CHIRON CORP, 10-Q, 2000-11-07

CHIRON CORP
10-Q, 2000-11-07
PHARMACEUTICAL PREPARATIONS

Previous: LAWSON PRODUCTS INC/NEW/DE/, 10-Q, EX-27, 2000-11-07

Next: CHIRON CORP, 10-Q, EX-10.307, 2000-11-07

<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

(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 SEPTEMBER 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)

4560 HORTON STREET, EMERYVILLE, 94608
CALIFORNIA
(Address of principal executive (Zip code)
offices)
</TABLE>

(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>
<S> <C>
TITLE OF CLASS OUTSTANDING AT OCTOBER 31, 2000

Common Stock, $0.01 par value 191,511,721
</TABLE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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 September
30, 2000 and December 31, 1999 (Unaudited)............. 3

Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999
(Unaudited)............................................ 4

Condensed Consolidated Statements of Comprehensive
Income for the three and nine months ended September
30, 2000 and 1999 (Unaudited).......................... 5

Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999
(Unaudited)............................................ 6

Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 36

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS................................. 37

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................. 38

SIGNATURES.................................................. 41
</TABLE>

2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS

CHIRON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 180,473 $ 363,865
Short-term investments in marketable debt securities...... 409,856 640,027
Short-term investments in equity securities............... 5,462 3,315
---------- ----------
Total cash and short-term investments................... 595,791 1,007,207
Accounts receivable, net.................................. 192,184 161,883
Current portion of note receivable........................ 3,233 3,233
Inventories............................................... 95,232 84,724
Net assets to be allocated, current (Note 6).............. 41,275 --
Other current assets...................................... 57,938 66,027
---------- ----------
Total current assets.................................... 985,653 1,323,074
Noncurrent investments in marketable debt securities........ 191,051 547,580
Property, plant, equipment and leasehold improvements, at
cost:
Land and buildings........................................ 130,371 132,861
Laboratory, production and office equipment............... 307,345 291,503
Leasehold improvements.................................... 75,922 73,143
Construction-in-progress.................................. 30,809 23,894
---------- ----------
544,447 521,401
Less accumulated depreciation and amortization............ (251,578) (222,566)
---------- ----------
Property, plant, equipment and leasehold improvements,
net.................................................... 292,869 298,835
Purchased technology, net................................... 6,915 11,722
Other intangible assets, net................................ 126,317 143,320
Investments in equity securities and affiliated companies... 119,463 63,021
Notes receivable............................................ 12,405 13,967
Net assets to be allocated, noncurrent (Note 6)............. 656,345 --
Other assets................................................ 22,723 41,024
---------- ----------
$2,413,741 $2,442,543
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 34,925 $ 46,187
Accrued compensation and related expenses................. 46,242 45,102
Short-term borrowings..................................... 2,747 20,300
Current portion of long-term debt......................... 238,788 249,534
Note payable to Novartis.................................. -- 67,791
Current portion of unearned revenue....................... 38,655 42,524
Taxes payable............................................. 54,288 19,118
Other current liabilities................................. 124,805 122,375
---------- ----------
Total current liabilities............................... 540,450 612,931
Long-term debt.............................................. 73 96,958
Other noncurrent liabilities................................ 45,404 56,043
Minority interest........................................... 2,884 --
---------- ----------
Total liabilities....................................... 588,811 765,932
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock.............................................. 1,833 1,819
Additional paid-in capital................................ 2,138,775 2,057,418
Accumulated deficit....................................... (294,186) (323,037)
Accumulated other comprehensive loss (Note 1)............. (21,492) (12,875)
Treasury stock, at cost (1,230,000 shares at December 31,
1999)................................................... -- (46,714)
---------- ----------
Total stockholders' equity.............................. 1,824,930 1,676,611
---------- ----------
$2,413,741 $2,442,543
========== ==========
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.

3
<PAGE>
CHIRON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................................ $143,580 $114,006 $462,207 $308,295
Equity in earnings of unconsolidated joint
businesses...................................... 23,430 23,297 61,552 58,431
Collaborative agreement revenues.................. 5,107 18,442 19,202 59,603
Royalty and license fee revenues.................. 37,588 36,524 105,539 96,292
Other revenues.................................... 11,276 12,107 30,081 46,425
-------- -------- -------- --------
Total revenues.................................. 220,981 204,376 678,581 569,046
-------- -------- -------- --------
Operating expenses:
Cost of sales..................................... 58,007 53,580 157,537 138,215
Research and development.......................... 69,230 75,473 211,398 216,732
Selling, general and administrative............... 45,671 41,802 142,868 128,617
Restructuring and reorganization (benefits)
charges (Note 3)................................ -- (1,290) (447) 2,062
Other operating expenses.......................... 4,123 2,471 15,121 7,164
-------- -------- -------- --------
Total operating expenses........................ 177,031 172,036 526,477 492,790
-------- -------- -------- --------
Income from operations.............................. 43,950 32,340 152,104 76,256
Loss on sale of assets.............................. -- -- (224) --
Interest expense.................................... (3,251) (6,158) (12,610) (17,866)
Other income, net................................... 26,971 19,685 70,051 63,061
Minority interest................................... (224) -- (625) --
-------- -------- -------- --------
Income from continuing operations before income
taxes............................................. 67,446 45,867 208,696 121,451
Provision for income taxes.......................... 24,441 826 68,195 18,938
-------- -------- -------- --------
Income from continuing operations................... 43,005 45,041 140,501 102,513
Gain on disposal of discontinued operations (Note
2)................................................ 74 23,288 2,416 26,297
-------- -------- -------- --------
Net income.......................................... $ 43,079 $ 68,329 $142,917 $128,810
======== ======== ======== ========
Basic earnings per share (Note 1):
Income from continuing operations................. $ 0.24 $ 0.25 $ 0.78 $ 0.57
======== ======== ======== ========
Net income........................................ $ 0.24 $ 0.38 $ 0.79 $ 0.71
======== ======== ======== ========
Diluted earnings per share (Note 1):
Income from continuing operations................. $ 0.23 $ 0.24 $ 0.74 $ 0.55
======== ======== ======== ========
Net income........................................ $ 0.23 $ 0.36 $ 0.75 $ 0.69
======== ======== ======== ========
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.

4
<PAGE>
CHIRON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (NOTE 1)

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income........................................... $ 43,079 $68,329 $142,917 $128,810
-------- ------- -------- --------
Other comprehensive income (loss):
Change in foreign currency translation adjustment
during the period, net of tax benefit of $1,579
and $2,213 for the three and nine months ended
September 30, 2000............................... (36,943) 6,236 (46,830) (13,500)
Unrealized gains from investments:
Unrealized holding gains arising during the
period, net of tax provision of ($840) and
($536) for the three months ended September 30,
2000 and 1999, respectively, and ($23,106) and
($1,253) for the nine months ended September
30, 2000 and 1999, respectively................ 1,371 874 37,701 2,043
Reclassification adjustment for net losses
(gains) included in net income, net of tax
benefit (provision) of $374 and ($169) for the
three months ended September 30, 2000 and 1999,
respectively, and $314 and $225 for the nine
months ended September 30, 2000 and 1999,
respectively................................... 610 (275) 512 367
-------- ------- -------- --------
Net unrealized gains from investments............ 1,981 599 38,213 2,410
-------- ------- -------- --------
Other comprehensive income (loss).................... (34,962) 6,835 (8,617) (11,090)
-------- ------- -------- --------
Comprehensive income................................. $ 8,117 $75,164 $134,300 $117,720
======== ======= ======== ========
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.

5
<PAGE>
CHIRON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities......... $ 199,367 $ (37,092)
----------- -----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.... (3,330,129) (1,130,974)
Proceeds from sale and maturity of investments in
marketable debt securities.............................. 3,907,677 867,365
Capital expenditures...................................... (24,337) (55,742)
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.................................... 4,788 --
Proceeds from disposal of discontinued operations......... -- 46,912
Cash paid to purchase PathoGenesis Corporation, net of
cash acquired........................................... (677,065) --
Other, net................................................ (23,695) (11,108)
----------- -----------
Net cash used in investing activities................... (150,511) (283,547)
----------- -----------
Cash flows from financing activities:
Proceeds from note receivable............................. 3,233 --
Net (repayment of) proceeds from short-term borrowings.... (16,325) 7,934
Repayment of debt and capital leases...................... (70,847) (1,987)
Proceeds from issuance of debt............................ -- 8,114
Payments to acquire treasury stock........................ (213,105) (69,060)
Proceeds from reissuance of treasury stock................ 63,751 36,408
Proceeds from issuance of common stock.................... 1,045 31,683
----------- -----------
Net cash (used in) provided by financing activities..... (232,248) 13,092
----------- -----------
Net decrease in cash and cash equivalents............... (183,392) (307,547)
Cash and cash equivalents at beginning of the period........ 363,865 513,315
----------- -----------
Cash and cash equivalents at end of the period.............. $ 180,473 $ 205,768
=========== ===========
</TABLE>

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.

