CHIRON CORP, 10-Q, 2000-05-10

CHIRON CORP
10-Q, 2000-05-10
PHARMACEUTICAL PREPARATIONS

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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

<TABLE>
<C> <S>
(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-12798
</TABLE>

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CHIRON CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 94-2754624
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>

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

(510) 655-8730
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes /X/ No / /

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
TITLE OF CLASS OUTSTANDING AT APRIL 30, 2000
-------------- -----------------------------
<S> <C>
Common Stock, $0.01 par value 179,675,324
</TABLE>

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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 March 31,
2000 and December 31, 1999............................. 3

Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999............. 4

Condensed Consolidated Statements of Comprehensive
Income for the three months ended March 31, 2000 and
1999................................................... 5

Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999............. 6

Notes to Condensed Consolidated Financial Statements.... 7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 29

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS................................ 30

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................. 31

SIGNATURES.................................................. 32
</TABLE>

2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS

CHIRON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 380,326 $ 363,865
Short-term investments in marketable debt securities...... 713,659 640,027
Short-term investments in equity securities............... 2,428 3,315
---------- ----------
Total cash and short-term investments................... 1,096,413 1,007,207
Accounts receivable, net.................................. 201,237 161,883
Current portion of note receivable........................ 3,233 3,233
Inventories............................................... 92,368 84,724
Other current assets...................................... 90,599 82,253
---------- ----------
Total current assets.................................... 1,483,850 1,339,300
Noncurrent investments in marketable debt securities........ 319,201 547,580
Property, plant, equipment and leasehold improvements, at
cost:
Land and buildings........................................ 131,790 132,861
Laboratory, production and office equipment............... 302,295 291,503
Leasehold improvements.................................... 73,989 73,143
Construction-in-progress.................................. 20,782 23,894
---------- ----------
528,856 521,401
Less accumulated depreciation and amortization............ (229,947) (222,566)
---------- ----------
Net property, plant, equipment and leasehold
improvements.......................................... 298,909 298,835
Purchased technology, net................................... 7,219 11,722
Other intangible assets, net................................ 139,415 143,320
Investments in equity securities and affiliated companies... 92,258 63,021
Notes receivable............................................ 15,563 13,967
Other assets................................................ 47,624 41,024
---------- ----------
$2,404,039 $2,458,769
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 45,072 $ 46,187
Accrued compensation and related expenses................. 39,175 45,102
Short-term borrowings..................................... 13,370 20,300
Current portion of long-term debt......................... 251,613 249,534
Note payable to Novartis.................................. -- 67,791
Current portion of unearned revenue....................... 53,077 42,524
Taxes payable............................................. 15,192 19,118
Other current liabilities................................. 145,621 122,375
---------- ----------
Total current liabilities............................... 563,120 612,931
Long-term debt.............................................. 93,062 96,958
Other noncurrent liabilities................................ 50,548 56,043
Minority interest........................................... 2,605 --
---------- ----------
Total liabilities....................................... 709,335 765,932
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock.............................................. 1,819 1,819
Additional paid-in capital................................ 2,081,250 2,057,418
Accumulated deficit....................................... (331,806) (323,037)
Accumulated other comprehensive income.................... 28,872 3,351
Treasury stock, at cost (1,976,000 and 1,230,000 shares at
March 31, 2000 and December 31, 1999, respectively)..... (85,431) (46,714)
---------- ----------
Total stockholders' equity.............................. 1,694,704 1,692,837
---------- ----------
$2,404,039 $2,458,769
========== ==========
</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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Product sales, net........................................ $157,606 $ 92,967
Equity in earnings of unconsolidated joint businesses..... 15,718 18,086
Collaborative agreement revenues.......................... 6,794 22,425
Royalty and license fee revenues.......................... 30,989 32,433
Other revenues............................................ 5,638 9,649
-------- --------
Total revenues.......................................... 216,745 175,560
-------- --------
Operating expenses:
Cost of sales............................................. 51,251 43,876
Research and development.................................. 70,990 67,453
Selling, general and administrative....................... 50,911 41,662
Restructuring and reorganization charges (Note 3)......... (371) 3,352
Other operating expenses.................................. 4,822 4,183
-------- --------
Total operating expenses................................ 177,603 160,526
-------- --------
Income from operations...................................... 39,142 15,034
Loss on sale of assets...................................... (224) --
Interest expense............................................ (5,026) (5,845)
Other income, net........................................... 24,470 22,560
Minority interest........................................... (201) --
-------- --------
Income from continuing operations before income taxes....... 58,161 31,749
Provision for income taxes.................................. 18,077 8,011
-------- --------
Income from continuing operations........................... 40,084 23,738
Gain on disposal of discontinued operations (Note 2)........ 152 --
-------- --------
Net income.................................................. $ 40,236 $ 23,738
======== ========
Basic earnings per share (Note 1):
Income from continuing operations......................... $ 0.22 $ 0.13
======== ========
Net income................................................ $ 0.22 $ 0.13
======== ========
Diluted earnings per share (Note 1):
Income from continuing operations......................... $ 0.21 $ 0.13
======== ========
Net income................................................ $ 0.21 $ 0.13
======== ========
</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

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net income.................................................. $ 40,236 $ 23,738
-------- --------
Other comprehensive income (loss):
Change in foreign currency translation adjustment during
the period.............................................. (10,282) (14,365)
Unrealized gains (losses) from investments:
Unrealized holding gains (losses) arising during the
period................................................ 36,374 (1,726)
Reclassification adjustment for net gains included in
net income, net of tax provision of $256 and $795 for
the three months ended March 31, 2000 and 1999,
respectively.......................................... (571) (1,414)
-------- --------
Net unrealized gains (losses) from investments.......... 35,803 (3,140)
-------- --------
Other comprehensive income (loss)........................... 25,521 (17,505)
-------- --------
Comprehensive income........................................ $ 65,757 $ 6,233
======== ========
</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>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities......... $ 15,471 $(130,274)
--------- ---------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.... (500,654) (701,195)
Proceeds from sale and maturity of investments in
marketable debt securities.............................. 652,000 412,142
Capital expenditures...................................... (11,736) (33,889)
Proceeds from sale of assets.............................. 1,000 --
Proceeds from sale of equity securities and interests in
affiliated companies.................................... 3,098 --
Other, net................................................ 6,750 (18,604)
--------- ---------
Net cash provided by (used in) investing activities..... 150,458 (341,546)
--------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) short-term borrowings.... (6,250) 1,024
Repayment of debt and capital leases...................... (67,882) (887)
Payments to acquire treasury stock........................ (114,319) (555)
Proceeds from reissuance of treasury stock................ 38,983 --
Proceeds from issuance of common stock.................... -- 28,069
--------- ---------
Net cash (used in) provided by financing activities..... (149,468) 27,651
--------- ---------
Net increase (decrease) in cash and cash equivalents.... 16,461 (444,169)
Cash and cash equivalents at beginning of the period........ 363,865 513,315
--------- ---------
Cash and cash equivalents at end of the period.............. $ 380,326 $ 69,146
========= =========
</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

MARCH 31, 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 March 31, 2000, and for the three months ended March 31, 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.

During the second quarter of 1999, the Company completed the implementation
of an integrated information system. As a result, certain previously reported
amounts have been reclassified to conform to the current period presentation.
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.

Prior to January 1999, the results of Chiron's Italian subsidiary ("Chiron
S.p.A.") were reported on a one-month lag. In the first quarter of 1999, the
results of Chiron S.p.A. were brought current. As a result, during the first
quarter of 1999, the Company recorded a loss of approximately $5.2 million for
the month of December 1998 as a component of "Accumulated deficit" in the
Condensed Consolidated Balance Sheets.

PRINCIPLES OF CONSOLIDATION

The Condensed Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. For consolidated majority-owned
subsidiaries in which the Company owns less than 100%, the Company records
"Minority interest" in the Condensed Consolidated Financial Statements to
account for the ownership interest of the minority owner. Investments in joint
ventures, partnerships and interests in which the Company has an equity interest
of 50% or less are accounted for using either the equity or cost method. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

In 2000, the Company began consolidating, and recording minority interest
related to, its 51% owned joint venture, Chiron Behring Vaccines Private, Ltd.

