademark-" above, the increase in 2000 as compared
with 1999 was primarily related to increased utilization of interferon therapy
in Europe, offset by a weaker exchange rate of the Euro as compared with the
U.S. dollar. The year-to-date increase in royalty and license fee revenues also
included revenue recognized under an agreement with Glaxo Group Limited
("Glaxo"), whereby Chiron granted to Glaxo rights under certain Chiron HCV
patents. The agreement provides for certain milestone payments and minimum
annual royalties. If Glaxo commercializes products using Chiron's HCV patents,
the agreement provides for royalties on future product sales, against which the
minimum annual royalties will be applied. However, there can be no assurance
that Glaxo will meet such development objectives or commercialize a product
using Chiron's HCV patent rights.
The year-to-date increase in Betaferon-Registered Trademark- royalty
revenues and Glaxo revenues was offset by decreases in other royalty
arrangements. Chiron estimates recombinant insulin and glucagon royalty revenues
based on previous period actual recombinant insulin and glucagon product sales.
Chiron recognized $2.9 million and $8.0 million for the six months ended
June 30, 2000 and 1999, respectively, under the recombinant insulin and glucagon
royalty arrangement. The decrease in 2000 as compared with 1999 was primarily
due to a $5.0 million non-recurring positive adjustment in 1999. The Company
also earns royalties on third party sales of HBV products. Royalty revenues
recognized under the HBV royalty arrangement were $4.5 million and $4.7 million
for the six months ended June 30, 2000 and 1999, respectively.
Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. In addition,
Chiron estimates royalty revenues based on product sales estimates provided by
the third party or previous period actual product sales. In the subsequent
quarter, Chiron records an adjustment equal to the difference between those
estimated royalty revenues recorded in the previous quarter and the contractual
percentage of the third party's actual product sales for that period. Results in
any one period 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. There can be no assurance that the Company will
be able to do so or that future royalty and license fee revenue will not
decline.
OTHER REVENUES For the three months ended June 30, 2000 and 1999, the
biopharmaceuticals segment recognized other revenues of $8.5 million and
$18.6 million, respectively. For the six months ended June 30, 2000 and 1999,
the biopharmaceuticals segment recognized other revenues of $10.6 million and
$21.6 million, respectively.
Other revenues included contract manufacturing revenues of $4.6 million and
$6.4 million for the three months ended June 30, 2000 and 1999, respectively,
and $5.8 million and $8.9 million for the six months ended June 30, 2000 and
1999, respectively. The decrease in 2000 as compared with 1999 was due to the
timing of contract manufacturing activities and reductions in European contract
manufacturing activities with the sale of the Amsterdam facility in
December 1999. For the three and six months ended June 30, 1999, other revenues
also included $9.7 million of revenues earned upon the FDA's approval of
DepoCyt-Registered Trademark- in April 1999.
Biopharmaceuticals' other revenues may fluctuate due to the nature of the
revenues recognized and the timing of events giving rise to these revenues.
There can be no guarantee that the Company will be successful in obtaining
additional revenues or that these revenues will not decline.
20
<PAGE>
GROSS PROFIT For the three months ended June 30, 2000 and 1999,
biopharmaceutical gross profit as a percentage of net product sales was 72% and
70%, respectively. The increase in biopharmaceutical gross profit margins in
2000 as compared with 1999 was primarily related to a favorable mix of
biopharmaceutical product sales and a decrease in idle facility costs due to the
timing of manufacturing activities. For the six months ended June 30, 2000 and
1999, biopharmaceutical gross profit as a percentage of net product sales was
70% and 71%, respectively.
Biopharmaceutical gross profit percentages may fluctuate significantly in
future periods as the biopharmaceutical product mix changes.
RESEARCH AND DEVELOPMENT For each of the three months ended June 30, 2000
and 1999, the biopharmaceuticals segment recognized research and development
expenses of $53.3 million. For the six months ended June 30, 2000 and 1999, the
biopharmaceuticals segment recognized research and development expenses of
$105.1 million and $102.1 million, respectively. The year-to-date increase in
research and development spending in 2000 as compared with 1999 was due to the
furtherance of the Company's clinical trials related to various programs, such
as Proleukin-Registered Trademark- for HIV, Fibroblast Growth Factor ("FGF") for
coronary and peripheral artery diseases and tifacogin (recombinant Tissue Factor
Pathway Inhibitor or "TFPI") for severe sepsis.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended June 30,
2000 and 1999, the biopharmaceuticals segment recognized selling, general and
administrative ("SG&A") expenses of $9.4 million and $12.4 million,
respectively. For the six months ended June 30, 2000 and 1999, the
biopharmaceuticals segment recognized SG&A expenses of $19.8 million and
$22.9 million, respectively. The decrease in SG&A expenses in 2000 as compared
with 1999 was primarily due to a change in the method of allocating certain
legal costs to segments. In 2000, the Company allocated certain legal costs to
the "Other" segment, whereas in 1999, the Company allocated these certain legal
costs to all segments. The year-to-date decrease was offset by an increase in
SG&A expenses due to the Company's worldwide implementation of its integrated
information system in April 1999.
VACCINES
PRODUCT SALES Chiron sells pediatric and adult vaccines in Germany, Italy,
the United Kingdom and other international markets. For the three months ended
June 30, 2000 and 1999, vaccine product sales were $91.8 million and
$38.8 million, respectively. For the six months ended June 30, 2000 and 1999,
vaccine product sales were $201.6 million and $83.3 million, respectively. The
increase in product sales in 2000 as compared with 1999 was primarily due to
shipments of $41.1 million and $101.5 million of Menjugate-TM-, its conjugate
vaccine against meningococcal meningitis caused by the bacterium N. meningitidis
serogroup C, to the National Health Service ("NHS") in the United Kingdom under
tender for the three and six months ended June 30, 2000, respectively. Under the
tender, the Company shipped $101.5 million of Menjugate-TM- to the NHS. In
July 2000, the Department of Health ("DoH") in Ireland extended a tender to the
Company to supply Menjugate-TM-. The Company has received orders for
Menjugate-TM- shipments to Ireland, which are scheduled to begin in the third
quarter 2000 and will continue into the first quarter 2001. Also in July 2000,
the Company received orders for Menjugate-TM- shipments to Spain, which are
scheduled to begin in the third quarter 2000. The Company is exploring
opportunities for additional Menjugate-TM- sales in the United Kingdom and other
countries; however, the Company does not expect Menjugate-TM- shipments, if any,
in following quarters to be commensurate with those in the first and second
quarters 2000.