6
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 September 30, 2000, and for the three and nine months ended September 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, except that in the
third quarter of 2000, the Company reclassified $37.4 million to "Other
comprehensive income (loss)" and $2.2 million to "Taxes payable," with an
offsetting entry of $39.6 million to the deferred tax liability, which
represented the cumulative tax effect on the Company's net unrealized gains from
investments and the Company's foreign currency translation adjustments,
respectively, as the Company had not previously recorded these amounts net of
deferred taxes and taxes payable. The adjustment had no effect on income from
continuing operations, net income or earnings per share. Certain previously
reported amounts in the Condensed Consolidated Balance Sheets and the Condensed
Consolidated Statements of Comprehensive Income have been reclassified to
conform with the current period presentation as follows:

<TABLE>
<CAPTION>
THREE THREE THREE
MONTHS MONTHS FISCAL YEAR MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 1999 1999
-------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Accumulated other comprehensive
income (loss), as previously
reported....................... $51,266 $28,872 $ 3,351 $ (7,351)
Accumulated other comprehensive
income (loss), as currently
reported....................... $13,470 $ (859) $(12,875) $(13,600)
</TABLE>

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.

As discussed in Note 6, Chiron acquired PathoGenesis Corporation
("PathoGenesis") on September 21, 2000. The Company will include PathoGenesis'
operating results, including the seven business days from September 21 to 30,
2000, in its consolidated operating results beginning on October 1, 2000.

7
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PathoGenesis' operating results for the seven business days in September 2000
were not significant to the Company's consolidated operating results.

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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods...................................... $17,912 $16,614
Work-in-process..................................... 58,554 49,193
Raw materials....................................... 18,766 18,917
------- -------
$95,232 $84,724
======= =======
</TABLE>

CONVERSION OF SUBORDINATED DEBENTURES

On April 4, 2000, the Company's Board of Directors authorized management to
call for redemption the outstanding $100.0 million 5.25% convertible
subordinated debentures. Through September 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. 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. The remaining unconverted debentures were redeemed in cash.

On August 11, 2000, the Company's Board of Directors authorized management
to call for redemption the outstanding $253.9 million 1.90% convertible
subordinated debentures, including $10.1 million held by Novartis. The
redemption price for each $1,000 principal amount of the debentures was
$1,004.98, which includes accrued interest of $7.60 to the redemption date. As
an alternative to redemption, bondholders were entitled to convert the
debentures into shares of the Company's common stock at a conversion price of
$28.91 per share, or 34.6 shares for each $1,000 principal amount of bonds held,
plus cash in lieu of fractional shares. The bondholders' right to convert to
shares expired at the close of business on October 10, 2000. Through
September 30, 2000, debentures with a face value of $15.4 million, and an
amortized cost of $15.3 million, were converted into 0.5 million shares of the
Company's common stock. The unamortized discount and the related deferred tax
liability were recorded in additional paid-in capital. The interest accrued
through the conversion date, net of income taxes, was also recorded in
additional paid-in capital. As of October 10, 2000, substantially all of the
1.90% debentures were converted into a total of 8.8 million shares of the
Company's common stock.

8
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

The 2000 effective tax rate is estimated to be approximately 32.7% 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 nine months ended September 30, 1999 was
based on an estimated annual effective tax rate on pretax income from continuing
operations of approximately 27.0%, prior to the recognition of deferred tax
assets through a reduction in the valuation allowance associated with such
assets. The actual 1999 annual effective tax rate of 18.0% reflects the
utilization of state deferred tax assets that were recognized during the first
nine months of 1999 through a reduction in the valuation allowance associated
with such assets.

FORWARD CONTRACTS

The Company selectively enters into forward contracts with major financial
institutions to hedge against possible reductions in market values of its equity
securities. Forward contracts are generally marked-to-market at the end of each
quarter with gains or losses recorded in a manner consistent with the accounting
for gains and losses on the underlying securities. If the underlying securities
are classified as trading, the gain or loss on the forward contracts is recorded
as a component of "Other income, net" in the Condensed Consolidated Statements
of Operations. If the underlying securities are classified as
available-for-sale, the gain or loss on forward contracts is recorded as a
component of "Other comprehensive income (loss)" in the Condensed Consolidated
Statements of Comprehensive Income. Outstanding notional principal amounts of
the Company's forward contracts were $24.6 million at September 30, 2000. Under
the forward contracts, the Company earns interest through the forward contract
maturity dates, which range from June 2002 to October 2003, based on three-month
LIBOR (6.815% at September 30, 2000) as applied to the forward prices. The
Company had no forward contracts during 1999.

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 nine months ended September 30, 2000, the Company
charged losses to accumulated deficit of $25.6 million and $114.1 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)

SEPTEMBER 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (Numerator):
Income from continuing operations available to
common stockholders............................. $ 43,005 $ 45,041 $140,501 $102,513
Plus: Interest on 1.90% convertible debentures,
net of taxes.................................... 1,607 1,936 5,264 1,936
Plus: Interest on 5.25% convertible debentures,
net of taxes.................................... -- -- 440 --
-------- -------- -------- --------
Income available to common stockholders, plus
assumed conversions............................. $ 44,612 $ 46,977 $146,205 $104,449
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding........ 182,782 181,419 181,418 181,160
Effect of dilutive securities:
Options and equivalents......................... 6,337 4,686 6,394 3,948
Warrants........................................ 439 319 427 265
1.90% convertible debentures.................... 8,637 8,785 8,731 2,928
5.25% convertible debentures.................... -- -- 526 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions............................. 198,195 195,209 197,496 188,301
-------- -------- -------- --------
Basic earnings per share............................ $ 0.24 $ 0.25 $ 0.78 $ 0.57
======== ======== ======== ========
Diluted earnings per share.......................... $ 0.23 $ 0.24 $ 0.74 $ 0.55
======== ======== ======== ========
</TABLE>

10
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (Numerator):
Net income available to common stockholders....... $ 43,079 $ 68,329 $142,917 $128,810
Plus: Interest on 1.90% convertible debentures,
net of taxes.................................... 1,607 1,936 5,264 1,936
Plus: Interest on 5.25% convertible debentures,
net of taxes.................................... -- -- 440 --
-------- -------- -------- --------
Income available to common stockholders, plus
assumed conversions............................. $ 44,686 $ 70,265 $148,621 $130,746
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding........ 182,782 181,419 181,418 181,160
Effect of dilutive securities:
Options and equivalents......................... 6,337 4,686 6,394 3,948
Warrants........................................ 439 319 427 265
1.90% convertible debentures.................... 8,637 8,785 8,731 2,928
5.25% convertible debentures.................... -- -- 526 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions............................. 198,195 195,209 197,496 188,301
-------- -------- -------- --------
Basic earnings per share............................ $ 0.24 $ 0.38 $ 0.79 $ 0.71
======== ======== ======== ========
Diluted earnings per share.......................... $ 0.23 $ 0.36 $ 0.75 $ 0.69
======== ======== ======== ========
</TABLE>

For the three months ended September 30, 2000 and 1999, options to purchase
2.1 million and 2.0 million shares, respectively, and for the nine months ended
September 30, 2000 and 1999, options to purchase 1.6 million and 6.1 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
3.2 million shares for each of the three and nine months ended September 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 Corporation ("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

11
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)
September 17, 1998, between 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 the
nine months ended September 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 September 30, 2000 and
December 31, 1999, the real estate assets of $1.9 million, which represented 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 nine months ended September 30, 2000, "Gain on
disposal of discontinued operations" included an income tax provision of
$0.1 million. For the three and nine months ended September 30, 1999, "Gain on
disposal of discontinued operations" included income tax benefits of
$15.3 million and $16.0 million, respectively.