INVENTORIES

Inventories are stated at the lower of cost or market using the moving
weighted-average cost method. Inventories consist of the following (in
thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
Finished goods........................................ $17,084 $16,614
Work-in-process....................................... 56,697 49,193
Raw materials......................................... 18,587 18,917
------- -------
$92,368 $84,724
======= =======
</TABLE>

7
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CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 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 31% of pretax
income from continuing operations. The effective tax rate may be affected in
future periods by changes in management's estimates with respect to the
Company's deferred tax assets and other items affecting the overall tax rate.
Income tax expense for the three months ended March 31, 1999 was based on an
estimated annual effective tax rate on pretax income from continuing operations
of approximately 25%. The actual 1999 annual effective tax rate of 18% reflects
the utilization of state deferred tax assets that were recognized during the
second half of 1999 through a reduction in the valuation allowance associated
with such assets.

TREASURY STOCK

Treasury stock is stated at cost. Gains on reissuance of treasury stock are
credited to additional paid-in capital. Losses on reissuance of treasury stock
are charged to additional paid-in capital to the extent of available net gains
on reissuance of treasury stock. Otherwise, losses are charged to accumulated
deficit. For the three months ended March 31, 2000, the Company charged losses
of $49.0 million to accumulated deficit.

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.

8
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Income (Numerator):
Income from continuing operations available to common
stockholders............................................ $40,084 $23,738
Plus: Interest on 1.9% convertible debentures, net of
taxes................................................... 1,830 --
------- -------
Income available to common stockholders, plus assumed
conversions............................................... $41,914 $23,738
------- -------
Shares (Denominator):
Weighted-average common shares outstanding................ 180,314 180,639
Effect of dilutive securities:
Options and equivalents................................. 7,084 4,160
Warrants................................................ 431 255
1.9% convertible debentures............................. 8,784 --
------- -------
Weighted-average common shares outstanding, plus assumed
conversions............................................. 196,613 185,054
------- -------
Basic earnings per share.................................... $ 0.22 $ 0.13
======= =======
Diluted earnings per share.................................. $ 0.21 $ 0.13
======= =======
</TABLE>

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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Income (Numerator):
Net income available to common stockholders............... $40,236 $23,738
Plus: Interest on 1.9% convertible debentures, net of
taxes................................................... 1,830 --
------- -------
Income available to common stockholders, plus assumed
conversions............................................. $42,066 $23,738
------- -------
Shares (Denominator):
Weighted-average common shares outstanding................ 180,314 180,639
Effect of dilutive securities:
Options and equivalents................................. 7,084 4,160
Warrants................................................ 431 255
1.9% convertible debentures............................. 8,784 --
------- -------
Weighted-average common shares outstanding, plus assumed
conversions............................................. 196,613 185,054
------- -------
Basic earnings per share.................................... $ 0.22 $ 0.13
======= =======
Diluted earnings per share.................................. $ 0.21 $ 0.13
======= =======
</TABLE>

9
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the three months ended March 31, 2000 and 1999, options to purchase
0.6 million and 1.4 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 and 12.0 million shares for the three months ended March 31, 2000
and 1999, respectively, 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 exceeds basic earnings per share. As
indicated in Note 7, on April 17, 2000, the Company filed a registration
statement with the Securities and Exchange Commission to register 4.5%
convertible subordinated debentures to be offered in exchange for its existing
1.9% convertible subordinated debentures. The new debentures are convertible, at
the holders' option, into common stock at a price equal to a 33% premium over
the average of the closing market prices of the Company's common stock for each
of the five business days ending on (and including) May 10, 2000 per $1,000
principal amount. Also, on April 4, 2000, the Company's Board of Directors
authorized management to call, for redemption in common stock, all of the
outstanding 5.25% convertible subordinated debentures prior to the next interest
payment date of May 21, 2000.

NOTE 2--DISCONTINUED OPERATIONS

On November 30, 1998, Chiron completed the sale of its IN VITRO diagnostics
business to Bayer for $1,013.8 million in cash, subject to certain post-closing
adjustments. The sale was completed under the terms of a Stock Purchase
Agreement (the "Bayer Agreement"), dated as of September 17, 1998, between
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 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 March 31, 2000 and
December 31, 1999, the real estate assets of $1.9 million, which represent all
of the remaining net assets of Chiron's discontinued operations, are recorded in
the Condensed Consolidated Balance Sheets as "Other current assets."

For the three months ended March 31, 2000, "Gain on disposal of discontinued
operations" includes income tax expenses of $0.1 million.

10
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

(UNAUDITED)

NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES

In 2000 and 1999, 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 March 31, 2000, 27 of these 28 positions had been eliminated. The
ongoing rationalization of its business operations consisted of termination and
other employee-related costs recognized in connection with the elimination of
382 positions in manufacturing, research and development, sales, marketing and
other administrative functions, and facility-related costs. During 2000, the
Company decided to retain 11 of those 382 positions to support future contract
manufacturing activities and, therefore, adjusted the number of positions for
elimination to 371. Included in this amount were 36 positions at the Company's
Amsterdam facility, which was sold in December 1999. These positions were
transferred to the buyer in January 2000.

For the three months ended March 31, 2000, the Company recorded
restructuring and reorganization benefits of $0.4 million, which related to
revised estimates of termination and other employee-related costs recorded in
connection with the elimination of the 371 positions. As of March 31, 2000, 356
of these 371 positions had been eliminated.

For the three months ended March 31, 1999, the Company recorded net
restructuring and reorganization charges of $3.4 million related to the
integration of its worldwide vaccines operations.

The current status of the restructuring and reorganization accruals is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
AMOUNT
AMOUNT OF AMOUNT OF UTILIZED AMOUNT TO
ACCRUAL AT TOTAL TOTAL THROUGH BE UTILIZED
DECEMBER 31, RESTRUCTURING RESTRUCTURING MARCH 31, IN FUTURE
1999 CHARGE BENEFIT 2000 PERIODS
------------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Employee-related costs.............. $3,772 $ -- $(531) $ (688) $2,553
Other facility-related costs........ 1,631 160 -- (512) 1,279
------ ---- ----- ------- ------
5,403 160 (531) (1,200) 3,832
Discontinued operations............. 285 -- (109) -- 176
------ ---- ----- ------- ------
$5,688 $160 $(640) $(1,200) $4,008
====== ==== ===== ======= ======
</TABLE>

The restructuring and reorganization accruals, which are included as a
component of "Other current liabilities" in the Condensed Consolidated Balance
Sheets, are expected to be substantially settled within 12 months 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

11
<PAGE>
CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

(UNAUDITED)

NOTE 4--SALE OF AUSTRALIAN SUBSIDIARY (CONTINUED)
nature of MitoKor. The promissory notes are due on August 7, 2001 and
February 7, 2003 and are included in "Other assets" in the Condensed
Consolidated Balance Sheets, with a face amount of $2.0 million and net of an
unamortized discount of $0.4 million at an imputed interest rate of 9%, at
March 31, 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 are 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 is included in "Loss on sale of assets" in the
Condensed Consolidated Statements of Operations.

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 and $1.2 million for the three months ended March 31, 2000 and
1999, respectively.

The Company intends to liquidate the remaining assets and liabilities of the
Australian subsidiary in the third quarter of 2000.

In connection with the sale, the Company and Mimotopes entered into an
agreement, under which Mimotopes would perform the research and development for
the remaining term of an agreement with Novartis, which ends in November 2000.
The Company paid Mimotopes $0.7 million for the research and development
services, which it will amortize over the period during which the services are
performed.

NOTE 5--SEGMENT INFORMATION

Chiron is organized based on the products and services that it offers. Under
this organizational structure, the Company has the following three reportable
segments: (i) biopharmaceuticals, (ii) vaccines and (iii) blood testing. The
biopharmaceuticals segment consists of therapeutic products and services, with
an emphasis on the treatment of cancer, infectious diseases and cardiovascular
disease, as well as the development and acquisition of technologies related to
recombinant proteins, small molecules and genomics. The vaccines segment
consists principally of products and services related to adult and pediatric
vaccines sold primarily in the United Kingdom, Germany, Italy and other
international markets, as well as the development of technologies related to
vaccines. The blood testing segment consists of Chiron's one-half interest in
the pretax operating earnings of its joint business with Ortho-Clinical
Diagnostics, Inc. ("Ortho"), a Johnson & Johnson company, and an alliance with
Gen-Probe Incorporated ("Gen-Probe"). Chiron's joint business with Ortho sells a
line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and
provides supplemental tests and microplate-based instrument systems to automate
test performance and data collection. Chiron's alliance with Gen-Probe is
focused on developing and selling nucleic acid testing ("NAT") products using
transcription-mediated amplification ("TMA") technology to screen transfused
blood and plasma products for viral infection.

12
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CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

(UNAUDITED)

NOTE 5--SEGMENT INFORMATION (CONTINUED)
Certain other revenues and expenses, particularly Novartis research and
development funding, certain royalty revenues and unallocated corporate
expenses, are not viewed by management as belonging to any one reportable
segment. As a result, these items have been aggregated into an "Other" segment,
as permitted by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131").