Also contributing to the increase in vaccine product sales in 2000 as
compared with 1999 was the re-launch of the Company's tick-borne encephalitis
vaccine combined with the seasonality of certain of the
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Company's vaccine products. In the first half of 1999, the Company's tick-borne
encephalitis vaccine inventory failed to meet manufacturing specifications for
purity and a portion of inventory was written off.
In May 2000, the Company received approval in certain western European
countries to market Fluad-Registered Trademark-, its adjuvanted influenza
vaccine. The Company expects to begin selling Fluad-Registered Trademark- in
Germany and Austria in the third quarter 2000.
Certain of the Company's vaccine products, particularly its flu vaccine, are
seasonal and typically have higher sales in the second half of the year. In
addition, 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.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. In the second quarter 2000, the Company entered into an
agreement with the National Institutes of Health ("NIH") to advance its HIV
vaccine program into human clinical trials. Under this arrangement, the Company
will receive $23.2 million over five years. The Company expects to begin
recognizing revenue under this arrangement in the third quarter 2000.
ROYALTY AND LICENSE FEE REVENUES For the three months ended June 30, 2000
and 1999, the vaccines segment recognized royalty and license fee revenues of
$3.4 million and $4.0 million, respectively. For the six months ended June 30,
2000 and 1999, the vaccines segment recognized royalty and license fee revenues
of $7.4 million and $9.5 million, respectively.
An agreement with SmithKline Beecham provides for royalties on sales of
certain human vaccine products, under which Chiron recognized $1.3 million of
such royalties for each of the three months ended June 30, 2000 and 1999, and
$3.1 million and $3.5 million of such royalties for the six months ended
June 30, 2000 and 1999, respectively. Chiron also recognized $2.1 million and
$2.7 million for the three months ended June 30, 2000 and 1999, respectively,
and $4.3 million and $6.0 million for the six months ended June 30, 2000 and
1999, respectively, of royalty revenues on third party sales of HBV vaccine
products, hepatitis A virus ("HAV") vaccine products and rabies vaccine
products. The decrease in 2000 as compared with 1999 was due to the HAV royalty
arrangement, which expired in early 2000, and, to a lesser extent, the rabies
royalty arrangement, which expired in the second quarter 1999.
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
period 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. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenue will not decline.
OTHER REVENUES For the three months ended June 30, 2000 and 1999, the
vaccines segment recognized other revenues of $4.7 million and $5.5 million,
respectively. For the six months ended June 30, 2000 and 1999, the vaccines
segment recognized other revenues of $8.2 million and $11.7 million,
respectively.
Other revenues included commission revenues on sales of HBV vaccine products
and immunoglobulin products of $2.0 million and $4.3 million for the three
months ended June 30, 2000 and 1999, respectively, and $4.0 million and
$7.3 million for the six months ended June 30, 2000 and 1999, respectively. The
decrease in commission revenues in 2000 as compared with 1999 was primarily
related to a decrease in third party sales of the HBV vaccine products due to
the introduction of competitive combination vaccines.
Vaccines' other revenues may fluctuate due to the nature of the revenues
recognized and the timing of events giving rise to these revenues. There can be
no guarantee that the Company will be successful in obtaining additional
revenues or that these revenues will not decline.
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GROSS PROFIT For the three months ended June 30, 2000 and 1999, vaccine
gross profit as a percentage of net product sales was 73% and 49%, respectively.
For the six months ended June 30, 2000 and 1999, vaccine gross profit as a
percentage of net product sales was 73% and 45%, respectively. The increase in
vaccine gross profit margins in 2000 as compared with 1999 was primarily related
to sales of Menjugate-TM-. A significant portion of Menjugate-TM- production
occurred in 1999. Since the Company had not received approval as of the end of
fiscal year 1999 in the United Kingdom to market Menjugate-TM-, the Company
expensed manufacturing costs to research and development. The NHS in the United
Kingdom accepted the Company's tender to supply Menjugate-TM- in March 2000. The
Company does not expect vaccine gross profit margins in following quarters to be
commensurate with those in the first and second quarters 2000.
Vaccine gross profit percentages may fluctuate significantly in future
periods as the vaccine product mix changes.
RESEARCH AND DEVELOPMENT For the three months ended June 30, 2000 and 1999,
the vaccines segment recognized research and development expenses of
$14.0 million and $18.0 million, respectively. For the six months ended
June 30, 2000 and 1999, the vaccines segment recognized research and development
expenses of $29.3 million and $34.3 million, respectively. The decrease in
research and development spending in 2000 as compared with 1999 was due to
receipt of approval for sales of Menjugate-TM- in March 2000, as discussed in
"Gross profit" above, offset by increased spending due to the furtherance of the
Company's clinical trials related to various vaccine programs.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended June 30,
2000 and 1999, the vaccines segment recognized SG&A expenses of $17.3 million
and $19.9 million, respectively. For the six months ended June 30, 2000 and
1999, the vaccines segment recognized SG&A expenses of $35.6 million and
$37.1 million, respectively. The decrease in SG&A expenses in 2000 as compared
with 1999 was due to a change in the method of allocating certain legal costs to
segments, as discussed previously. The year-to-date decrease was offset by an
increase in SG&A expenses due to the Company's re-launch of its tick-borne
encephalitis vaccine product in the first quarter 2000 and the worldwide
implementation of its integrated information system in April 1999.
In the third quarter 1999, Chiron and Aventis Pasteur ("AvP") entered into a
co-marketing arrangement for Fluad-Registered Trademark-, under which Chiron
will pay AvP co-marketing fees in certain territories.
In the first quarter 2000, Chiron and AvP entered into a co-promotion and
co-marketing arrangement for Menjugate-TM-. Chiron will pay AvP co-promotion
fees in certain territories and may receive remuneration from AvP for
co-marketing in other territories. As discussed in "Product sales" above, the
DoH in Ireland accepted the Company's tender to supply Menjugate-TM-.
Menjugate-TM- shipments to Ireland are scheduled to begin in the third quarter
2000 and will continue into the first quarter 2001. The current tender with the
NHS in the United Kingdom and the shipments to Spain are not included in this
arrangement.