For the nine months ended September 30, 2000, basic and diluted earnings per
share from discontinued operations were $0.01. For the three months ended
September 30, 1999, basic and diluted earnings per share from discontinued
operations were $0.13 and $0.12, respectively. For the nine months ended
September 30, 1999, basic and diluted earnings per share from discontinued
operations were $0.14.

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 September 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

12
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 3--RESTRUCTURING AND REORGANIZATION (CONTINUED)
were transferred to the buyer in January 2000. During the nine months ended
September 30, 2000, the Company recorded net 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 September 30, 2000, 356 of these 371 positions had been
eliminated.

During the nine months ended September 30, 1999, the Company recorded net
restructuring and reorganization charges of $2.1 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 SEPTEMBER 30, 2000 PERIODS
------------ ------------- ------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Employee-related costs........ $3,772 $ -- $(607) $(1,197) $1,968
Other facility-related
costs....................... 1,631 160 -- (915) 876
------ ---- ----- ------- ------
5,403 160 (607) (2,112) 2,844
Discontinued operations....... 285 -- (109) -- 176
------ ---- ----- ------- ------
$5,688 $160 $(716) $(2,112) $3,020
====== ==== ===== ======= ======
</TABLE>

The restructuring and reorganization accruals, of which $1.8 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 "Notes
receivable" in the Condensed Consolidated Balance Sheets, with a face amount of
$2.0 million and net of an unamortized discount of $0.3 million at an imputed
interest rate of 9%, at September 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.

13
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 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 nine months ended September 30, 2000 and $0.8 million and
$3.1 million for the three and nine months ended September 30, 1999,
respectively.

The Company intends to liquidate the remaining assets and liabilities of the
Australian subsidiary in the fourth 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 and infectious diseases, 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 novel vaccines and vaccination technology. 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 to the Company's Annual Report on Form 10-K. 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
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Biopharmaceuticals................................ $ 73,670 $ 59,921 $220,797 $215,576
Vaccines, includes equity in earnings of
unconsolidated joint businesses of $319 and $963
for the three and nine months ended September
30, 1999, respectively.......................... 88,496 84,692 305,477 188,873
Blood testing, includes equity in earnings of
unconsolidated joint businesses of $23,430 and
$22,978 for the three months ended September 30,
2000 and 1999, respectively, and $61,552 and
$57,468 for the nine months ended September 30,
2000 and 1999, respectively..................... 41,217 32,943 102,665 83,594
Other............................................. 17,598 26,820 49,642 81,003
-------- -------- -------- --------
Total revenues.................................. $220,981 $204,376 $678,581 $569,046
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals................................ $(11,432) $(22,941) $(23,441) $(27,708)
Vaccines.......................................... 23,723 13,187 113,518 (3,093)
Blood testing..................................... 24,833 21,167 57,200 47,765
Other............................................. 6,826 19,637 4,380 61,354
-------- -------- -------- --------
Segment income from operations.................. 43,950 31,050 151,657 78,318
Operating income (expense) reconciling items:
Restructuring and reorganization benefits
(charges)..................................... -- 1,290 447 (2,062)
-------- -------- -------- --------
Income from operations............................ 43,950 32,340 152,104 76,256
Loss on sale of assets.......................... -- -- (224) --
Interest expense................................ (3,251) (6,158) (12,610) (17,866)
Other income, net............................... 26,971 19,685 70,051 63,061
Minority interest............................... (224) -- (625) --
-------- -------- -------- --------
Income from continuing operations before
income taxes.................................... $ 67,446 $ 45,867 $208,696 $121,451
======== ======== ======== ========
</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)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 6--ACQUISITION OF PATHOGENESIS CORPORATION

On September 21, 2000, Chiron acquired PathoGenesis, a company that develops
and markets drugs to treat infectious diseases, particularly serious lung
infections. The acquisition was accounted for under the purchase method of
accounting and included the purchase of all of the outstanding shares of common
stock of PathoGenesis at $38.50 per share. As of September 30, 2000, the Company
paid approximately $677.1 million, plus an additional $29.9 million on
October 12, 2000, for a total payment of $707.0 million.

As of September 30, 2000, the purchase price of $697.6 million, which
included the cash payment of $677.1 million and accrued severance and other
acquisition costs of $20.5 million, had not been allocated to the acquired
assets and liabilities assumed since preliminary results from the valuation
studies were not yet available. As a result, the Company recorded the purchase
price as "Net assets to be allocated" in the Condensed Consolidated Balance
Sheets at September 30, 2000. "Net assets to be allocated, current" represents
the book value, which management believes approximates fair value, of
PathoGenesis' current assets less current liabilities as of September 21, 2000.
Outstanding options on PathoGenesis' stock were either redeemed in cash or
converted into options on Chiron's stock. The difference between the fair value
of all options and the intrinsic value associated with the unvested portion of
those options of $69.6 million was included as part of the purchase price.

In the fourth quarter of 2000, the Company expects to allocate the purchase
price and record a charge for purchased in-process research and development,
which will represent the fair value of certain acquired research and development
for which there is no alternative future use. The Company expects to finalize
its plans for combining PathoGenesis with its existing operations in the fourth
quarter of 2000, at which time any additional severance and exit costs will be
reflected as an adjustment to the allocation of the purchase price. The Company
will include PathoGenesis' operating results, including the seven business days
from September 21 to 30, 2000, in its consolidated operating results beginning
on October 1, 2000. PathoGenesis' operating results for the seven business days
in September 2000 were not significant to the Company's consolidated operating
results.

The following unaudited pro forma information presents the results of
continuing operations of Chiron and PathoGenesis for the three and nine months
ended September 30, 2000 and 1999 as if Chiron's acquisition of PathoGenesis had
been consummated as of January 1, 2000 and 1999, respectively. The pro forma
information does not purport to be indicative of what would have occurred had
the acquisition been made as of those dates or of results that may occur in the
future. The pro forma results exclude nonrecurring charges which resulted
directly from the transaction and PathoGenesis' operating results for

16
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2000

(UNAUDITED)

NOTE 6--ACQUISITION OF PATHOGENESIS CORPORATION (CONTINUED)
the seven business days in September 2000. The unaudited pro forma information
is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues...................... $239,264 $220,837 $736,800 $610,069
Income from continuing operations... $ 25,944 $ 44,258 $122,330 $ 94,493
Pro forma income per share from
continuing operations:
Basic............................. $ 0.14 $ 0.24 $ 0.67 $ 0.52
Diluted........................... $ 0.14 $ 0.24 $ 0.65 $ 0.51
</TABLE>

NOTE 7--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.

NOTE 8--SUBSEQUENT EVENT

In October 2000, the Company entered into three agreements with F.
Hoffman-La Roche Ltd. ("Roche") related to the settlement of litigation in the
U.S. and certain other countries. Under the first agreement, Chiron was paid
$85.0 million, of which $61.0 million will be recognized in the fourth quarter
2000 for past sales related to Roche's use of Chiron's HCV patent in its IN
VITRO diagnostic products. The remaining $24.0 million, which will be deferred,
represents royalties on future sales related to Roche's use of Chiron's HCV
patent in its IN VITRO diagnostic products. Under the second agreement, Chiron
could earn up to $30.0 million of license fees related to Roche's use of
Chiron's HIV patent in its IN VITRO diagnostic products. Under both the HCV and
HIV license arrangements, Chiron will also earn royalties on Roche's future
sales of IN VITRO diagnostic products for HCV and HIV. Under the third
agreement, Chiron will earn royalties on blood donations tested with Roche's
nucleic acid testing products that utilize Chiron's HCV and HIV patents.

17
<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 and infectious diseases, 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- (interferon
beta-lb), and Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson ("J&J")
company, related to PDGF (recombinant human platelet-derived growth factor
-rhPDGF-BB). 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 novel vaccines and
vaccination technology. 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.

On September 21, 2000, Chiron acquired PathoGenesis Corporation, a company
that develops and markets drugs to treat infectious diseases, particularly
serious lung infections. The Company will include PathoGenesis' operating
results, including the seven business days from September 21 to 30, 2000, in its
consolidated operating results beginning on October 1, 2000. PathoGenesis'
operating results for the seven business days in September 2000 were not
significant to the Company's consolidated operating results. PathoGenesis will
be part of the Company's biopharmaceuticals segment.