The accounting policies of the Company's reportable segments are the same as
those described in Note 1--The Company and Summary of Significant Accounting
Policies. Chiron evaluates the performance of its segments based on each
segment's income (loss) from continuing operations, excluding certain special
items, such as restructuring and reorganization charges, which are shown as
reconciling items in the table below.

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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES
Biopharmaceuticals........................................ $ 61,492 $ 67,741
Vaccines.................................................. 117,461 56,474
Blood testing, includes equity in earnings of
unconsolidated joint businesses of $15,718 and $17,843
for the three months ended March 31, 2000 and 1999,
respectively............................................ 26,396 24,630
Other..................................................... 11,396 26,715
-------- --------
Total revenues.......................................... $216,745 $175,560
======== ========

INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals........................................ $(15,550) $ (4,692)
Vaccines.................................................. 50,023 (6,308)
Blood testing............................................. 11,518 14,515
Other..................................................... (7,220) 14,871
-------- --------
Segment income from operations.......................... 38,771 18,386
Operating income (expense) reconciling items:
Restructuring and reorganization charges................ 371 (3,352)
-------- --------
Income from operations.................................... 39,142 15,034
Loss on sale of assets.................................. (224) --
Interest expense........................................ (5,026) (5,845)
Other income, net....................................... 24,470 22,560
Minority interest....................................... (201) --
-------- --------
Income from continuing operations before income taxes..... $ 58,161 $ 31,749
======== ========
</TABLE>

13
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CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

(UNAUDITED)

NOTE 5--SEGMENT INFORMATION (CONTINUED)
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.

NOTE 6--CONTINGENCIES

The Company is party to various claims, investigations and legal proceedings
arising in the ordinary course of business. These claims, investigations and
legal proceedings relate to intellectual property rights, contractual rights and
obligations, employment matters, claims of product liability and other issues.
While there is no assurance that an adverse determination of any of such matters
could not have a material adverse impact in any future period, management does
not believe, based upon information known to it, that the final resolution of
any of these matters will have a material adverse effect upon the Company's
consolidated financial position and annual results of operations and cash flows.

NOTE 7--SUBSEQUENT EVENTS

On April 17, 2000, the Company filed a registration statement with the
Securities and Exchange Commission to register $243.8 million of 4.5%
convertible subordinated debentures to be offered in exchange for its existing
1.9% convertible subordinated debentures, which are due in November 2000. The
new debentures are convertible, at the holders' option, into common stock at a
price equal to a 33% premium over the average of the closing market prices of
the Company's common stock for each of the five business days ending on, and
including, May 10, 2000 per $1,000 principal amount and are due in May 2007.
Interest will be paid semi-annually. The Company may redeem the new debentures
at any time on or after May 2003, at a redemption price starting at $1,025.71
per $1,000 principal amount, decreasing to a redemption price equal to 100% of
the principal amount at maturity. The Company's obligation to proceed with the
offer is conditioned upon 75% of the existing 1.9% convertible subordinated
debentures being tendered and upon the average of the closing market prices of
the Company's common stock for each of the five business days ending on, and
including, May 10, 2000 remaining between $40 and $55 per share. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"), the Company will account for the exchange as an
extinguishment of debt and recognize an extraordinary loss.

On April 4, 2000, the Company's Board of Directors authorized management to
call, for redemption in common stock, all of the outstanding 5.25% convertible
subordinated debentures prior to the next interest payment date of May 21, 2000.
The redemption price for each $5,000 principal amount of the bonds will equal
$5,260.31, which includes accrued interest of $260.31 to the redemption date. As
an alternative to redemption, bondholders may elect to convert into shares of
the Company's common stock at a conversion price of $30.83 per share, or 162
shares for each $5,000 principal amount of bonds held, plus cash in lieu of
fractional shares. The bondholders' right to convert to shares will expire at
the close of business on May 11, 2000.

14
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS.
THESE INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE
EVENTS OR PERFORMANCE, AND ALL OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS
OF HISTORICAL FACT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS
SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "ESTIMATES," "PROJECTS," "WILL,"
"MAY," "MIGHT," AND WORDS OF A SIMILAR NATURE. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT REFLECT MANAGEMENT'S CURRENT BELIEFS AND EXPECTATIONS
ON THE DATE OF THIS REPORT. ACTUAL RESULTS, PERFORMANCE OR OUTCOMES MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. SOME OF THE
IMPORTANT FACTORS WHICH, IN THE VIEW OF CHIRON CORPORATION ("CHIRON" OR THE
"COMPANY"), COULD CAUSE ACTUAL RESULTS TO DIFFER ARE DISCUSSED UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY ANNOUNCE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT FACTS OR CIRCUMSTANCES OF WHICH MANAGEMENT BECOMES AWARE AFTER THE DATE
THEREOF.

THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I., ITEM 1.,
"FINANCIAL STATEMENTS," OF THIS QUARTERLY REPORT ON FORM 10-Q AND PART II.
ITEMS 7., 7A., AND 8., "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK" AND "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,"
RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999.

Chiron is a biotechnology company that participates in three global
healthcare markets: biopharmaceuticals, vaccines and blood testing. The
biopharmaceuticals segment consists of therapeutic products and services, with
an emphasis on the treatment of cancer, infectious diseases and cardiovascular
disease, as well as the development and acquisition of technologies related to
recombinant proteins, small molecules and genomics. The vaccines segment
consists principally of adult and pediatric vaccines sold primarily in the
United Kingdom, Germany, Italy and other international markets, as well as the
development of technologies related to vaccines. The blood testing segment
consists of Chiron's one-half interest in the pretax operating earnings of its
joint business with Ortho-Clinical Diagnostics, Inc. ("Ortho"), a Johnson &
Johnson company, and an alliance with Gen-Probe Incorporated ("Gen-Probe").
Chiron's joint business with Ortho sells a line of immunodiagnostic tests to
detect hepatitis viruses and retroviruses and provides supplemental tests and
microplate-based instrument systems to automate test performance and data
collection. Chiron's alliance with Gen-Probe is focused on developing and
selling nucleic acid testing ("NAT") products using transcription-mediated
amplification ("TMA") technology to screen transfused blood and plasma products
for viral infection. Certain other revenues and expenses are not viewed by
management as belonging to any one segment. As a result, these items have been
aggregated into an "Other" segment.

On December 29, 1997, Chiron completed the sale of its ophthalmics business
("Chiron Vision") to Bausch & Lomb Incorporated ("B&L"), and on November 30,
1998, Chiron completed the sale of its IN VITRO diagnostics business ("Chiron
Diagnostics") to Bayer Corporation ("Bayer"). The Company's Condensed
Consolidated Statements of Operations reflect the after-tax results of Chiron
Vision and Chiron Diagnostics as discontinued operations.

RESULTS OF OPERATIONS

BIOPHARMACEUTICALS

PRODUCT SALES For the three months ended March 31, 2000 and 1999, product
sales from the biopharmaceuticals segment were $40.7 million and $43.1 million,
respectively. In 2000 and 1999, biopharmaceutical product sales consisted
principally of Proleukin-Registered Trademark- (aldesleukin, interleukin-2) and
Betaseron-Registered Trademark- (interferon beta-1b).

15
<PAGE>
PROLEUKIN-REGISTERED TRADEMARK- Chiron sells Proleukin-Registered
Trademark- directly in the U.S. and certain international markets. For the three
months ended March 31, 2000 and 1999, sales of Proleukin-Registered Trademark-
were $19.2 million and $25.9 million, respectively. The decrease in
Proleukin-Registered Trademark- product sales in 2000 as compared with 1999 was
primarily due to reductions in inventory stocking levels by certain U.S.
wholesalers during the first quarter 2000. Despite the purchasing patterns of
these wholesalers, underlying purchases by end users have increased in the U.S.
There can be no assurance that wholesalers will maintain inventory stocking
levels in 2000 commensurate with those in 1999. If these levels are not
maintained, the Company may experience a corresponding reduction in
Proleukin-Registered Trademark- sales to wholesalers in 2000. The 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 Laboratories, Inc. ("Berlex") and its parent company,
Schering AG of Germany. Chiron earns a payment for Betaseron-Registered
Trademark- upon shipment to Berlex and Schering AG and a subsequent additional
payment upon sales by Berlex and Schering AG. Accordingly, Chiron's revenues
from Betaseron-Registered Trademark- tend to fluctuate based upon the inventory
management practices of Berlex and Schering AG. For the three months ended
March 31, 2000 and 1999, sales of Betaseron-Registered Trademark- were
$18.7 million and $14.6 million, respectively. In the first quarter 2000, the
number of Betaseron-Registered Trademark- vials, which underly the sales
recorded by Chiron, shipped by Berlex and Schering AG increased 20% over the
first quarter 1999, and Chiron's shipments of Betaseron-Registered Trademark- to
Berlex and Schering AG increased 1% over the first quarter 1999. The Company
also earns royalties on Schering AG's European sales of Betaferon-Registered
Trademark-(interferon beta-lb) (collectively, "Betaseron-Registered Trademark-
revenues"). 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 market growth, particularly in
Europe, Canada and Australia.