BLOOD TESTING
PRODUCT SALES For the three months ended June 30, 2000 and 1999, blood
testing product sales were $8.9 million and $7.5 million, respectively. For the
six months ended June 30, 2000 and 1999, blood testing product sales were
$15.9 million and $12.9 million, respectively.
Under the Ortho arrangement, the Company is reimbursed for its manufacturing
costs related to immunodiagnostic products. The Company recognized revenues
under this agreement of $6.2 million and $5.6 million for the three months ended
June 30, 2000 and 1999, respectively, and $10.3 million and $11.0 million for
the six months ended June 30, 2000 and 1999, respectively. The increase in the
second
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quarter 2000 as compared with the second quarter 1999 was primarily due to the
timing of reimbursement for manufacturing costs. The year-to-date decrease in
2000 as compared with 1999 was driven by a first quarter 2000 shift in revenues
from product sales to collaborative agreement revenues, due to certain costs
that had been reimbursable previously as manufacturing costs becoming
reimbursable as research costs, offset by the second quarter 2000 increase
discussed previously.
Under the collaboration agreement with Gen-Probe, Chiron and Gen-Probe
jointly participate in new assay and instrument research and development while
Gen-Probe performs certain product development and assay and instrument
manufacturing functions. Currently, Gen-Probe is the only manufacturer of
nucleic acid testing products using TMA technology.
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 $2.7 million and
$1.9 million for the three months ended June 30, 2000 and 1999, respectively,
and $5.6 million and $1.9 million for the six months ended June 30, 2000 and
1999, respectively.
In September 1999, the Company received regulatory approval in France for
the TMA assay and began recognizing revenue for assay sales and instrument
rentals to several regional blood testing centers under a government-sponsored
product evaluation. That evaluation was completed in the second quarter 2000.
Currently, the French government is considering the guidelines that it will
adopt regarding nucleic acid testing for blood screening. The outcome and impact
of this upcoming decision on future assay sales and instrument rentals in France
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 in the fourth quarter 1999. In
addition, in March 2000, the Company received regulatory approval in Australia
for the TMA assay.
In April 2000, the Company signed a contract with the U.S. military to test
U.S. Army blood donations using the TMA assay. The Company began this testing in
the second quarter 2000.
In May 2000, the Company signed a contract with a local distributor to
provide blood testing products for NAT screening in Singapore. In June 2000, the
Company received regulatory approval in Singapore for the TMA assay. A bid was
submitted to the Singapore Blood Transfusion Services ("SBTS") to supply NAT
kits under tender. A final decision on the tender is expected in the third
quarter 2000.
The Company expects the competitive pressures related to many of its blood
testing products to continue into the foreseeable future as a result of the
introduction of competing products into the market, as listed in Item 1.,
"Business--Competition" of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES For the three months
ended June 30, 2000 and 1999, Chiron's earnings from its joint business with
Ortho were $22.4 million and $16.6 million, respectively. For the six months
ended June 30, 2000 and 1999, Chiron's earnings from its joint business with
Ortho were $38.1 million and $34.5 million, respectively. The overall
fluctuations in earnings from the joint business were primarily due to increased
profitability of Ortho's foreign affiliates. The year-to-date increase was
offset by certain adjustments made during the first quarters 2000 and 1999.
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COLLABORATIVE AGREEMENT REVENUES For the three months ended June 30, 2000
and 1999, the blood testing segment recognized collaborative agreement revenues
of $3.8 million and $1.8 million, respectively. For the six months ended
June 30, 2000 and 1999, the blood testing segment recognized collaborative
agreement revenues of $7.3 million and $3.3 million, respectively
Under the Ortho arrangement, the Company is reimbursed for its research
costs related to immunodiagnostic products. The Company recognized revenues
under this agreement of $2.9 million and $1.5 million for the three months ended
June 30, 2000 and 1999, respectively, and $5.7 million and $2.9 million for the
six months ended June 30, 2000 and 1999, respectively. The increase in the
second quarter 2000 as compared with the second quarter 1999 was primarily due
to the timing of reimbursement for research costs. Also affecting the
year-to-date increase in 2000 as compared with 1999 was a first quarter 2000
shift in revenues from product sales to collaborative agreement revenues. As
discussed above, certain costs that had been reimbursable previously as
manufacturing costs became reimbursable as research costs.
GROSS PROFIT For each of the three months ended June 30, 2000 and 1999,
blood testing gross profit as a percentage of net product sales was 29%. For
each of the six months ended June 30, 2000 and 1999, blood testing gross profit
as a percentage of net product sales was 17%.
Blood testing gross profit percentages may fluctuate significantly in future
periods as the blood testing product mix changes.
RESEARCH AND DEVELOPMENT For the three months ended June 30, 2000 and 1999,
the blood testing segment recognized research and development expenses of
$3.9 million and $2.5 million, respectively. For the six months ended June 30,
2000 and 1999, the blood testing segment recognized research and development
expenses of $7.8 million and $4.9 million, respectively. The increase in
research and development spending in 2000 as compared with 1999 was due to an
increase in development costs related to the nucleic acid testing business.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended June 30,
2000 and 1999, the blood testing segment recognized SG&A expenses of
$4.0 million and $6.1 million, respectively. For the six months ended June 30,
2000 and 1999, the blood testing segment recognized SG&A expenses of
$8.0 million and $8.5 million, respectively. The decrease in SG&A expenses in
2000 as compared with 1999 was primarily due to a change in the method of
allocating certain legal costs to segments, as discussed previously. The
year-to-date decrease was offset by an increase in SG&A expenses associated with
the nucleic acid testing business and, to a lesser extent, the Company's
worldwide implementation of its integrated information system in April 1999.
OTHER
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. For the three and six months ended June 30, 2000, the
other segment did not recognize any collaborative agreement revenues. For the
three and six months ended June 30, 1999, the other segment recognized
collaborative agreement revenues of $13.0 million and $29.0 million,
respectively.
The decrease in collaborative agreement revenues in 2000 as compared with
1999 was due to no research funding recognized under an agreement with Novartis
in the first and second quarters 2000, as the Company focuses on the
self-funding of research programs. Novartis agreed to provide research funding
for certain projects through December 31, 2000 (for more information, refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
In December 1999, Chiron and Novartis
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amended this agreement to increase the aggregate maximum amount of funding
provided by Novartis from $250.0 million to $265.0 million.