18
<PAGE>
RESULTS OF OPERATIONS

BIOPHARMACEUTICALS

PRODUCT SALES For the three months ended September 30, 2000 and 1999,
biopharmaceutical product sales were $50.3 million and $36.9 million,
respectively. For the nine months ended September 30, 2000 and 1999,
biopharmaceutical product sales were $151.3 million and $135.0 million,
respectively. In 2000 and 1999, biopharmaceutical product sales consisted
principally of Proleukin-Registered Trademark- (aldesleukin, interleukin-2),
Betaseron-Registered Trademark- and PDGF.

PROLEUKIN-REGISTERED TRADEMARK- Chiron sells
Proleukin-Registered Trademark- directly in the U.S. and certain international
markets. For the three months ended September 30, 2000 and 1999, sales of
Proleukin-Registered Trademark- were $21.3 million and $18.9 million,
respectively. In both 2000 and 1999, the Company experienced a shift in U.S.
sales from the third quarter to the second quarter due to fluctuations in
wholesaler inventory management practices. However, this shift occurred later in
the second quarter 2000, as compared with the second quarter 1999, therefore
continuing into early third quarter 2000. 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. For the nine months ended September 30, 2000 and 1999, sales of
Proleukin-Registered Trademark- were $76.6 million and $82.0 million,
respectively. The quarter-to-date and year-to-date changes in
Proleukin-Registered Trademark- sales were also affected by a weaker exchange
rate of the Euro as compared with the U.S. dollar, increasing cost sensitivity
from reimbursement authorities, particularly in Europe, and the onset of
competitive clinical trials. 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- (see
"Royalties and license fee revenues" below) (collectively,
"Betaseron-Registered Trademark- revenues").

For the three months ended September 30, 2000 and 1999,
Betaseron-Registered Trademark- product sales were $24.5 million and
$17.9 million, respectively. For the nine months ended September 30, 2000 and
1999, Betaseron-REGISTERED TRADEMARK- product sales were $59.2 million and
$46.5 million, respectively. 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 and fluctuations in Berlex and Schering AG's
inventory management practices. In addition, underlying purchases by end users
have increased in Europe and the U.S. 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 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 nine months ended September 30, 2000, net sales of PDGF were
$3.2 million and $10.8 million, respectively. There were no commercial sales of
PDGF to J&J from the first quarter 1999 through the first quarter 2000. Net PDGF
sales for the nine months ended September 30, 2000 included a decrease in the
product returns allowance of $3.0 million. 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.

19
<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.

DEPOCYT-REGISTERED TRADEMARK- 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. In October 2000, the Company submitted a
request for FDA approval to relaunch DepoCyt-Registered Trademark-. 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 expected to resume in 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 September 30, 2000 and 1999,
the biopharmaceuticals segment recognized collaborative agreement revenues of
$2.8 million and $5.3 million, respectively. For the nine months ended
September 30, 2000 and 1999, the biopharmaceuticals segment recognized
collaborative agreement revenues of $9.6 million and $14.2 million,
respectively.

The decrease in collaborative agreement revenues in 2000 as compared with
1999 was 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) and a $2.0 million milestone
payment earned in the third quarter 1999 related to the Company's collaboration
agreement with Medivir AB, in which Medivir licensed certain of Chiron's
combinatorial chemistry technology for use in the research and development of
pharmaceuticals for human use. 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. The Company expects to begin recognizing
revenue under this arrangement in the fourth quarter 2000. 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 its development objectives or commercialize a
product using Chiron's gene expression and combinatorial chemistry technologies.

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 revenues will not decline.

20
<PAGE>
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 ("HCV") patents, used by third
parties. For the three months ended September 30, 2000 and 1999, the
biopharmaceuticals segment recognized royalty and license fee revenues of
$15.3 million and $13.9 million, respectively. For the nine months ended
September 30, 2000 and 1999, the biopharmaceuticals segment recognized royalty
and license fee revenues of $43.9 million and $41.0 million, respectively.

The Company earns royalties on Schering AG's European sales of
Betaferon-Registered Trademark-. Chiron recognized $10.2 million and
$7.3 million for the three months ended September 30, 2000 and 1999,
respectively, and $27.4 million and $21.4 million for the nine months ended
September 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 $4.7 million and $9.9 million for the nine months ended
September 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 $7.1 million and
$8.7 million for the nine months ended September 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 revenues will not
decline.

OTHER REVENUES For the three months ended September 30, 2000 and 1999, the
biopharmaceuticals segment recognized other revenues of $5.7 million and
$4.1 million, respectively. For the nine months ended September 30, 2000 and
1999, the biopharmaceuticals segment recognized other revenues of $16.3 million
and $25.8 million, respectively.

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 recognized $1.0 million for each of
the three and nine months ended September 30, 2000 under this arrangement.

Other revenues also included contract manufacturing revenues of
$3.1 million and $2.8 million for the three months ended September 30, 2000 and
1999, respectively, and $9.0 million and $11.8 million for the

21
<PAGE>
nine months ended September 30, 2000 and 1999, respectively. The year-to-date
decrease in 2000 as compared with 1999 was due to the timing of contract
manufacturing activities and reductions in European contract manufacturing
activities as a result of the sale of the Amsterdam manufacturing facility in
December 1999. For the nine months ended September 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.

GROSS PROFIT For the three months ended September 30, 2000 and 1999,
biopharmaceutical gross profit as a percentage of net product sales was 64% and
63%, respectively. The increase in biopharmaceutical gross profit margins in the
third quarter 2000 as compared with the third quarter 1999 was primarily related
to a favorable mix of biopharmaceutical product sales. For the nine months ended
September 30, 2000 and 1999, biopharmaceutical gross profit as a percentage of
net product sales was 68% and 69%, respectively.

Biopharmaceutical gross profit percentages may fluctuate significantly in
future periods as the biopharmaceutical product mix changes.

RESEARCH AND DEVELOPMENT For the three months ended September 30, 2000 and
1999, the biopharmaceuticals segment recognized research and development
expenses of $51.2 million and $54.1 million, respectively. The decrease in
research and development spending in the third quarter 2000 as compared with the
same period in 1999 was due to the timing of various clinical trials, including
Fibroblast Growth Factor ("FGF") for coronary and peripheral artery diseases,
offset by the furtherance of the Company's clinical trial related to
Proleukin-Registered Trademark- for HIV. For the nine months ended
September 30, 2000 and 1999, the biopharmaceuticals segment recognized research
and development expenses of $156.3 million and $156.2 million, respectively.

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
September 30, 2000 and 1999, the biopharmaceuticals segment recognized selling,
general and administrative ("SG&A") expenses of $10.2 million and
$12.3 million, respectively. For the nine months ended September 30, 2000 and
1999, the biopharmaceuticals segment recognized SG&A expenses of $30.0 million
and $35.2 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
partially 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
September 30, 2000 and 1999, vaccine product sales were $77.9 million and
$70.3 million, respectively. For the nine months ended September 30, 2000 and
1999, vaccine product sales were $279.5 million and $153.7 million,
respectively. The increase in the third quarter 2000 product sales compared to
the same period in 1999 was primarily due to shipments of Menjugate-TM-, its
conjugate vaccine against meningococcal meningitis caused by the bacterium N.
meningitidis serogroup C, to Spain and to the Department of Health ("DoH") in
Ireland. In July 2000, the DoH extended a tender to the Company to supply
Menjugate-TM- for a universal vaccination program in Ireland. Under the tender,
the Company will ship approximately $13.0 million of Menjugate-TM- to Ireland,
of which the Company shipped $1.4 million in the third quarter 2000. The Company
expects to ship the remaining

22
<PAGE>
Menjugate-TM- under the tender through the first quarter 2001. Also contributing
to the increase in third quarter 2000 vaccine product sales as compared with the
same period in 1999 was an increase in flu vaccine sales, attributed to
manufacturing problems of certain of the Company's competitors, the launch of
Fluad-Registered Trademark- in Germany and Austria and the re-launch of the
Company's tick-borne encephalitis vaccine. In May 2000, the Company received
approval in certain western European countries to market
Fluad-Registered Trademark-, its adjuvanted influenza vaccine. 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. The year-to-date increase in vaccine product sales in 2000 as compared with
1999 also included shipments of $101.5 million of Menjugate-TM- to the National
Health Service ("NHS") in the United Kingdom under tender for a universal
vaccination program in the U.K.