PDGF Chiron manufactures PDGF (recombinant human platelet-derived growth
factor -rhPDGF-BB) for Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson
("J&J") company. PDGF is the active ingredient in Regranex-Registered Trademark-
(becaplermin) Gel, a treatment for diabetic foot ulcers. Regranex-Registered
Trademark- Gel was approved by the Food and Drug Administration ("FDA") in
December 1997 and was launched commercially in early 1998. 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. Chiron's sales of PDGF
fluctuate based upon the inventory management practices of J&J. As a result,
there were no commercial sales of PDGF to J&J from the first quarter 1999
through the first quarter 2000. Commercial sales of PDGF to J&J are expected to
resume in the second quarter 2000.

The Company expects the competitive pressures related to many of its
biopharmaceutical products to continue into the foreseeable future as a result
of the introduction of competing products into the market, as listed in
Item 1., "Business--Competition" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.

In October 1999, SkyePharma, Inc. ("SkyePharma"), the manufacturer of
DepoCyt-Registered Trademark-, discovered two DepoCyt-Registered Trademark- lots
that did not meet manufacturing specifications and, as a result, all
DepoCyt-Registered Trademark- vials were recalled from these lots. The
commercial supply of this product is on hold while the Company and SkyePharma
work with the FDA to resolve various issues related to the manufacture of the
product. Management of the Company does not believe that this event will have a
material impact on the results of operations for fiscal year 2000.The impact of
this event on future shipments of DepoCyt-Registered Trademark- is not yet
known. There can be no assurance that commercial shipments of DepoCyt-Registered
Trademark- will resume.

COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received for research services as they are performed and fees
received upon the achievement of specified milestones. For the three months
ended March 31, 2000 and 1999, the biopharmaceuticals segment recognized
collaborative agreement revenues of $3.2 million and $5.0 million, respectively.

16
<PAGE>
The decrease in collaborative agreement revenues in 2000 as compared with
1999 was partially due to decreases in revenue earned by the Company under two
agreements with Novartis (for more information, refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999). The Company's "Other"
segment also earns collaborative agreement revenues under a third Novartis
agreement. See "Other--Collaborative agreement revenues" below.

Collaborative agreement revenues tend to fluctuate based on the amount of
research services performed, the status of projects under collaboration and the
achievement of milestones. Due to the nature of the biopharmaceutical
collaborative agreement revenues, results in any one period are not necessarily
indicative of results to be achieved in the future. The Company's ability to
generate additional collaborative agreement revenues may depend, in part, on its
ability to initiate and maintain relationships with potential and current
collaborative partners. In particular, the November 1996 consent agreement
between Chiron, Novartis and the Federal Trade Commission expires in the fourth
quarter 2001 (for more information, refer to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999), and the November 1995 agreement
with Novartis expires in the fourth quarter 2000 (for more information, refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
There can be no assurance that new relationships will be established or that
current collaborative agreement revenue will not decline.

ROYALTY AND LICENSE FEE REVENUES For the three months ended March 31, 2000
and 1999, the biopharmaceuticals segment recognized royalty and license fee
revenues of $15.4 million and $16.6 million, respectively. The Company earns
royalties on third party sales of several products, including recombinant
insulin and glucagon products, Betaferon-Registered Trademark- and hepatitis B
virus ("HBV") products.

Chiron estimates recombinant insulin and glucagon royalty revenues based on
previous period actual recombinant insulin and glucagon product sales. For the
three months ended March 31, 2000 and 1999, Chiron recognized $1.5 million and
$7.1 million, 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 the first quarter 1999.

The decrease in royalty revenues under the recombinant insulin and glucagon
royalty arrangement was offset by increases in other royalty arrangements. The
Company earns royalties on Schering AG's European sales of Betaferon-Registered
Trademark- (interferon beta-lb). For the three months ended March 31, 2000 and
1999, Chiron recognized $7.5 million and $6.8 million, 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
market growth in Europe, offset by a weaker exchange rate of the Euro as
compared with the U.S. dollar. The Company also earns royalties on third party
sales of HBV products. For the three months ended March 31, 2000 and 1999,
royalty revenues recognized under the HBV royalty arrangement were $2.7 million
and $2.4 million, respectively.

In addition, in the first quarter 2000, Chiron recognized revenue under an
agreement with Glaxo Group Limited ("Glaxo"), whereby Chiron granted to Glaxo
rights under certain Chiron hepatitis C virus ("HCV") patents. The agreement
provides for certain milestone payments and minimum annual royalties. If Glaxo
commercializes a product 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.

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 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 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

17
<PAGE>
addition, the Company's ability to generate additional royalty and license fee
revenues may depend, in part, on its ability to market and capitalize on its
technologies. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenue will not decline.

OTHER REVENUES For the three months ended March 31, 2000 and 1999, the
biopharmaceuticals segment recognized other revenues of $2.2 million and
$3.1 million, respectively.

For the three months ended March 31, 2000 and 1999, other revenues included
contract manufacturing revenues of $1.2 million and $2.6 million, respectively.
The decrease was a result of the timing of contract manufacturing activities.
The Company anticipates that there will be increased contract manufacturing
activities in 2000 as compared with 1999, as we seek to improve utilization of
manufacturing capacity.

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 March 31, 2000 and 1999,
biopharmaceutical gross profit as a percentage of net product sales was 67.2%
and 71.1%, respectively.

The decrease in biopharmaceutical gross profit margins in 2000 as compared
with 1999 was primarily related to an increase in idle facility costs due to the
timing of manufacturing activities.

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

RESEARCH AND DEVELOPMENT For the three months ended March 31, 2000 and
1999, the biopharmaceuticals segment recognized research and development
expenses of $51.8 million and $48.8 million, respectively. The increase in
research and development spending in 2000 as compared with 1999 was due to the
furtherance of the Company's clinical trials related to various programs, such
as Proleukin-Registered Trademark- for HIV, Fibroblast Growth Factor ("FGF") for
coronary and peripheral artery diseases, tifacogin (recombinant Tissue Factor
Pathway Inhibitor or "TFPI") for severe sepsis and Insulin-Like Growth Factor-1
("IGF-1") for osteoarthritis.

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 March 31,
2000 and 1999, selling, general and administrative ("SG&A") expenses of the
biopharmaceuticals segment were $10.4 million and $10.5 million, respectively.
The decrease in SG&A expenses in 2000 as compared with 1999 was primarily due to
a change in the method of allocating certain legal costs to segments. 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. This
decrease was offset by an increase in SG&A expenses due to the Company's
worldwide implementation of its integrated information system in April 1999.

VACCINES

PRODUCT SALES Chiron sells pediatric and adult vaccines in the United
Kingdom, Germany, Italy and other international markets. For the three months
ended March 31, 2000 and 1999, vaccine product sales were $109.8 million and
$44.5 million, respectively. The increase in product sales in 2000 as compared
with 1999 was primarily due to shipments of $60.4 million of Menjugate-TM-, its
conjugate vaccine against meningococcal meningitis caused by the bacterium N.
meningitidis serogroup C, to the National Health Service ("NHS") in the United
Kingdom under tender. Under the tender, the Company will ship approximately
$100.0 million of Menjugate-TM- to the NHS. The Company expects to ship a
majority of the remaining Menjugate-TM- under the tender in the second quarter
2000. In addition, the Company is exploring

18
<PAGE>
opportunities for additional Menjugate-TM- sales in the United Kingdom and other
countries; however, the Company does not expect Menjugate-TM- shipments, if any,
in following quarters to be commensurate with those in the first quarter 2000.

Certain of the Company's vaccine products, particularly its flu vaccine, are
seasonal and typically have higher sales in the second half of the year. In
addition, the Company expects the competitive pressures related to many of its
vaccine products to continue into the foreseeable future as a result of the
introduction of competing products into the market, including new combination
vaccines.