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 period 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 revenue will not decline. In particular,
the research funding agreement with Novartis expires on December 31, 2000, and
there can be no assurance that new relationships will be established.
ROYALTY AND LICENSE FEE REVENUES For the three months ended June 30, 2000
and 1999, the other segment recognized royalty and license fee revenues of
$20.3 million and $12.8 million, respectively. For the six months ended
June 30, 2000 and 1999, the other segment recognized royalty and license fee
revenues of $31.9 million and $23.1 million, respectively.
The increase in royalty and license fee revenues in 2000 as compared with
1999 was primarily due to an increase in license fee revenues related to a
cross-license agreement with Abbott Laboratories ("Abbott") whereby Chiron
granted to Abbott rights under Chiron's HCV patents. In exchange for these
rights, Abbott paid Chiron a license fee of $10.0 million, which became
nonrefundable and was recognized as revenue on June 30, 2000. In addition, the
cross-license agreement provides for royalties to Chiron on HCV products sold by
Abbott. The year-to-date increase in royalty and license fee revenues also
included a $3.3 million positive adjustment in the first quarter 2000 related to
an agreement with F. Hoffman-LaRoche Ltd. and its affiliates ("Roche"). Under
this agreement, the Company receives royalties on sales of polymerase chain
reaction ("PCR") products sold by Roche. Chiron estimates royalties on PCR
product sales based on previous period actual sales. In the following quarter,
Chiron records an adjustment equal to the difference between those estimated
royalty revenues recorded in the previous quarter and the contractual percentage
of actual PCR product sales for that period. 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 June 30, 2000, Chiron had recognized royalties with
a net present value of $15.1 million.
The increase in royalty and license fee revenues in 2000 as compared with
1999 was offset by a decrease in licensing fees related to a cross-license
agreement with Bayer whereby Chiron granted to Bayer rights under certain Chiron
patents, including rights under patents relating to HIV and 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. Chiron recognized
license fee revenues of $7.5 million and $10.0 million for the three months
ended June 30, 2000 and 1999, respectively, and $15.0 million and $20.0 million
for the six months ended June 30, 2000 and 1999, respectively, which represent
the portions of the $100.0 million payment that became nonrefundable during
those periods. In addition, the cross-license agreement provides for royalties
to Chiron on HIV and HCV products sold by Bayer. Chiron recognized $0.8 million
and $1.1 million for the three months ended June 30, 2000 and 1999,
respectively, and $1.7 million and $2.0 million for the six months ended
June 30, 2000 and 1999, respectively, of royalty revenue related to this
agreement.
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
period 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. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenue will not decline.
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SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended June 30,
2000 and 1999, the other segment recognized SG&A expenses of $15.6 million and
$6.8 million, respectively. For the six months ended June 30, 2000 and 1999, the
other segment recognized SG&A expenses of $33.8 million and $18.3 million,
respectively. The increase in SG&A expenses in 2000 as compared with 1999 was
due to increased payroll related expenses, the Company's worldwide
implementation of its integrated information system in April 1999 and a change
in the method of allocating certain legal costs to segments, as discussed
previously.
OTHER OPERATING EXPENSES In the first half of 2000, the Company recorded
restructuring and reorganization benefits of $0.4 million related to revised
estimates of termination and other employee-related costs recorded in connection
with the elimination of 371 positions. As of June 30, 2000, 356 of these 371
positions had been eliminated. In the first half of 1999, the Company recorded
net restructuring and reorganization charges of $3.4 million related to the
integration of its worldwide vaccines operations.
For the six months ended June 30, 1999, Chiron recognized a reduction in
other operating expenses of $6.4 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 (for more information, refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
NON-OPERATING INCOME AND EXPENSE Other income, net primarily consisted of
interest and investment income on the Company's cash and investment balances and
other non-operating gains and losses. For the three months ended June 30, 2000
and 1999, Chiron recognized interest and investment income of $22.0 million and
$20.5 million, respectively. For the six months ended June 30, 2000 and 1999,
the Company recognized interest and investment income of $43.7 million and
$40.7 million, respectively. The increase in interest and investment income in
2000 as compared with 1999 was primarily due to higher average interest rates.
Interest expense decreased to $4.3 million for the three months ended June 30,
2000 from $5.9 million for the three months ended June 30, 1999 and
$9.4 million for the six months ended June 30, 2000 from $11.7 million for the
six months ended June 30, 1999, primarily due to the lack of interest expense
from mid-May to June 30, 2000 related to the conversion of the 5.25% convertible
debentures to common stock in mid-May 2000 and the repayment of the note payable
to Novartis on January 4, 2000.
In connection with its research and development collaborations, the Company
may invest in equity securities of its collaborative partners. The price of
these securities may be subject to significant volatility. For each of the three
and six months ended June 30, 2000 and each of the three and six months ended
June 30, 1999, Chiron recognized a loss attributable to the other-than-temporary
impairment of certain of these equity securities of $5.0 million and
$1.0 million, respectively.
INCOME TAXES The 2000 effective tax rate is estimated to be approximately
31% of pretax income from continuing operations. The effective tax rate may be
affected in future periods by changes in management's estimates with respect to
the Company's deferred tax assets and other items affecting the overall tax
rate. Income tax expense for the three and six months ended June 30, 1999 was
based on an estimated annual effective tax rate on pretax income from continuing
operations of approximately 24%. The actual 1999 annual effective tax rate of
18% reflects the utilization of state deferred tax assets that were recognized
during the second half of 1999 through a reduction in the valuation allowance
associated with such assets.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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
accordance with SFAS 133, an entity is required to recognize all derivatives as
either assets or liabilities in the statement of
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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. SFAS 133, as amended by SFAS 137 and 138, shall be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company is currently evaluating the effect that implementation of
SFAS 133, as amended, will have on its results of operations and financial
position and anticipates that it will implement SFAS 133, as amended, during the
first fiscal quarter of 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This statement gives specific guidance and clarification on the
conditions that must be met before an entity may recognize revenue. In
March 2000, the SEC issued SAB 101A to defer the effective date of
implementation of SAB 101. In June 2000, the SEC issued SAB 101B to defer
further the effective date of implementation of SAB 101 with earlier application
encouraged. As a result of this last amendment, SAB 101 shall be effective for
the fourth fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company is currently evaluating the effect that implementation of SAB 101
will have on its results of operations and financial position and anticipates
that it will adopt SAB 101 during the fourth quarter 2000.