In October 2000, the United Kingdom's Medicines Control Agency and the Irish
Medicines Board approved the use of Menjugate-TM- in vaccinating infants. The
United Kingdom and Ireland tenders for Menjugate-TM- included the application
for infant indication. Shipments to the United Kingdom for infant indication are
expected to commence in the first quarter 2001. Menjugate-TM- shipped to Ireland
may now also be used in vaccinating infants. The Company is exploring
opportunities for additional Menjugate-TM- sales in other countries; however,
the Company does not expect Menjugate-TM- shipments in 2001 to be commensurate
with those in the first three quarters of 2000.

The Company expects the competitive pressures related to many of its vaccine
products to continue into the foreseeable future as a result of the introduction
of competing products into the market, including new combination vaccines.

ROYALTY AND LICENSE FEE REVENUES For the three months ended September 30,
2000 and 1999, the vaccines segment recognized royalty and license fee revenues
of $4.4 million and $5.8 million, respectively. For the nine months ended
September 30, 2000 and 1999, the vaccines segment recognized royalty and license
fee revenues of $11.7 million and $15.3 million, respectively.

An agreement with SmithKline Beecham ("SKB") provides for royalties on sales
of certain vaccine products, under which Chiron recognized $2.0 million and
$2.3 million of such royalties for the three months ended September 30, 2000 and
1999, respectively, and $5.1 million and $5.8 million of such royalties for the
nine months ended September 30, 2000 and 1999, respectively. The decrease in
2000 as compared with 1999 was primarily related to a decrease in SKB sales due
to the introduction of competitive vaccine products. Chiron also recognized
$2.4 million and $2.8 million for the three months ended September 30, 2000 and
1999, respectively, and $6.6 million and $8.8 million for the nine months ended
September 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 introduction of competitive combination HBV products, as well as 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 revenues will not decline.

OTHER REVENUES For the three months ended September 30, 2000 and 1999, the
vaccines segment recognized other revenues of $5.6 million and $7.8 million,
respectively. For the nine months ended September 30, 2000 and 1999, the
vaccines segment recognized other revenues of $13.8 million and $19.5 million,
respectively.

23
<PAGE>
Other revenues included commission revenues on sales of HBV vaccine products
and immunoglobulin products of $1.7 million and $4.3 million for the three
months ended September 30, 2000 and 1999, respectively, and $5.6 million and
$11.6 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in commission revenues in 2000 as compared with 1999
was primarily related to a decrease in sales of the monovalent HBV vaccine
product 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.

GROSS PROFIT For the three months ended September 30, 2000 and 1999,
vaccine gross profit as a percentage of net product sales was 61% and 53%,
respectively. For the nine months ended September 30, 2000 and 1999, vaccine
gross profit as a percentage of net product sales was 70% and 48%, respectively.
The increase in vaccine gross profit margins in 2000 as compared with 1999 was
primarily related to sales of Menjugate-TM-, manufacturing efficiencies
resulting from increased production and a favorable mix of vaccine product
sales. 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 at that time.

Vaccine gross profit percentages may fluctuate significantly in future
periods as the vaccine product mix changes.

RESEARCH AND DEVELOPMENT For the three months ended September 30, 2000 and
1999, the vaccines segment recognized research and development expenses of
$15.1 million and $19.0 million, respectively. For the nine months ended
September 30, 2000 and 1999, the vaccines segment recognized research and
development expenses of $44.4 million and $53.3 million, respectively. The
decrease in research and development spending in 2000 as compared with 1999 was
primarily 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
September 30, 2000 and 1999, the vaccines segment recognized SG&A expenses of
$20.0 million and $18.6 million, respectively. The increase in SG&A expenses in
the third quarter 2000 as compared with the third quarter 1999 related to
increased activity this flu season and co-promotion fees to Aventis Pasteur MSD
("AvP") related to Menjugate-TM-. 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 began in the third
quarter 2000 and will continue into the first quarter 2001. The current tender
with the NHS in the United Kingdom, including the infant indication, and the
shipments to Spain were not included in this arrangement.

For the nine months ended September 30, 2000 and 1999, the vaccines segment
recognized SG&A expenses of $55.5 million and $55.7 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, 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.

24
<PAGE>
BLOOD TESTING

PRODUCT SALES For the three months ended September 30, 2000 and 1999, blood
testing product sales were $15.4 million and $6.8 million, respectively. For the
nine months ended September 30, 2000 and 1999, blood testing product sales were
$31.4 million and $19.6 million, respectively.

Under the Ortho arrangement, the Company performs manufacturing services
related to immunodiagnostic products. The Company recognized revenues under this
agreement of $6.6 million and $4.8 million for the three months ended
September 30, 2000 and 1999, respectively, and $17.0 million and $15.7 million
for the nine months ended September 30, 2000 and 1999, respectively. The
increase in the third quarter 2000 as compared with the third quarter 1999 was
due the timing of manufacturing services. The year-to-date increase in 2000 as
compared with 1999 was partially offset by a first quarter 2000 shift in
revenues from product sales to collaborative agreement revenues, since certain
activities that had been characterized previously as manufacturing services were
recharacterized as research services.

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 NAT
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. Sales under IND are
limited to cost recovery pricing. Evaluation studies at several non-U.S. sites
also began during the second quarter 1999. Worldwide product sales related to
tests and instruments were $8.8 million and $2.0 million for the three months
ended September 30, 2000 and 1999, respectively, and $14.4 million and
$3.9 million for the nine months ended September 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 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. The
Singapore Blood Transfusion Services ("SBTS") accepted the local distributor's
bid to supply NAT kits under tender. The Company expects sales to SBTS to begin
in the fourth quarter 2000.

In connection with the collaboration agreement with Gen-Probe, Chiron
assumed primary account responsibility for one of its key U.S. customers in
July 2000. As a result, the Company began recognizing NAT product sales to this
customer. In addition, the remaining U.S. customers renewed their agreements
during the third quarter 2000, which resulted in price increases for NAT
products.

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.

25
<PAGE>
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES For the three months
ended September 30, 2000 and 1999, Chiron's earnings from its joint business
with Ortho were $23.4 million and $23.0 million, respectively. For the nine
months ended September 30, 2000 and 1999, Chiron's earnings from its joint
business with Ortho were $61.6 million and $57.5 million, respectively. The
overall fluctuations in earnings from the joint business were primarily due to
increased profitability of Ortho's foreign affiliates.

COLLABORATIVE AGREEMENT REVENUES For the three months ended September 30,
2000 and 1999, the blood testing segment recognized collaborative agreement
revenues of $2.3 million and $3.1 million, respectively. For the nine months
ended September 30, 2000 and 1999, the blood testing segment recognized
collaborative agreement revenues of $9.6 million and $6.4 million, respectively.

Under the Ortho arrangement, the Company performs research services related
to immunodiagnostic products. The Company recognized revenues under this
agreement of $2.3 million and $2.7 million for the three months ended
September 30, 2000 and 1999, respectively, and $8.0 million and $5.6 million for
the nine months ended September 30, 2000 and 1999, respectively. The
fluctuations between 2000 and 1999 were partly due to the timing of research
services. 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 activities that had been
characterized previously as manufacturing services were recharacterized as
research services.

ROYALTY AND LICENSE FEE REVENUES The blood testing segment will earn
royalties on blood donations tested with third party nucleic acid testing
products that utilize Chiron's hepatitis C virus ("HCV") and HIV patents.

In the fourth quarter 2000, the Company entered into three agreements with
F. Hoffman-La Roche Ltd. ("Roche") related to the settlement of litigation in
the U.S. and certain other countries. Under one of the agreements, Chiron will
earn royalties on blood donations tested with Roche's nucleic acid testing
products that utilize Chiron's HCV and HIV patents. The Company expects to begin
recognizing revenue under this arrangement in the first quarter 2001 continuing
through 2003. The agreement contemplates future negotiation that may result in
the extension and expansion of this relationship. The Company's "Other" segment
will also earn royalty and license fee revenues under the other two Roche
agreements. See "Other--Royalty and license fee revenues" below.