ROYALTY AND LICENSE FEE REVENUES For the three months ended March 31, 2000
and 1999, the vaccines segment recognized royalty and license fee revenues of
$4.0 million and $5.5 million, respectively.

An agreement with SmithKline Beecham provides for royalties on sales of
certain human vaccine products, under which Chiron recognized $1.8 million and
$2.1 million of such royalties for the three months ended March 31, 2000 and
1999, respectively. Also, for the three months ended March 31, 2000 and 1999,
Chiron recognized $2.2 million and $3.3 million, respectively, of royalty
revenues on third party sales of HBV vaccine products, hepatitis A virus ("HAV")
vaccine products and rabies vaccine products. The decrease was due to the HAV
royalty arrangement, which expired in early 2000, and, to a lesser extent, the
rabies royalty arrangement, which expired in the second quarter 1999.

Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. Results in any one
period are not necessarily indicative of results to be achieved in the future.
In addition, the Company's ability to generate additional royalty and license
fee revenues may depend, in part, on its ability to market and capitalize on its
technologies. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenue will not decline.

OTHER REVENUES For the three months ended March 31, 2000 and 1999, the
vaccines segment recognized other revenues of $3.6 million and $6.2 million,
respectively.

Other revenues included commission revenues on sales of HBV vaccine products
and immunoglobulin products of $1.9 million and $3.0 million for the three
months ended March 31, 2000 and 1999, respectively. The decrease in commission
revenues in 2000 as compared with 1999 was primarily related to a decrease in
third party sales of the HBV vaccine products due to the introduction of
competitive combination vaccines. In addition, for the three months ended
March 31, 1999, other revenues included a $1.2 million grant from the Italian
government for vaccines research performed under an agreement that ended in the
third quarter 1999.

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 March 31, 2000 and 1999, vaccine
gross profit as a percentage of net product sales was 72.7% and 41.0%,
respectively. The increase in vaccine gross profit margins in 2000 as compared
with 1999 was primarily related to sales of Menjugate-TM-. A significant portion
of Menjugate-TM- production occurred in 1999. Since the Company had not received
approval as of the end of fiscal year 1999 in the United Kingdom to market
Menjugate-TM-, the Company expensed manufacturing costs to research and
development. The NHS in the United Kingdom accepted the Company's tender to
supply Menjugate-TM- in March 2000. The Company does not expect vaccine gross
profit margins in following quarters to be commensurate with those in the first
quarter 2000.

In the first quarter 2000, Chiron and Aventis Pasteur ("AvP") entered into a
co-promotion and co-marketing arrangement for Menjugate-TM-. Chiron may be
required to pay AvP co-promotion fees in certain territories and may receive
remuneration from AvP for co-marketing in other territories. The current tender
with the NHS in the United Kingdom is not included in this arrangement.

19
<PAGE>
Vaccine gross profit percentages may fluctuate significantly in future
periods as the vaccine product mix continues to evolve.

RESEARCH AND DEVELOPMENT For the three months ended March 31, 2000 and
1999, the vaccines segment recognized research and development expenses of
$15.3 million and $16.3 million, respectively. The decrease in research and
development spending in 2000 as compared with 1999 was due to receipt of
approval for sales of Menjugate-TM- in March 2000, as discussed in "Gross
profit" above, offset by increased spending due to the furtherance of the
Company's clinical trials related to various vaccine programs.

Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.

SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended March 31,
2000 and 1999, the vaccines segment recognized SG&A expenses of $18.3 million
and $17.2 million, respectively. The increase in SG&A expenses in 2000 as
compared with 1999 was due to the Company's re-launch of its tick-borne
encephilitis vaccine product in the first quarter 2000 and the worldwide
implementation of its integrated information system in April 1999. This increase
was offset by a decrease in SG&A expenses due to a change in the method of
allocating certain legal costs to segments, as discussed previously.

BLOOD TESTING

PRODUCT SALES For the three months ended March 31, 2000 and 1999, blood
testing product sales were $7.1 million and $5.4 million, respectively.

Under the Ortho arrangement, the Company is reimbursed for its manufacturing
costs related to immunodiagnostic products. For the three months ended
March 31, 2000 and 1999, the Company recognized revenues under this agreement of
$4.2 million and $5.4 million, respectively. In the second quarter 1999, certain
costs that had been reimbursable previously as manufacturing costs under the
Ortho arrangement, became reimbursable as research costs. This resulted in a
shift from product sales to collaborative agreement revenues in the first
quarter 2000.

Under the collaboration agreement with Gen-Probe, Chiron and Gen-Probe
jointly participate in new assay and instrument research and development while
Gen-Probe performs certain product development and assay and instrument
manufacturing functions. Currently, Gen-Probe is the only manufacturer of
nucleic acid testing products using TMA technology.

During the second quarter 1999, the Company began recognizing revenues from
sales of its nucleic acid tests that are used to screen blood and plasma under
an investigational new drug ("IND") application in the U.S. Evaluation studies
at several non-U.S. sites also began during the second quarter 1999. Worldwide
product sales related to tests and instruments were $2.9 million for the three
months ended March 31, 2000.

In September 1999, the Company received regulatory approval in France for
the TMA assay and began selling and providing assays and renting instruments to
several regional blood testing centers. Currently, the French government is
considering the guidelines that it will adopt regarding nucleic acid testing,
and Chiron is participating in a government-sponsored evaluation at four major
testing centers to support this decision. The outcome and impact of this
upcoming decision on future assay sales and instrument rentals to French blood
testing centers is not yet known.

During the fourth quarter 1999, the Company signed an exclusive contract
with the Australian Red Cross Blood Service to provide blood testing products
for NAT screening. Under the contract, Chiron began recognizing product revenue
for sales of its nucleic acid tests in Australia in the fourth quarter 1999. In
addition, in March 2000, the Company received regulatory approval in Australia
for the TMA assay.

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,

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as listed in Item 1., "Business--Competition" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.

EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES For the three months
ended March 31, 2000 and 1999, Chiron's earnings from its joint business with
Ortho were $15.7 million and $17.8 million, respectively. The overall
fluctuations in earnings from the joint business were primarily due to lower
profitability of Ortho's foreign affiliates and certain adjustments made during
2000 and 1999.

COLLABORATIVE AGREEMENT REVENUES For the three months ended March 31, 2000
and 1999, blood testing collaborative agreement revenues were $3.6 million and
$1.4 million, respectively.

Under the Ortho arrangement, the Company is reimbursed for its research
costs related to immunodiagnostic products. For the three months ended
March 31, 2000 and 1999, the Company recognized revenues under this agreement of
$2.9 million and $1.4 million, respectively. As discussed above, in the second
quarter 1999, certain costs that had been reimbursable previously as
manufacturing costs under the Ortho arrangement, became reimbursable as research
costs. This resulted in a shift from product sales to collaborative agreement
revenues in the first quarter 2000.

GROSS PROFIT For the three months ended March 31, 2000 and 1999, blood
testing gross profit as a percentage of net product sales was 1.9% and 0.6%,
respectively. Sales of nucleic acid tests and instruments began in the second
quarter 1999.

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

RESEARCH AND DEVELOPMENT For the three months ended March 31, 2000 and
1999, the blood testing segment recognized research and development expenses of
$3.9 million and $2.4 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 March 31,
2000 and 1999, the blood testing segment recognized SG&A expenses of
$4.0 million and $2.4 million, respectively. The increase in SG&A expenses in
2000 as compared with 1999 was primarily due to 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. This increase
was offset by a decrease in SG&A expenses due to 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 for research services as they are performed and fees
received upon the achievement of specified milestones. For the three months
ended March 31, 2000, the other segment did not recognize any collaborative
agreement revenues. For the three months ended March 31, 1999, the other segment
recognized collaborative agreement revenues of $16.0 million.

The decrease in collaborative agreement revenues in 2000 as compared with
1999 was due to the Company not drawing research funding under an agreement with
Novartis in the first quarter 2000, as the Company focuses on the self-funding
of research programs. Novartis agreed to provide research funding for certain
projects through December 31, 2000 (for more information, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999). In December
1999, Chiron and Novartis amended this agreement to increase the aggregate
maximum amount of funding provided by Novartis from $250.0 million to
$265.0 million.

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Collaborative agreement revenues tend to fluctuate based on the amount of
research services performed, the status of projects under collaboration and the
achievement of milestones. Due to the nature of the Company's collaborative
agreement revenues, results in any one period are not necessarily indicative of
results to be achieved in the future. The Company's ability to generate
additional collaborative agreement revenues may depend, in part, on its ability
to initiate and maintain relationships with potential and current collaborative
partners. There can be no assurance that such relationships will be established
or that current collaborative agreement revenue will not decline. In particular,
the research funding agreement with Novartis expires on December 31, 2000, and
there can be no assurance that new relationships will be established.