In March 2000, the FASB issued Interpretation No. 44 of Accounting
Principals Board No. 25 ("APB 25"), which clarifies the application of APB 25 as
it relates to (i) the definition of employee for purposes of applying APB 25,
(ii) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (iii) the accounting consequence of various modifications to the terms of
a previously fixed stock option or award and (iv) the accounting for an exchange
of stock compensation awards in a business combination. Interpretation No. 44 is
effective on July 1, 2000. The Company anticipates that it will implement
Interpretation No. 44 during the third quarter 2000. The Company believes that
the implementation of Interpretation No. 44 will not have a material effect on
the Company's results of operations and financial position for the third quarter
2000.
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 investments in equity securities, which totaled
$1.4 billion at June 30, 2000, 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 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
$474.5 million and $47.5 million at June 30, 2000 and 1999, respectively. For
the first half of 2000, net cash provided by operating activities was
$137.2 million as compared with net cash used in operating activities of
$125.2 million in 1999. The increase in cash provided by operating activities
was largely due to higher net income and lower tax payments in the first half of
2000 as compared with the first half of 1999. In the first half of 1999, the
Company paid $165.4 million in estimated taxes related to the sale of Chiron
Diagnostics.
Through the six months ended June 30, 2000, net cash provided by investing
activities consisted of proceeds from the sale and maturity of investments in
marketable debt securities of $2,703.6 million, proceeds from the sale of equity
securities and interests in affiliated companies of $3.1 million, proceeds from
the sale of assets of $1.0 million and other sources of cash of $0.6 million,
offset by purchases of investments in marketable debt securities of
$2,470.8 million, capital expenditures of $22.0 million and
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purchases of equity securities and interests in affiliated companies of
$8.8 million. The purchases of equity securities and interests in affiliated
companies consisted of a $5.0 million capital contribution under a joint venture
agreement and a $3.8 million capital contribution under a limited partnership
agreement. Under the joint venture agreement, the Company formed a
Singapore-based joint venture, S*BIO, to research and develop therapeutic,
diagnostic and vaccine products. The Company will contribute $8.0 million, of
which $5.0 million was paid in June 2000, for a 19.9% ownership interest and
will account for the investment on the cost method. Under the limited
partnership agreement, the Company will pay $25.0 million over five years for an
ownership percentage of 49.75% and will account for the investment on the equity
method.
Through the six months ended June 30, 2000, net cash used in financing
activities consisted of $192.3 million related to the acquisition of treasury
stock, $69.4 million related to the repayment of debt, including the note owed
to Novartis, and $22.4 million related to short-term borrowings. This use of
cash was offset by $49.9 million and $0.9 million in proceeds from the
reissuance of treasury stock and the issuance of common stock, respectively,
primarily related to stock option exercises and employee stock purchases.
On April 4, 2000, the Company's Board of Directors authorized management to
call, for redemption in common stock, the outstanding $100.0 million 5.25%
convertible subordinated debentures prior to the next interest payment date of
May 21, 2000. Through June 30, 2000, debentures with a face value of
$98.4 million were converted into 3.2 million shares of the Company's common
stock, at a conversion price of $30.83 per share.
On April 17, 2000, the Company filed a registration statement with the
Securities and Exchange Commission to register $243.8 million of 4.5%
convertible subordinated debentures to be offered in exchange for its existing
1.9% convertible subordinated debentures, which are due in November 2000. The
Company's obligation to proceed with the offer was conditioned, in part, upon
the average of the closing market prices of the Company's common stock for each
of the five business days ending on, and including, May 10, 2000 remaining
between $40 and $55 per share. Since the average of the May 4 through 10 closing
market prices of the Company's common stock was below the specified price range,
management elected not to proceed with the exchange offer. The 1.9% convertible
subordinated debentures remain outstanding as of June 30, 2000.
Through May 2000, the Company's Board of Directors authorized the repurchase
of up to 11.5 million shares of Chiron common stock from time to time on the
open market to offset the dilution associated with the operation of the
Company's stock option and employee stock purchase plans and the granting of
share rights. In June 2000, the Board of Directors approved a 4.0 million share
increase, thereby bringing the total number of shares authorized for repurchase
to 15.5 million shares. The Board has authorized such repurchases through
May 31, 2001. Through June 30, 2000, the Company repurchased 9.2 million shares
of Chiron common stock.
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.
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 June 30, 2000. Chiron also has credit facilities outside the U.S.,
which allow for total borrowings of $63.4 million. Under these credit
facilities, $2.1 million of borrowings were outstanding at June 30, 2000.
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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.
EURO CONVERSION
On January 1, 1999, eleven European Union member countries established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The legacy currencies will remain as legal tender in
the member countries as denominations of the Euro between January 1, 1999 and
January 1, 2002. The Euro is currently traded on currency exchanges and can be
used in business transactions. The Company believes that its financial systems
are Euro-ready in all material respects. However, the Company is still in the
process of evaluating the effect, if any, that the Euro may have on its product
pricing and gross profit percentages.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As a biotechnology company, Chiron is engaged in a rapidly evolving and
often unpredictable business. The forward-looking statements contained in this
Report and in other periodic reports, press releases and other statements issued
by the Company from time to time reflect management's current beliefs and
expectations concerning objectives, plans, strategies, future performance and
other future events. The following discussion highlights some of the factors,
many of which are beyond the Company's control, which could cause actual results
to differ.
PROMISING TECHNOLOGIES ULTIMATELY MAY NOT PROVE SUCCESSFUL
The Company focuses its research and development activities on areas in
which it has particular strengths and on technologies that appear promising.
These technologies often are on the "cutting edge" of modern science. As a
result, the outcome of any research or development program is highly uncertain.