GROSS PROFIT For the three months ended September 30, 2000 and 1999, blood
testing gross profit as a percentage of net product sales was 41% and 15%,
respectively. For the nine months ended September 30, 2000 and 1999, blood
testing gross profit as a percentage of net product sales was 29% and 17%,
respectively. The increase in blood testing gross profit margins in 2000 as
compared with 1999 was primarily related to a favorable mix of blood testing
product sales. As discussed in "Product sales" above, Chiron began recognizing
NAT product sales for one of its key U.S. customers, which were previously
recorded as collaborative agreement revenues, in July 2000. In addition, the
remaining U.S. customers renewed their agreements during the third quarter 2000,
which resulted in price increases for NAT products.

Blood testing gross profit percentages may fluctuate significantly in future
periods as the blood testing product mix changes.

26
<PAGE>
RESEARCH AND DEVELOPMENT For the three months ended September 30, 2000 and
1999, the blood testing segment recognized research and development expenses of
$2.9 million and $2.4 million, respectively. For the nine months ended
September 30, 2000 and 1999, the blood testing segment recognized research and
development expenses of $10.7 million and $7.2 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
September 30, 2000 and 1999, the blood testing segment recognized SG&A expenses
of $4.2 million and $3.5 million, respectively. For the nine months ended
September 30, 2000 and 1999, the blood testing segment recognized SG&A expenses
of $12.3 million and $12.0 million, respectively. The quarter-to-date and
year-to-date increases in SG&A expenses in 2000 as compared with 1999 were
primarily due to 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, partially offset by a change
in the method of allocating certain legal costs to segments, as discussed
previously.

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 nine months ended September 30, 2000,
the other segment did not recognize any collaborative agreement revenues. For
the three and nine months ended September 30, 1999, the other segment recognized
collaborative agreement revenues of $10.0 million and $39.0 million,
respectively.

The decrease in collaborative agreement revenues in 2000 as compared with
1999 occurred because the Company recognized no research funding under an
agreement with Novartis through the nine months ended September 30, 2000, as the
Company self-funded its research programs. In December 1999, Chiron and Novartis
amended this agreement to increase the aggregate maximum amount of funding
provided by Novartis from $250.0 million to $265.0 million (for more
information, refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).

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 revenues will not decline. In
particular, the research funding agreement with Novartis currently expires on
December 31, 2000, and there can be no assurance that this relationship will be
extended or that new relationships will be established.

ROYALTY AND LICENSE FEE REVENUES For the three months ended September 30,
2000 and 1999, the other segment recognized royalty and license fee revenues of
$17.9 million and $16.8 million, respectively. For the nine months ended
September 30, 2000 and 1999, the other segment recognized royalty and license
fee revenues of $49.9 million and $40.0 million, respectively.

The increase in royalty and license fee revenues in the third quarter 2000
as compared with the same period in 1999 was primarily due to an agreement with
Roche, in which the Company receives royalties on sales of polymerase chain
reaction ("PCR") products sold by Roche. Roche's sales of PCR products increased
in the third quarter 2000 as compared with the same period in 1999. Also in the
third quarter 2000, the Company recorded a $2.0 million positive adjustment
related to the Roche agreement. Chiron

27
<PAGE>
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 obligations, with certain limited exceptions for future products, will
expire in the fourth quarter 2000.

The year-to-date increase in royalty and license fee revenues in 2000 as
compared with 1999 also included a $3.3 million positive adjustment related to
the Roche agreement, as well as license fee revenues related to a cross-license
agreement with Abbott Laboratories ("Abbott"), under which 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 in the second quarter 2000. In addition, the cross-license
agreement provides for royalties to Chiron on HCV products sold by Abbott.

The quarter-to-date and year-to-date increases in royalty and license fee
revenues in 2000 as compared with 1999 were offset by decreases in license 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 September 30, 2000 and 1999, respectively, and
$22.5 million and $30.0 million for the nine months ended September 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 $1.0 million and $1.8 million for the three months
ended September 30, 2000 and 1999, respectively, and $2.6 million and
$3.8 million for the nine months ended September 30, 2000 and 1999,
respectively, of royalty revenues related to this agreement.

In the fourth quarter 2000, the Company entered into three agreements with
Roche related to the settlement of litigation in the U.S. and certain other
countries. Under the first agreement, Chiron was paid $85.0 million, of which
$61.0 million will be recognized in the fourth quarter 2000 for past sales
related to Roche's use of Chiron's HCV patent in its IN VITRO diagnostic
products. The remaining $24.0 million, which will be deferred and recognized as
revenue through 2005, represents royalties on future sales related to Roche's
use of Chiron's HCV patent in its IN VITRO diagnostic products. Under the second
agreement, Chiron could earn up to $30.0 million of license fees related to
Roche's use of Chiron's HIV patent in its IN VITRO diagnostic products. The
Company will begin recognizing revenue under this arrangement when and if its
patents on HIV are upheld in Europe and issued in the U.S. Currently, Chiron has
an issued HIV patent in Europe, which is being challenged in appeal proceedings
before the European Patent Office (for more information, refer to Part II., Item
1., "Legal Proceedings"). Under both the HCV and HIV license arrangements,
Chiron will also earn royalties on Roche's future sales of IN VITRO diagnostic
products for HCV and HIV. Such royalties will continue through the lives of the
HCV and HIV patents. Issued HCV patents begin to expire in 2015 for the U.S. and
in 2010 for Europe. The HIV patent lives depend upon decisions by the European
and U.S. patent authorities.

SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended
September 30, 2000 and 1999, the other segment recognized SG&A expenses of
$11.3 million and $7.4 million, respectively. For the nine months ended
September 30, 2000 and 1999, the other segment recognized SG&A expenses of
$45.1 million and $25.7 million, respectively. The increase in SG&A expenses in
2000 as compared with 1999 was

28
<PAGE>
due to increased payroll related expenses and patent litigation costs, 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 Through the nine months ended September 30, 2000,
the Company recorded net 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 September 30, 2000, 356 of these 371 positions had been
eliminated. Through the nine months ended September 30, 1999, the Company
recorded net restructuring and reorganization charges of $2.1 million related to
the integration of its worldwide vaccines operations.

For the nine months ended September 30, 1999, Chiron recognized a reduction
in other operating expenses of $8.4 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 September 30,
2000 and 1999, Chiron recognized interest and investment income of
$26.3 million and $20.2 million, respectively. For the nine months ended
September 30, 2000 and 1999, the Company recognized interest and investment
income of $70.0 million and $60.9 million, respectively. The increase in
interest and investment income in 2000 as compared with 1999 was due to gains
realized on the unwinding of currency swaps related to the Company's German
subsidiary and higher average interest rates. Due to the $707.0 million cash
payments to purchase PathoGenesis, the Company does not expect interest and
investment income in following quarters to be commensurate with that in the
first three quarters of 2000. Interest expense decreased to $3.3 million for the
three months ended September 30, 2000 from $6.2 million for the three months
ended September 30, 1999, and $12.6 million for the nine months ended
September 30, 2000 from $17.9 million for the nine months ended September 30,
1999, primarily due to the conversion of $98.4 million 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 the nine months
ended September 30, 2000, Chiron recognized a loss attributable to the
other-than-temporary impairment of certain of these equity securities of
$5.0 million. For the three and nine months ended September 30, 1999, Chiron
recognized a loss attributed to the other-than-temporary impairment of certain
of these equity securities of $0.6 million and $1.6 million, respectively.

INCOME TAXES The 2000 effective tax rate is estimated to be approximately
32.7% 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 nine months ended September 30, 1999
was based on an estimated annual effective tax rate on pretax income from
continuing operations of approximately 27.0%, prior to the recognition of
deferred tax assets through a reduction in the valuation allowance associated
with such assets. The actual 1999 annual effective tax rate of 18.0% reflects
the utilization of state deferred tax assets that were recognized during the
first nine months 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

29
<PAGE>
SFAS 133, an entity is required to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. 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 will implement
SFAS 133, as amended, during the first fiscal quarter of 2001. The Company
believes that the implementation of SFAS 133 will not have a material effect on
the Company's results of operations and financial position.

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 anticipates that it will adopt SAB 101 during the fourth quarter
2000. The Company believes that the implementation of SAB 101 will not have a
material effect on the Company's results of operations and financial position.

In March 2000, the FASB issued Interpretation No. 44 of Accounting
Principals Board No. 25 ("APB 25"), "Accounting for Certain Transactions
involving Stock Compensation," 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
became effective on July 1, 2000. The Company implemented Interpretation No. 44
during the third quarter 2000. The implementation of Interpretation No. 44 did
not have a material effect on the Company's results of operations and financial
position.