ROYALTY AND LICENSE FEE REVENUES For the three months ended March 31, 2000
and 1999, the other segment recognized royalty and license fee revenues of
$11.6 million and $10.3 million, respectively.

The increase in royalty and license fee revenues in 2000 as compared with
1999 was primarily due to an agreement with F. Hoffman-LaRoche Ltd. and its
affiliates ("Roche"), under which the Company receives royalties on sales of
polymerase chain reaction ("PCR") products sold by Roche. Chiron estimates
royalties on PCR product sales based on previous period actual sales. In the
following quarter, Chiron records an adjustment equal to the difference between
those estimated royalty revenues recorded in the previous quarter and the
contractual percentage of actual PCR product sales for that period. The increase
in 2000 as compared with 1999 was primarily due to a $3.3 million positive
adjustment in the first quarter 2000. Roche's royalty obligation expires upon
the earlier of December 31, 2000 or when Chiron recognizes royalties with an
aggregate net present value of $30.0 million as of the date of the agreement
(discounted at 14.0%). As of March 31, 2000, Chiron had recognized royalties
with a net present value of $14.4 million.

The increase in royalty and license fee revenues in 2000 as compared with
1999 was offset by a decrease in licensing fees related to a cross-license
agreement with Bayer whereby Chiron granted to Bayer rights under certain Chiron
patents, including rights under patents relating to HIV and HCV. In exchange for
these rights, Bayer paid to Chiron a license fee of $100.0 million, which is
refundable in decreasing amounts over a period of three years. During the three
months ended March 31, 2000 and 1999, Chiron recognized license fee revenues of
$7.5 million and $10.0 million, 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. During each of the three months ended March 31,
2000 and 1999, Chiron recognized $0.9 million of royalty revenue related to this
agreement.

SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended March 31,
2000 and 1999, the other segment recognized SG&A expenses of $18.3 million and
$11.6 million, respectively. The increase in SG&A expenses in 2000 as compared
with 1999 was due to increased payroll related expenses, the Company's worldwide
implementation of its integrated information system in April 1999 and a change
in the method of allocating certain legal costs to segments, as discussed
previously.

OTHER OPERATING EXPENSES For the three months ended March 31, 2000, the
Company recorded restructuring and reorganization benefits of $0.4 million,
which related to revised estimates of termination and other employee-related
costs recorded in connection with the elimination of 371 positions. As of
March 31, 2000, 356 of these 371 positions had been eliminated. For the three
months ended March 31, 1999, the Company recorded net restructuring and
reorganization charges of $3.4 million related to the integration of its
worldwide vaccines operations.

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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 March 31, 2000
and 1999, Chiron recognized interest and investment income of $21.7 million and
$20.3 million, respectively. The increase in interest and investment income in
2000 as compared with 1999 was primarily due to higher average cash and
investment balances. Interest expense decreased to $5.0 million for the three
months ended March 31, 2000 from $5.8 million for the three months ended
March 31, 1999 primarily due to the repayment of the note payable to Novartis on
January 4, 2000.

INCOME TAXES The 2000 effective tax rate is estimated to be approximately
31% of pretax income from continuing operations. The effective tax rate may be
affected in future periods by changes in management's estimates with respect to
the Company's deferred tax assets and other items affecting the overall tax
rate. Income tax expense for the three months ended March 31, 1999 was based on
an estimated annual effective tax rate on pretax income from continuing
operations of approximately 25%. The actual 1999 annual effective tax rate of
18% reflects the utilization of state deferred tax assets that were recognized
during the second half of 1999 through a reduction in the valuation allowance
associated with such assets.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In June
1999, SFAS 133 was amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
SFAS 133." As a result of this amendment, SFAS 133 shall be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.

In accordance with SFAS 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. The Company is currently evaluating the effect that
implementation of SFAS 133 will have on its results of operations and financial
position and anticipates that it will implement SFAS 133 during the first fiscal
quarter of 2001.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This statement gives specific guidance and clarification on the
conditions that must be met before an entity may recognize revenue. In March
2000, the SEC issued SAB 101A to defer for one quarter the effective date of
implementation of SAB 101 with earlier application encouraged. As a result of
this amendment, SAB 101 shall be effective for the second fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is currently
evaluating the effect that implementation of SAB 101 will have on its results of
operations and financial position and anticipates that it will adopt SAB 101
during the second quarter 2000.

In March 2000, the FASB issued Interpretation No. 44 of Accounting
Principals Board No. 25 ("APB 25"), which clarifies the application of APB 25 as
it relates to (i) the definition of an employee for purposes of applying
APB 25, (ii) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (iii) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award and (iv) the accounting
for an exchange of stock compensation awards in a business combination.
Interpretation No. 44 is effective on July 1, 2000. The Company is currently
evaluating the effect that implementation of Interpretation No. 44 will have on
its results of operations and financial position and anticipates that it will
implement Interpretation No. 44 during the third quarter 2000.

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LIQUIDITY AND CAPITAL RESOURCES

Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings, issuance of common stock and
off-balance sheet financing. Chiron's cash, investments in marketable debt
securities and short-term investment in equity securities, which totaled
$1.4 billion at March 31, 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
$380.3 million and $69.1 million at March 31, 2000 and 1999, respectively.
Through the three months ended March 31, 2000, net cash provided by operating
activities was $15.5 million as compared with net cash used in operating
activities of $130.3 million in 1999. The increase in cash provided by operating
activities was largely due to higher net income and lower tax payments in the
first quarter 2000 as compared to the first quarter 1999, partially offset by an
increase in accounts receivable in the first quarter 2000 due to the shipment of
Menjugate-TM- in March 2000. In the first quarter 1999, the Company paid
$165.4 million in estimated taxes related to the sale of Chiron Diagnostics.

Through the three months ended March 31, 2000, net cash provided by
investing activities consisted of proceeds from the sale and maturity of
investments in marketable debt securities of $652.0 million, proceeds from the
sale of equity securities and interests in affiliated companies of
$3.1 million, proceeds from the sale of assets of $1.0 million and other sources
of cash of $6.8 million, offset by purchases of investments in marketable debt
securities of $500.7 million and capital expenditures of $11.7 million.

Through the three months ended March 31, 2000, net cash used in financing
activities consisted of $114.3 million related to the acquisition of treasury
stock, $67.9 million related to the repayment of debt, including the note owed
to Novartis, and $6.3 million related to short-term borrowings. This use of cash
was offset by $39.0 million in proceeds from the reissuance of treasury stock
primarily related to stock option exercises and employee stock purchases.

Through March 31, 2000, $3.8 million of the 5.25% convertible debentures
were converted into 122,920 shares of the Company's common stock, at a
conversion price of $30.83 per share. On April 4, 2000, the Company's Board of
Directors authorized management to call, for redemption in common stock, all of
the outstanding 5.25% convertible subordinated debentures prior to the next
interest payment date of May 21, 2000. The redemption price for each $5,000
principal amount of the bonds will equal $5,260.31, which includes accrued
interest of $260.31 to the redemption date. As an alternative to redemption,
bondholders may elect to convert into shares of the Company's common stock at a
conversion price of $30.83 per share, or 162 shares for each $5,000 principal
amount of bonds held, plus cash in lieu of fractional shares. The bondholders'
right to convert to shares will expire at the close of business on May 11, 2000.

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the five business days ending on, and including, May 10, 2000 remaining between
$40 and $55 per share. Since the average of the May 4 through 9 closing market
prices of the Company's common stock are outside the specified price range,
management is reviewing alternative courses of action.

Through 2000, the Company's Board of Directors authorized the repurchase of
up to 11.5 million shares of Chiron common stock from time to time on the open
market to offset the dilution associated with the operation of the Company's
stock option and employee stock purchase plans and the granting of share rights.
The Board has authorized such repurchases through February 28, 2001. Through
March 31, 2000, the Company repurchased 7.9 million shares of Chiron common
stock.

The Company is currently evaluating a number of business development
opportunities. To the extent that the Company is successful in reaching
agreements with third parties, these transactions may involve the expenditure of
a significant amount of the Company's current investment portfolio.

BORROWING ARRANGEMENTS Under a revolving, committed, unsecured credit
agreement with a major financial institution, Chiron can borrow up to
$100.0 million in the U.S. This credit facility is guaranteed by Novartis under
a November 1994 Investment Agreement, provides various interest rate options and
matures in February 2003. There were no borrowings outstanding under this credit
facility at March 31, 2000. Chiron also has credit facilities outside the U.S.,
which allow for total borrowings of $63.1 million. Under these credit
facilities, $13.4 million of borrowings were outstanding at March 31, 2000.