Only a very small fraction of such programs ultimately result in commercial
products or even product candidates. Product candidates that initially appear
promising often fail to yield successful products. In many cases, preclinical or
clinical studies will show that a product candidate is not efficacious (that is,
it does not have the intended therapeutic or prophylactic effect), or that it
raises safety concerns or has other side effects which outweigh the intended
benefit. Success in preclinical or early clinical trials (which generally focus
on safety issues) may not translate into success in large-scale clinical trials
(which are designed to show efficacy), often for reasons that are not fully
understood. And even after a product is approved and launched, general usage or
post-marketing studies may identify safety or other previously unknown problems
with the product which may result in regulatory approvals being suspended,
limited to narrow indications or revoked, or which may otherwise prevent
successful commercialization.
REGULATORY APPROVALS
The Company is required to obtain and maintain regulatory approval in order
to market most of its products. Generally, these approvals are on a
product-by-product and country-by-country basis, and, in the case of therapeutic
products, a separate approval is required for each therapeutic indication. See
Item 1., "Business--Government Regulation" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. Product candidates that appear
promising based on early, and even large-scale, clinical trials may not receive
regulatory approval. The results of clinical trials often are susceptible to
varying interpretations that may delay, limit or prevent approval or result in
the need for post-marketing studies.
MANUFACTURING
Most of the Company's products are biologics. Manufacturing biologic
products is complex. Unlike chemical pharmaceuticals, a biologic product
generally cannot be sufficiently characterized (in terms of its
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physical and chemical properties) to rely on assaying of the finished product
alone to ensure that the product will perform in the intended manner.
Accordingly, it is essential to be able to both validate and control the
manufacturing process: that is, to show that the process works and that the
product is made strictly and consistently in compliance with that process.
Slight deviations in the manufacturing process may result in unacceptable
changes in the products that may result in lot failures. Manufacturing processes
which are used to produce the (smaller) quantities of material needed for
research and development purposes may not be successfully scaled up to allow
production of commercial quantities at reasonable cost or at all. All of these
difficulties are compounded when dealing with novel biologic products that
require novel manufacturing processes. Accordingly, manufacturing is subject to
extensive government regulation. Even minor changes in the manufacturing process
require regulatory approval, which, in turn, may require further clinical
studies.
PATENTS HELD BY THIRD PARTIES MAY DELAY OR PREVENT COMMERCIALIZATION
Third parties, including competitors, have patents and patent applications
in the U.S. and other significant markets that may be useful or necessary for
the manufacture, use or sale of certain of the Company's products and products
in development. 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 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.
PRODUCT ACCEPTANCE
The Company may experience difficulties in launching new products, many of
which are novel products based on technologies that are unfamiliar to the
healthcare community. There can be no assurance that healthcare providers and
patients will accept such products. In addition, government agencies, as well as
private organizations involved in healthcare, from time to time publish
guidelines or recommendations to healthcare providers and patients. Such
guidelines or recommendations can be very influential and may adversely affect
the usage of the Company's products directly (for example, by recommending a
decreased dosage of the Company's product in conjunction with a concomitant
therapy) or indirectly (for example, by recommending a competitive product over
the Company's product).
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. Accordingly, even if the Company is
successful in launching a product, it may find that a competitive product
dominates the market for any number of reasons, including the possibility that
the competitor may have launched its product first; the competitor may have
greater marketing capabilities; or the competitive product may have therapeutic
or other advantages. The technologies applied by the Company and its competitors
are rapidly evolving, and new developments frequently result in price
competition and product obsolescence.
CHIRON'S PATENTS MAY NOT PREVENT COMPETITION OR GENERATE REVENUES
Chiron seeks to obtain patents on its inventions. Without the protection of
patents, competitors may be able to use the Company's inventions to manufacture
and market competing products without being
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<PAGE>
required to undertake the lengthy and expensive development efforts made by
Chiron and without having to pay royalties or otherwise compensate Chiron for
the use of the invention.
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 U.S. and other
important markets. It is not known how many of the Company's pending patent
applications will be granted, or the effective coverage of those that are
granted. In the U.S. and other important markets, the issuance of a patent is
neither conclusive as to its validity nor 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. The
length of time necessary to successfully resolve patent litigation may allow
infringers to gain significant market advantage. 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.
AVAILABILITY OF REIMBURSEMENT; GOVERNMENT AND OTHER PRESSURES ON PRICING
In the U.S. and other significant markets, sales of the Company's products
may be affected by the availability of reimbursement from the government or
other third parties, such as insurance companies. It is difficult to predict the
reimbursement status of newly approved, novel biotechnology products, and
current reimbursement policies for existing products may change. In certain
foreign markets, governments have issued regulations relating to the pricing and
profitability of pharmaceutical companies. There have been proposals in the U.S.
(at both the federal and state level) to implement such controls. The growth of
managed care in the U.S. also has placed pressure on the pricing of healthcare
products. These pressures can be expected to continue.
COSTS ASSOCIATED WITH EXPANDING THE BUSINESS
Management expects to grow the business in areas in which the Company can be
most competitive, either through in-licensing, collaborations or acquisitions of
products or companies. In connection with these efforts, the Company may incur
significant charges, costs and expenses which could impact the Company's
profitability, including impairment losses, restructuring charges, the write-off
of purchased in-process technology, transaction-related expenses, costs
associated with integrating new businesses and the cost of amortizing goodwill
and other intangibles.
OTHER NEW PRODUCTS AND SOURCES OF REVENUE
Many products in the Company's current pipeline are in relatively early
stages of research or development. The Company's ability to grow earnings in the
near- to medium-term may depend, in part, on its ability to initiate and
maintain other revenue generating relationships with third parties, such as
licenses to certain of the Company's technologies, and on its ability to
identify and successfully acquire rights to later-stage products from third
parties. There can be no assurance that such other sources of revenue will be
established.
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INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS
In 1998, the Company sold certain businesses for cash, including its IN
VITRO diagnostics and ophthalmics businesses, and as a result has significant
cash balances and short-term investments. The Company's financial results,
therefore, are sensitive to interest rate fluctuations in the U.S. In addition,
the Company sells products in many countries throughout the world, and its
financial results could be significantly affected by fluctuations in foreign
currency exchange rates or by weak economic conditions in foreign markets.