LIQUIDITY AND CAPITAL RESOURCES

Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings and issuance of common stock.
Chiron's cash, investments in marketable debt securities and short-term
investments in equity securities, which totaled $786.8 million at September 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
$180.5 million and $205.8 million at September 30, 2000 and 1999, respectively.
Through the nine months ended September 30, 2000, net cash provided by operating
activities was $199.4 million as compared with net cash used in operating
activities of $37.1 million in 1999. The increase in cash provided by operating
activities was largely due to lower tax payments, a decrease in inventories and
higher net income through the nine months ended September 30, 2000 as compared
with the nine months ended September 30, 1999. Through the nine months ended
September 30, 1999, the Company paid $179.7 million in estimated taxes related
to the sale of Chiron Diagnostics.

30
<PAGE>
Through the nine months ended September 30, 2000, net cash used in investing
activities consisted of purchases of investments in marketable debt securities
of $3.3 billion, cash paid to purchase PathoGenesis of $677.1 million, capital
expenditures of $24.3 million, purchases of equity investments of $8.8 million
and other uses of cash of $23.7 million. This use of cash was offset by proceeds
from the sale and maturity of investments in marketable debt securities of
$3.9 billion, proceeds from the sale of equity securities and interests in
affiliated companies of $4.8 million and proceeds from the sale of assets of
$1.0 million. As of September 30, 2000, Chiron paid approximately
$677.1 million, plus an additional $29.9 million on October 12, 2000, to
purchase the outstanding shares of common stock of PathoGenesis at $38.50 per
share. 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
20.75% and will account for the investment on the equity method.

Through the nine months ended September 30, 2000, net cash used in financing
activities consisted of $213.1 million for the acquisition of treasury stock,
$70.8 million for the repayment of debt, including the note owed to Novartis,
and $16.3 million related to short-term borrowings. This use of cash was offset
by $63.8 million and $1.0 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, and $3.2 million in proceeds from
a note receivable.

On August 11, 2000, the Company's Board of Directors authorized management
to call for redemption the outstanding $253.9 million 1.90% convertible
subordinated debentures, including $10.1 million held by Novartis. The
redemption price for each $1,000 principal amount of the debentures was
$1,004.98, which includes accrued interest of $7.60 to the redemption date. As
an alternative to redemption, bondholders were entitled to convert the
debentures into shares of the Company's common stock at a conversion price of
$28.91 per share, or 34.6 shares for each $1,000 principal amount of bonds held,
plus cash in lieu of fractional shares. The bondholders' right to convert to
shares expired at the close of business on October 10, 2000. Through
September 30, 2000, debentures with a face value of $15.4 million were converted
into 0.5 million shares of the Company's common stock. As of October 10, 2000,
substantially all of the 1.90% debentures were converted into a total of
8.8 million shares of the Company's common stock.

The Company's Board of Directors authorized the repurchase of Chiron common
stock 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. The Board has authorized such repurchases through May 31, 2001. As
of September 30, 2000, the Company may repurchase 5.9 million shares of its
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.

31
<PAGE>
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 Euro conversion may have
competitive implications on the Company's pricing strategies. The Company is
still in the process of evaluating the effect, if any, that the Euro conversion
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 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

32
<PAGE>
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.

Specific to the Company's new product, TOBI-Registered Trademark-
(tobramycin solution for inhalation), the Company relies on others to supply raw
materials and to manufacture TOBI-Registered Trademark- according to regulatory
requirements. Although Chiron believes either one of its two suppliers of bulk
powdered tobramycin will be able to supply sufficient quantities to meet its
current needs, Chiron has not entered into long-term supply contracts with the
suppliers. Rather, the Company has an agreement for the formulation and
packaging of TOBI-Registered Trademark- for a minimum term of 10 years. There
can be no assurance that Chiron will be able to obtain future supplies of bulk
tobramycin on favorable terms, that contract manufacturers will be able to
provide sufficient quantities of TOBI-Registered Trademark- by a third party or
that the products supplied will meet specifications.

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

33
<PAGE>
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 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.

34
<PAGE>
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.

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

35
<PAGE>
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 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 as they relate to interest rates and counterparties through the
first nine months of 2000.

In September 2000, the Company decided to terminate its swaps, which
originally were established to modify the interest and/or currency
characteristics of certain assets and liabilities denominated in nonfunctional
currencies. The objective of the swaps was to fix the interest and currency
exposures associated with the Company's wholly-owned German subsidiary. The
exposures are denominated in Deutsche marks. As of September 30, 2000, if the
Deutsche mark strengthened or weakened by 10%, the value of the underlying
exposure would increase or decrease by $29.6 million and $23.7 million,
respectively.

During the third quarter 2000, the Company entered into forward contracts to
hedge against possible reductions in the market values of a portion of its
equity securities. The notional principal amount of the Company's forward
contracts on its equity securities at September 30, 2000 was $24.6 million. The
Company had no forward contracts on its equity securities during 1999. As of
September 30, 2000, if the market price of Chiron's equity investments,
including warrants, decreased by 10%, the market value of the equity portfolio
would decrease by $11.7 million. This amount includes the effect of both the
forward contracts and the short sales, which were established in the fourth
quarter 1999.

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.

36
<PAGE>
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 Reports on Form 10-Q for the
periods ended March 31, 2000 and June 30, 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
and second Quarterly Reports on Form 10-Q.

CYSTIC FIBROSIS PHARMACY, INC.

In May 2000, PathoGenesis Corporation ("PathoGenesis") initiated an action
against Cystic Fibrosis Pharmacy, Inc. ("CF Pharmacy") in the United States
District Court For The Middle District Of Florida Orlando Division. PathoGenesis
asserted that CF Pharmacy's advertising and sale of an inhaled antibiotic
infringes PathoGenesis' U.S. Patent No. 5,508,269 (the "'269 patent").
PathoGenesis seeks, INTER ALIA, injunctive relief and damages. CF Pharmacy filed
a counterclaim seeking a declaratory judgment of invalidity regarding the '269
Patent. In September 2000, the court entered a consent order enjoining CF
Pharmacy from advertising, compounding or selling the aerosol formulation
alleged to infringe the '269 Patent or use any imitation of the
TOBI-Registered Trademark- trademark until further order of the court. It is not
known when nor on what basis this matter will be resolved.

F. HOFFMAN LA-ROCHE A.G.

In July 2000, Chiron initiated an action against Roche Diagnostics GmbH in
the German Federal Court ("Landgericht") in Dusseldorf. The Company asserted
that Roche's manufacture and sale of products regarding HCV nucleic acid test
technology and HCV immunoassay technology infringe Chiron's German Patent Nos.
DD 298 527 (the "'527 patent"), DD 298 524 (the "'524 patent"), DD 287 104 (the
"'104 patent"), DD 297 446 (the "'446 patent") and Chiron's European Patent No.
EP 0 450 931 (the "'931 patent"). The Landgericht subsequently separated the
matter into five individual actions. In July 2000, Chiron initiated action
against Roche Diagnostics GmbH in the German Administrative Court
("Verwaltungsgericht") in Karlsruhe. The Company asserted that Roche's
manufacture and sale of HCV immunoassay products infringe the '931 patent.

In October 2000, Chiron and Roche resolved all pending litigation in the
United States, Italy, Japan, the Netherlands, Belgium, Germany and Australia
regarding HCV and HIV nucleic acid test technology. Still ongoing are previously
reported lawsuits between Chiron and Roche and four of the five Dusseldorf
actions reported above regarding HCV immunoassay technology, as well as Roche's
pending appeal against Chiron's European Patent No. EP 0 181 150 (the "'150
patent") relating to HIV technology in the European Patent Office. It is not
known when nor on what basis the remaining matters will be resolved.

LIPTON ET AL.