In December 1999, Chiron and Novartis amended the November 1994 Investment
Agreement. This amendment reduced the maximum amount of Chiron obligations that
Novartis will guarantee from $725.0 million to $702.5 million.

YEAR 2000

Chiron developed a comprehensive risk-based plan designed to make its
computer hardware and communication systems, software applications and
facilities and other non-information technology-related functions Year 2000
compliant. The Company did not experience any upsets or failures in systems
during the year-end rollover. The Company did experience some minor date
related-problems in non-critical software applications after the year-end
rollover; however, these problems were identified and resolved with no impact to
the Company's operations. As part of the Company's contingency plans, teams
monitored critical systems at each site during the year-end rollover. No backup
contingency plans required execution.

The Company did not experience delays in shipment of products to customers
or in delivery of materials from vendors related to the Year 2000. Business
partners have not reported any Year 2000 system upsets or failures that would
impact the Company's operations.

The Company sold its facility in Amsterdam, The Netherlands in December
1999. This facility did not experience any upsets or failures in its systems
related to the Year 2000.

The Company monitored its computer hardware and communication systems,
software applications and facilities and other non-information
technology-related functions for Year 2000 issues through March 31, 2000. Except
for the minor date-related problems in non-critical software applications
mentioned above, the Company did not experience any additional Year 2000
problems.

As of March 31, 2000, total costs incurred to date were funded through
operations and approximated $3.9 million.

EURO CONVERSION

On January 1, 1999, eleven European Union member countries established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The legacy currencies will remain as legal tender in
the member countries as denominations of the Euro between

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January 1, 1999 and January 1, 2002. The Euro is currently traded on currency
exchanges and can be used in business transactions. The Company believes that
its financial systems are Euro-ready in all material respects. However, the
Company is still in the process of evaluating the effect, if any, that the Euro
may have on its product pricing and gross profit percentages.

FACTORS THAT MAY AFFECT FUTURE RESULTS

As a biotechnology company, Chiron is engaged in a rapidly evolving and
often unpredictable business. The forward-looking statements contained in this
Report and in other periodic reports, press releases and other statements issued
by the Company from time to time reflect management's current beliefs and
expectations concerning objectives, plans, strategies, future performance and
other future events. The following discussion highlights some of the factors,
many of which are beyond the Company's control, which could cause actual results
to differ.

PROMISING TECHNOLOGIES ULTIMATELY MAY NOT PROVE SUCCESSFUL

The Company focuses its research and development activities on areas in
which it has particular strengths and on technologies that appear promising.
These technologies often are on the "cutting edge" of modern science. As a
result, the outcome of any research or development program is highly uncertain.
Only a very small fraction of such programs ultimately result in commercial
products or even product candidates. Product candidates that initially appear
promising often fail to yield successful products. In many cases, preclinical or
clinical studies will show that a product candidate is not efficacious (that is,
it does not have the intended therapeutic or prophylactic effect), or that it
raises safety concerns or has other side effects which outweigh the intended
benefit. Success in preclinical or early clinical trials (which generally focus
on safety issues) may not translate into success in large-scale clinical trials
(which are designed to show efficacy), often for reasons that are not fully
understood. And even after a product is approved and launched, general usage or
post-marketing studies may identify safety or other previously unknown problems
with the product which may result in regulatory approvals being suspended,
limited to narrow indications or revoked, or which may otherwise prevent
successful commercialization.

REGULATORY APPROVALS

The Company is required to obtain and maintain regulatory approval in order
to market most of its products. Generally, these approvals are on a
product-by-product and country-by-country basis, and, in the case of therapeutic
products, a separate approval is required for each therapeutic indication. See
Item 1., "Business--Government Regulation" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. Product candidates that appear
promising based on early, and even large-scale, clinical trials may not receive
regulatory approval. The results of clinical trials often are susceptible to
varying interpretations that may delay, limit or prevent approval or result in
the need for post-marketing studies.

MANUFACTURING

Most of the Company's products are biologics. Manufacturing biologic
products is complex. Unlike chemical pharmaceuticals, a biologic product
generally cannot be sufficiently characterized (in terms of its physical and
chemical properties) to rely on assaying of the finished product alone to ensure
that the product will perform in the intended manner. Accordingly, it is
essential to be able to both validate and control the manufacturing process:
that is, to show that the process works and that the product is made strictly
and consistently in compliance with that process. Slight deviations in the
manufacturing process may result in unacceptable changes in the products that
may result in lot failures. Manufacturing processes which are used to produce
the (smaller) quantities of material needed for research and development
purposes may not be successfully scaled up to allow production of commercial
quantities at reasonable cost or at all. All of these difficulties are
compounded when dealing with novel biologic products that require novel
manufacturing processes. Accordingly, manufacturing is subject to extensive
government regulation. Even minor changes in the manufacturing process require
regulatory approval, which, in turn, may require further clinical studies.

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PATENTS HELD BY THIRD PARTIES MAY DELAY OR PREVENT COMMERCIALIZATION

Third parties, including competitors, have patents and patent applications
in the U.S. and other significant markets that may be useful or necessary for
the manufacture, use or sale of certain of the Company's products and products
in development. It is likely that third parties will obtain other such patents
in the future. Certain of these patents may be sufficiently broad to prevent or
delay Chiron from manufacturing or marketing products important to the Company's
current and future business. The scope, validity and enforceability of such
patents, if granted, the extent to which Chiron may wish or need to obtain
licenses to such patents, and the cost and availability of such licenses cannot
be accurately predicted. If Chiron does not obtain such licenses, products may
be withdrawn from the market or delays could be encountered in market
introduction while an attempt is made to design around such patents.
Alternatively, Chiron could find that the development, manufacture or sale of
such products is foreclosed. Chiron could also incur substantial costs in
challenging the validity and scope of such patents.

PRODUCT ACCEPTANCE

The Company may experience difficulties in launching new products, many of
which are novel products based on technologies that are unfamiliar to the
healthcare community. There can be no assurance that healthcare providers and
patients will accept such products. In addition, government agencies, as well as
private organizations involved in healthcare, from time to time publish
guidelines or recommendations to healthcare providers and patients. Such
guidelines or recommendations can be very influential and may adversely affect
the usage of the Company's products directly (for example, by recommending a
decreased dosage of the Company's product in conjunction with a concomitant
therapy) or indirectly (for example, by recommending a competitive product over
the Company's product).

COMPETITION

Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
blood testing companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and blood testing companies, have
greater resources than the Company. Accordingly, even if the Company is
successful in launching a product, it may find that a competitive product
dominates the market for any number of reasons, including the possibility that
the competitor may have launched its product first; the competitor may have
greater marketing capabilities; or the competitive product may have therapeutic
or other advantages. The technologies applied by the Company and its competitors
are rapidly evolving, and new developments frequently result in price
competition and product obsolescence.

CHIRON'S PATENTS MAY NOT PREVENT COMPETITION OR GENERATE REVENUES

Chiron seeks to obtain patents on its inventions. Without the protection of
patents, competitors may be able to use the Company's inventions to manufacture
and market competing products without being 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.

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Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection. The
length of time necessary to successfully resolve patent litigation may allow
infringers to gain significant market advantage. Third parties may be able to
design around the patents and develop competitive products that do not use the
inventions covered by the patents. Many countries, including certain countries
in Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties (for example, the third party's
product is needed to meet a threat to public health or safety in that country,
or the patent owner has failed to "work" the invention in that country, or the
third party has patented improvements) and most countries limit the
enforceability of patents against government agencies or government contractors.
In these countries, the patent owner may be limited to monetary relief and may
be unable to enjoin infringement, which could materially diminish the value of
the patent.

AVAILABILITY OF REIMBURSEMENT; GOVERNMENT AND OTHER PRESSURES ON PRICING

In the U.S. and other significant markets, sales of the Company's products
may be affected by the availability of reimbursement from the government or
other third parties, such as insurance companies. It is difficult to predict the
reimbursement status of newly approved, novel biotechnology products, and
current reimbursement policies for existing products may change. In certain
foreign markets, governments have issued regulations relating to the pricing and
profitability of pharmaceutical companies. There have been proposals in the U.S.
(at both the federal and state level) to implement such controls. The growth of
managed care in the U.S. also has placed pressure on the pricing of healthcare
products. These pressures can be expected to continue.