COLLABORATION PARTNERS
An important part of the Company's business strategy depends upon
collaborations with third parties, including research collaborations and joint
efforts to develop and commercialize new products. As circumstances change, the
Company and its corporate partners may develop conflicting priorities or other
conflicts of interest. The Company may experience significant delays and incur
significant expenses in resolving these conflicts and may not be able to resolve
these matters on acceptable terms. Even without conflicts of interest, the
parties may differ in their views as to how best to realize the value associated
with a current product or a product in development. In some cases, the corporate
partner may have responsibility for formulating and implementing key strategic
or operational plans. Decisions by corporate partners on key clinical,
regulatory, marketing (including pricing), inventory management and other issues
may prevent successful commercialization of the product or otherwise impact the
Company's profitability.
STOCK PRICE VOLATILITY
The price of the Company's stock, like that of other biotechnology
companies, is subject to significant volatility. Any number of events, both
internal and external to the Company, may affect the stock price. These include,
without limitation, results of clinical trials conducted by the Company or by
its competitors; announcements by the Company or its competitors regarding
product development efforts, including the status of regulatory approval
applications; the outcome of legal proceedings, including claims filed by the
Company against third parties to enforce its patents and claims filed by third
parties against the Company relating to patents held by the third parties; the
launch of competing products; the resolution of (or failure to resolve) disputes
with collaboration partners; corporate restructuring by the Company; licensing
activities by the Company; and the acquisition or sale by the Company of
products, products in development or businesses.
In connection with its research and development collaborations, from time to
time the Company invests in equity securities of its corporate partners. The
price of these securities also is subject to significant volatility and may be
affected by, among other things, the types of events that affect the Company's
stock. Changes in the market price of these securities may impact the Company's
profitability.
TAX
The Company is taxable principally in the U.S., Germany, Italy and The
Netherlands. All of these jurisdictions have in the past and may in the future
make changes to their corporate tax rates and other tax laws, which could
increase the Company's tax provision in the future. The Company has negotiated a
number of rulings regarding income and other taxes that are subject to periodic
review and renewal. If such rulings are not renewed or are substantially
modified, taxes payable in particular jurisdictions could increase. While the
Company believes that all material tax liabilities are properly reflected in its
balance sheet, the Company is presently under audit in several jurisdictions,
and there can be no assurance that Chiron will prevail in all cases in the event
the taxing authorities disagree with its interpretations of the tax law. In
addition, the Company has assumed liabilities for all income taxes incurred
prior to the sales of its former subsidiaries, Chiron Vision Corporation
(subject to certain limitations) and Chiron Diagnostics Corporation. Future
levels of research and development spending, capital investment and export sales
will
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impact the Company's entitlement to related tax credits and benefits which have
the effect of lowering its effective tax rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject to
fluctuations due to changes in foreign currency exchange rates, interest rates
and fair value of equity securities held. The Company attempts to limit its
exposure to some or all of these market risks through the use of various
financial instruments. There were no significant changes in the Company's market
risk exposures through the first half of 2000. For further discussion of the
Company's market risk exposures, refer to Part II., Item 7A., "Quantitative and
Qualitative Disclosures About Market Risk" of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits and legal proceedings, which are
described in Part I., Item 3., "Legal Proceedings," of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and in Part II., Item
1., "Legal Proceedings," of the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2000. The following is a description of material
developments during the period covered by this Quarterly Report and should be
read in conjunction with the Annual Report on Form 10-K and the first quarter
report on Form 10-Q.
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 Defendents") and Chiron. The Federal Express
complaint related to a fire that allegedly destroyed a Federal Express aircraft
and the majority of its cargo in September 1996. The matter was removed to the
United States District Court for the Southern District of New York. In
March 2000, the Federal court, on its own motion, dismissed the matter for lack
of subject matter jurisdiction. Federal Express appealed the dismissal, arguing
for remand to state court. Defendants filed cross-appeals. Briefing is ongoing.
It is not known when or on what basis this litigation will be concluded.
F. HOFFMAN LA-ROCHE A.G.
Chiron is involved in litigation with F. Hoffman-LaRoche AG and several of
its affiliated companies concerning infringement and/or validity of certain
patents related to HCV and HIV 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 asserted that Roche's manufacture and sale
of Amplicor -TM- HCV Test and Amplicor -TM- 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"). On the basis of alleged patent misuse and
breaches of state and federal antitrust statutes, Roche filed counterclaims
against Chiron seeking injunctive relief. Those claims were dismissed by the
Court on June 23, 2000. That decision is subject to appeal.
In July 2000, the Technical Board of Appeals of the European Patent Office
upheld, in amended form, Chiron's European Patent 0 318 216 (the "'216 patent")
relating to HCV nucleic acid technology. Chiron voluntarily withdrew certain
claims from the '216 patent, including claims relating to HCV immunoassay
technology.
In January 1997, Chiron, together with Ortho-Clinical Diagnostics, Inc.
(formerly known as "Ortho Diagnostics Systems, Inc."), filed suit against F.
Hoffman-LaRoche AG in the Regional Court, 4th Civil Division, Dusseldorf,
Germany, for infringement of immunoassay technology under the '216 patent. The
'216 patent claims which underlay the Court's April 1999 decision granting
injunctive relief were voluntarily withdrawn as described above. Therefore, the
injunction is no longer effective. The Company will continue to protect its
investment in and rights to HCV immunoassay technology against Roche based on
other intellectual property.
In July 2000, Chiron B.V., as assignee under the '216 patent, filed suit
against various Roche entities in the Administrative Court of Karlsruhe,
Germany. The suit alleges that Roche's HCV nucleic acid tests infringe the '216
patent. The suit seeks cross-border injunctive relief and damages.
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On July 4, 2000, Roche filed suit against Chiron in the Court of Milan,
Italy. Roche's suit seeks, INTER ALIA, a declaration that its nucleic acid
testing HCV products do not infringe the national patents resulting from the
'216 patent and that the Italian national patent resulting from the '216 patent
is invalid.
Chiron's European Patent 0 181 150 (the "'150 patent") relates to HIV
polynucleotides and polypeptides used in diagnostic technology. Chiron had filed
a suit against Roche in Dusseldorf, Germany, for infringement of the '150 patent
based on Roche's PCR-based HIV tests. In May 2000, the federal district court in
Dusseldorf issued a judgment in Chiron's favor, granting the Company the right
to enjoin Roche from the German market and to recover damages. Roche has
appealed that decision.