On February 18, 2000, the United States District Court for the Western
District of Washington dismissed with prejudice all eight consolidated putative
class action lawsuits that had been filed in March and April 1999 against
PathoGenesis, its Chief Executive Officer and its Chief Financial Officer. The
eight lawsuits subject to dismissal are Lipton v. PathoGenesis et al., C99-0419,
filed on March 24, 1999; Green v. PathoGenesis et al., C99-0439, filed on
March 26, 1999; Gellert v. PathoGenesis et al., C99-0452, filed on March 29,
1999; May v. PathoGenesis et al., C99-0453, filed on March 29, 1999; Shapiro v.
PathoGenesis et al., C99-0455, filed on March 29, 1999; Bassin v. PathoGenesis
et al., C99-0469, filed on March 30, 1999; Barker v. PathoGenesis et al.,
C99-0503, filed on April 6, 1999; and Kralovk v. PathoGenesis et al., C99-0506,
filed on April 6, 1999. The eight consolidated lawsuits alleged claims on behalf
of all purchasers

37
<PAGE>
of PathoGenesis common stock during the period January 15, 1999 to March 22,
1999. Plaintiffs had claimed that PathoGenesis and its officers violated certain
provisions of the federal securities laws by making statements in early 1999
regarding PathoGenesis' 1998 financial results. The court's order dismissed the
consolidated cases and bars plaintiffs from filing another lawsuit on the
matter. Plaintiffs have appealed the dismissal order to the United States Court
of Appeals for the Ninth Circuit. Chiron intends to defend the appeal
vigorously. It is not known when nor on what basis this matter will be resolved.

OFFICE OF THE ATTORNEY GENERAL, STATE OF CALIFORNIA

Chiron is responding to a subpoena served on September 18, 2000 by the
Office of the Attorney General of the State of California Department of Justice.
Chiron believes that the subpoena was issued in connection with a pending, but
as yet unserved, QUI TAM lawsuit against Chiron and a large number of other
pharmaceutical companies. With respect to Chiron, the subpoena seeks information
related to pricing to Medi-Cal and Medicaid programs of certain generic oncology
drugs sold by 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 nor on what basis this matter will be concluded.

TROXCLAIR

Chiron is aware of a class action suit filed on September 15, 2000 in the
Eastern District of Louisiana on behalf of minor child James Paul Troxclair, Jr.
against Chiron and a number of other pharmaceutical companies. Chiron has not
yet been served in this matter, and the Court has not certified the class. With
regards to Chiron, the complaint alleges that RabAvert-Registered Trademark-, a
rabies vaccine, contains Thimerosal, an additive that allegedly causes autism.
Troxclair seeks to recover damages based upon claims of negligence, breach of
implied warranty of merchantability, and other unspecified claims relating to
misrepresentations, fraudulent advertising, marketing and distribution of the
vaccine. It is not known when nor on what basis this matter will be concluded.

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, incorporated by
reference to Exhibit 3.04 of the Registrant's report on Form
10-Q for the period ended June 30, 2000.
4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, as 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.
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
--------------------- ------------------------------------------------------------
<C> <S>
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.
10.307 HCV Probe License Agreement dated October 10, 2000, between
Registrant, F. Hoffman-La Roche Ltd. and Roche Molecular
Systems, Inc. (Certain information has been omitted from the
Agreement and filed separately with the Securities and
Exchange Commission pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2. The omitted
confidential information has been identified by the
following statement "Confidential Treatment Requested".)
10.308 HIV Probe License Agreement dated October 10, 2000, between
Registrant, F. Hoffman-La Roche Ltd. and Roche Molecular
Systems, Inc. (Certain information has been omitted from the
Agreement and filed separately with the Securities and
Exchange Commission pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2. The omitted
confidential information has been identified by the
following statement "Confidential Treatment Requested".)
10.309 Blood Screening HCV/HIV Probe License Agreement dated
October 10, 2000, between Registrant, F. Hoffman-La Roche
Ltd. and Roche Molecular Systems, Inc. (Certain information
has been omitted from the Agreement and filed separately
with the Securities and Exchange Commission pursuant to a
request by Registrant for confidential treatment pursuant to
Rule 24b-2. The omitted confidential information has been
identified by the following statement "Confidential
Treatment Requested".)
10.310 License Agreement dated January 1, 1994, between Children's
Hospital and Medical Center and PathoGenesis Corporation,
incorporated by reference to Exhibit 10.14 to PathoGenesis
Corporation's Registration Statement on Form S-1
Registration No. 33-97070. (Certain information has been
omitted from the Agreement and filed separately with the
Securities and Exchange Commission pursuant to a request by
PathoGenesis Corporation for confidential treatment pursuant
to Rule 24b-2. Brackets denote such omissions.)
10.501 Chiron 1991 Stock Option Plan, as further amended.*
10.502 Form of Stock Option Agreement, Chiron 1991 Stock Option
Plan, as amended, for Employees of the Registrant.*
27.1 Financial Data Schedule for Nine Months ended September 30,
2000.
27.2 Financial Data Schedule for Six Months ended June 30, 2000.
27.3 Financial Data Schedule for Three Months ended March 31,
2000.
27.4 Financial Data Schedule for Fiscal Year ended December 31,
1999.
27.5 Financial Data Schedule for Nine Months ended September 30,
1999.
27.6 Financial Data Schedule for Six Months ended June 30, 1999.
27.7 Financial Data Schedule for Three Months ended March 31,
1999.
27.8 Financial Data Schedule for Fiscal Year ended January 3,
1999.
</TABLE>

------------------------

* Management contract, compensatory plan or arrangement.

(b) Reports on Form 8-K

On August 14, 2000, Registrant filed a Current Report on Form 8-K, reporting
under Item 5. the execution on August 13, 2000 of an agreement and plan of
merger (the "Merger Agreement") among

39
<PAGE>
Registrant, PathoGenesis Corporation, a Delaware corporation ("PathoGenesis"),
and Picard Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Registrant, pursuant to which Picard Acquisition Corporation
agreed to make a tender offer (the "Tender Offer") to purchase any or all of the
outstanding shares of common stock, par value $0.001 (the "Common Stock"),
together with the associated rights to purchase Series A Junior Preferred Stock,
of PathoGenesis at a purchase price equal to $38.50 per share in cash. Pursuant
to the Merger Agreement, Picard Acquisition Corporation would merge into
PathoGenesis after the Tender Offer, and PathoGenesis thereby would become a
wholly-owned subsidiary of Registrant (the "Merger").

On September 11, 2000, Registrant filed a Current Report on Form 8-K,
reporting under Item 5. the Company's call for redemption of all of its 1.90%
convertible subordinated debentures, aggregating $243.8 million, due
November 17, 2000, of which amount the public holds $243.8 million and Novartis
AG holds $10.1 million (the "1.90% Debentures"). The redemption date for the
1.90% Debentures was October 11, 2000.

On October 2, 2000, Registrant filed a Current Report on Form 8-K, reporting
under Item 2. the successful completion of the Tender Offer on September 18,
2000 and the Merger on September 21, 2000, pursuant to which PathoGenesis became
a wholly-owned subsidiary of Registrant.

On October 13, 2000, Registrant filed a Current Report on Form 8-K,
reporting under Item 5. the Company's execution of three patent license
agreements with F. Hoffman-La Roche dated October 10, 2000, for probe-based
clinical diagnostics for the hepatitis C virus ("HCV"), human immunodeficiency
virus ("HIV-1") and nucleic acid testing ("NAT") technology for blood screening.
Pursuant to the HCV and HIV clinical diagnostic licenses, Chiron agreed to grant
to Roche licenses under the Company's HCV and HIV patents for such diagnostics
and could receive, among other payments, a total of up to $115.0 million in
upfront payments, $85.0 million of which would be attributable to HCV and
$30.0 million attributable to HIV. The HIV payments are contingent upon HIV
patents being upheld in Europe and issued in the United States. Pursuant to the
blood screening license, Chiron agreed to grant to Roche a time-limited license
to its HCV and HIV patents for sale of NAT products to Roche's existing
customers in blood screening and would receive royalty payments from Roche based
on the number of blood donations tested through the use of Roche's HCV and HIV
NAT products.

40
<PAGE>
CHIRON CORPORATION
SEPTEMBER 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: NOVEMBER 7, 2000 By:
/s/ Sean P. Lance
-----------------------------------------
Sean P. Lance
CHIEF EXECUTIVE OFFICER AND PRESIDENT;
CHAIRMAN OF THE BOARD

DATE: November 7, 2000 By:
/s/ James R. Sulat
-----------------------------------------
James R. Sulat
VICE PRESIDENT; CHIEF FINANCIAL OFFICER

DATE: November 7, 2000 By:
/s/ David V. Smith
-----------------------------------------
David V. Smith
VICE PRESIDENT; CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER
</TABLE>