In June 2000, Roche and several of its related entities filed suit against
Chiron in the Court of First Instance in Brussels, Belgium seeking a
cross-border declaration of non-infringement of the '150 patent. Also in
June 2000, Roche and several of its related entities filed summary proceedings
against Chiron in the Court of First Instance in Brussels, Belgium, seeking
permission from the Court to import and commercialize certain of Roche's HIV-1
testing products, including Cobas Amplicor HIV-1 Monitor Test -TM-, Amplicor
HIV-1 Monitor -TM-, and Amplicor HIV-1 Test -TM-, pending resolution of the '150
infringement litigation.
In a separate proceeding, the Technical Board of Appeals of the European
Patent Office is expected to conduct a final hearing on the validity of the '150
patent before the end of first quarter 2001.
It is not known when or on what basis these matters will be resolved.
OFFICER OF INSPECTOR GENERAL SUBPOENA
Chiron is responding to a subpoena from the Office of the Inspector General
of the United States Department of Health and Human Services. Chiron believes
that the subpoena was issued in connection with a pending QUI TAM lawsuit
against Chiron and a large number of pharmaceutical companies in the United
States. With respect to Chiron, the subpoena relates to pricing to Medicare and
state Medicaid programs of certain generic oncology drugs sold to Cetus-Ben
Venue Therapeutics, a joint venture between Chiron and Ben Venue Laboratories.
Chiron sold its interest in that joint venture in 1996. It is not known when or
on what basis this matter will be resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on May 25, 2000.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-Q.
(c) The two matters voted upon at the meeting were: (i) to elect three
directors to hold office for three years until the Annual Meeting of
Stockholders in the year 2003; and (ii) to ratify the selection of KPMG
LLP as the independent auditors of the Company for the year ending
December 31, 2000.
(i) Donald A. Glaser, whose term would expire in the year 2000,
determined that he would not stand for reelection when his term
expired.
The following votes were cast for or were withheld with
respect to each of the nominees for director:
<TABLE>
<CAPTION>
DIRECTORS FOR WITHHELD
--------- ----------- ----------
<S> <C> <C>
Raymund Breu........................ 154,228,932 12,109,718
Sean P. Lance....................... 164,477,486 1,861,164
Pieter J. Strijkert................. 164,486,643 1,852,007
</TABLE>
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<PAGE>
All nominees were declared to have been elected as directors
to hold office until the Annual Meeting of Stockholders in the
year 2003 as noted above. No abstentions or broker non-votes were
cast for the election of directors.
The following directors shall continue in office after the
Company's Annual Meeting of Stockholders held on May 25, 2000:
Vaughn D. Bryson, Pierre E. Douaze, Edward E. Penhoet and Lewis
T. Williams shall continue in office until the Annual Meeting of
Stockholders in the year 2001; and Lewis W. Coleman, Paul L.
Herrling, William J. Rutter and Jack W. Schuler shall continue in
office until the Annual Meeting of Stockholders in the year 2002.
(ii) With respect to the proposal to ratify the selection of KPMG LLP as
the Company's independent auditors, 165,944,231 votes were cast for
the proposal, 265,051 votes were cast against the proposal, and
129,368 votes abstained. No broker non-votes were cast in
connection with the proposal. The selection of KPMG LLP as the
Company's independent auditors for the year ending December 31,
2000 was declared to have been ratified.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.01 Restated Certificate of Incorporation of the Registrant, as
filed with the Office of the Secretary of State of Delaware
on August 17, 1987, incorporated by reference to Exhibit
3.01 of the Registrant's report on Form 10-K for fiscal year
1996.
3.02 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the Office of
the Secretary of State of Delaware on December 12, 1991,
incorporated by reference to Exhibit 3.02 of the
Registrant's report on Form 10-K for fiscal year 1996.
3.03 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the Office of
the Secretary of State of Delaware on May 22, 1996,
incorporated by reference to Exhibit 3.04 of the
Registrant's report on Form 10-Q for the period ended
June 30, 1996.
3.04 Bylaws of the Registrant, as amended.
4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, Trustee (initially
filed as Exhibit 4.01 to the Registrant's report on Form
10-Q for the period ended September 30, 1994).
4.02 First Supplemental Indenture, dated as of December 12, 1991,
by and among Registrant, Cetus Corporation, and Bankers
Trust Company, incorporated by reference to Exhibit 4.02 of
the Registrant's report on Form 10-K for fiscal year 1997.
4.03 Second Supplemental Indenture, dated as of March 25, 1996,
by and among the Registrant, Cetus Oncology Corporation
(formerly Cetus Corporation), and Bankers Trust Company,
incorporated by reference to Exhibit 4.03 of the
Registrant's report on Form 10-Q for the period ended June
30, 1996.
4.04 Indenture, dated as of November 15, 1993, between Registrant
and The First National Bank of Boston, as Trustee (initially
filed as Exhibit 4.03 of the Registrant's report on Form
10-K for fiscal year 1993), incorporated by reference to
Exhibit 4.04 of the Registrant's report on Form 10-K for
fiscal year 1998.
10.208 Contract Manufacturing Agreement dated as of March 17, 2000,
between Chiron S.p.A. and SynCo Bio Partners B.V.
10.501 Chiron 1991 Stock Option Plan, as amended and restated.*
10.511 Audit Committee Charter.
10.617 Letter Agreement dated May 28, 1999 between Registrant and
Peder K. Jensen, as supplemented by Promissory Notes dated
as of September 21, 1999, executed by Peder K. Jensen and
Isabel J. Jensen, for the benefit of Registrant.*
27 Financial Data Schedule for Six Months ended June 30, 2000.
</TABLE>
(b) Reports on Form 8-K
None.
------------------------
* Management contract, compensatory plan or arrangement.
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CHIRON CORPORATION
JUNE 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
CHIRON CORPORATION
DATE: August 8, 2000 BY: /s/ SEAN P. LANCE
-----------------------------------------
Sean P. Lance
CHIEF EXECUTIVE OFFICER AND PRESIDENT;
CHAIRMAN OF THE BOARD
DATE: August 8, 2000 BY: /s/ JAMES R. SULAT
-----------------------------------------
James R. Sulat
VICE PRESIDENT; CHIEF FINANCIAL OFFICER
DATE: August 8, 2000 BY: /s/ DAVID V. SMITH
-----------------------------------------
David V. Smith
VICE PRESIDENT; CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
</TABLE>
39