COSTS ASSOCIATED WITH EXPANDING THE BUSINESS

Management expects to grow the business in areas in which the Company can be
most competitive, either through in-licensing, collaborations or acquisitions of
products or companies. In connection with these efforts, the Company may incur
significant charges, costs and expenses which could impact the Company's
profitability, including impairment losses, restructuring charges, the write-off
of purchased in-process technology, transaction-related expenses, costs
associated with integrating new businesses and the cost of amortizing goodwill
and other intangibles.

OTHER NEW PRODUCTS AND SOURCES OF REVENUE

Many products in the Company's current pipeline are in relatively early
stages of research or development. The Company's ability to grow earnings in the
near- to medium-term may depend, in part, on its ability to initiate and
maintain other revenue generating relationships with third parties, such as
licenses to certain of the Company's technologies, and on its ability to
identify and successfully acquire rights to later-stage products from third
parties. There can be no assurance that such other sources of revenue will be
established.

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

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circumstances change, the Company and its corporate partners may develop
conflicting priorities or other conflicts of interest. The Company may
experience significant delays and incur significant expenses in resolving these
conflicts and may not be able to resolve these matters on acceptable terms. Even
without conflicts of interest, the parties may differ in their views as to how
best to realize the value associated with a current product or a product in
development. In some cases, the corporate partner may have responsibility for
formulating and implementing key strategic or operational plans. Decisions by
corporate partners on key clinical, regulatory, marketing (including pricing),
inventory management and other issues may prevent successful commercialization
of the product or otherwise impact the Company's profitability.

STOCK PRICE VOLATILITY

The price of the Company's stock, like that of other biotechnology
companies, is subject to significant volatility. Any number of events, both
internal and external to the Company, may affect the stock price. These include,
without limitation, results of clinical trials conducted by the Company or by
its competitors; announcements by the Company or its competitors regarding
product development efforts, including the status of regulatory approval
applications; the outcome of legal proceedings, including claims filed by the
Company against third parties to enforce its patents and claims filed by third
parties against the Company relating to patents held by the third parties; the
launch of competing products; the resolution of (or failure to resolve) disputes
with collaboration partners; corporate restructuring by the Company; licensing
activities by the Company; and the acquisition or sale by the Company of
products, products in development or businesses.

In connection with its research and development collaborations, from time to
time the Company invests in equity securities of its corporate partners. The
price of these securities also is subject to significant volatility and may be
affected by, among other things, the types of events that affect the Company's
stock. Changes in the market price of these securities may impact the Company's
profitability.

TAX

The Company is taxable principally in the U.S., Germany, Italy and The
Netherlands. All of these jurisdictions have in the past and may in the future
make changes to their corporate tax rates and other tax laws, which could
increase the Company's tax provision in the future. The Company has negotiated a
number of rulings regarding income and other taxes that are subject to periodic
review and renewal. If such rulings are not renewed or are substantially
modified, taxes payable in particular jurisdictions could increase. While the
Company believes that all material tax liabilities are properly reflected in its
balance sheet, the Company is presently under audit in several jurisdictions,
and there can be no assurance that Chiron will prevail in all cases in the event
the taxing authorities disagree with its interpretations of the tax law. In
addition, the Company has assumed liabilities for all income taxes incurred
prior to the sales of its former subsidiaries, Chiron Vision Corporation
(subject to certain limitations) and Chiron Diagnostics Corporation. Future
levels of research and development spending, capital investment and export sales
will impact the Company's entitlement to related tax credits and benefits which
have the effect of lowering its effective tax rate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject to
fluctuations due to changes in foreign currency exchange rates, interest rates
and fair value of equity securities held. The Company attempts to limit its
exposure to some or all of these market risks through the use of various
financial instruments. There were no significant changes in the Company's market
risk exposures through the first quarter 2000. For further discussion of the
Company's market risk exposures, refer to Part II., Item 7A., "Quantitative and
Qualitative Disclosures About Market Risk" of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.

29
<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. 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.

FEDERAL EXPRESS

On September 3, 1999, Federal Express Corporation ("Federal Express") filed
suit in the Supreme Court of the State of New York, County of Orange against
Perseptive Biosystems, Inc., Perkin-Elmer Corporation, PE Biosystems Group and
PE Corporation (together, the "PE Defendants") and Chiron. The matter was
removed to the United States District Court for the Southern District of New
York on motion by Chiron. The Federal Express complaint relates to a fire that
allegedly destroyed a Federal Express aircraft and the majority of its cargo in
September 1996. Federal Express claims breach of contract, negligence and
product liability with regard to equipment owned and shipped by Chiron and
designed, manufactured, packaged and prepared for shipping by the PE Defendants
and seeks damages, interest, costs and fees. Federal Express alleges that
improper packing and shipping procedures proximately caused destruction of the
plane. The National Transportation Safety Board, an agency of the federal
government, investigated the circumstances surrounding the incident and, in
1999, issued a letter of no determination as to the cause of the fire. In March
2000, the Federal court, on its own motion, dismissed the matter for lack of
subject matter jurisdiction. That order is subject to appeal by either
defendants or plaintiffs. It is not known when nor on what basis this litigation
will be concluded.

F. HOFFMAN LA-ROCHE A.G.

Chiron is involved in certain litigation in the United States, The
Netherlands, Japan, Germany and other countries with F. Hoffman-LaRoche AG and
several of its affiliated companies (collectively, "Roche") concerning
infringement and/or validity of certain patents related to HCV technology.

Chiron also filed a suit against Roche in Dusseldorf, Germany for
infringement of Chiron's European Patent 0 181 150 relating to HIV probes
technology. The suit seeks injunctive relief and damages. Trial in that matter
was held in February 2000. A decision is expected in May 2000.

ORTHO-CLINICAL DIAGNOSTICS, INC.

On February 17, 1998, Chiron filed a lawsuit against Ortho-Clinical
Diagnostics, Inc. ("Ortho") in the United States District Court for the Northern
District of California. The suit sought to compel arbitration of certain issues
relating to the conduct of the parties' joint business. Chiron's motion to
compel arbitration was granted by the Court in December 1998. Ortho appealed
that order to the Ninth Circuit Court of Appeals and then refused Chiron's
demand to arbitrate in accordance with the order. Therefore, on March 31, 1999,
Chiron filed a second petition in the United States District Court for the
Northern District of California to compel arbitration. On November 1, 1999, the
Court entered judgment in Chiron's favor, ordering Ortho to submit the
underlying issues to arbitration. In March 2000, the Ninth Circuit entered its
order affirming Chiron's original motion to compel arbitration. Chiron expects
that arbitration to commence shortly.

OFFICE OF INSPECTOR GENERAL SUBPOENA

Chiron is responding to a subpoena from the Office of the Inspector General
of the United States Department of Health and Human Services. The subpoena is
similar to one received by many other pharmaceutical companies in the United
States. With respect to Chiron, the subpoena appears to relate to

30
<PAGE>
an investigation of the pricing to Medicare and state 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 or on what basis this matter
will be resolved.

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 to the Registrant's report on
Form 10-Q for the period ended June 30, 1999.

4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, Trustee (initially
filed as Exhibit 4.01 to the Registrant's report on
Form 10-Q for the period ended September 30, 1994).

4.02 First Supplemental Indenture, dated as of December 12, 1991,
by and among Registrant, Cetus Corporation, and Bankers
Trust Company, incorporated by reference to Exhibit 4.02 of
the Registrant's report on Form 10-K for fiscal year 1997.

4.03 Second Supplemental Indenture, dated as of March 25, 1996,
by and among the Registrant, Cetus Oncology Corporation
(formerly Cetus Corporation), and Bankers Trust Company,
incorporated by reference to Exhibit 4.03 of the
Registrant's report on Form 10-Q for the period ended
June 30, 1996.

4.04 Indenture, dated as of November 15, 1993, between Registrant
and The First National Bank of Boston, as Trustee (initially
filed as Exhibit 4.03 of the Registrant's report on
Form 10-K for fiscal year 1993), incorporated by reference
to Exhibit 4.04 of the Registrant's report on Form 10-K for
fiscal year 1998.

27 Financial Data Schedule for the Three Months ended
March 31, 2000.
</TABLE>

(b) Reports on Form 8-K

None.

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

* Management contract, compensatory plan or arrangement.

31
<PAGE>
CHIRON CORPORATION
MARCH 31, 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: May 9, 2000 BY: /s/ SEAN P. LANCE
---------------------------------------
Sean P. Lance
CHIEF EXECUTIVE OFFICER AND PRESIDENT;
CHAIRMAN OF THE BOARD

DATE: May 9, 2000 BY: /s/ JAMES R. SULAT
---------------------------------------
James R. Sulat
VICE PRESIDENT; CHIEF FINANCIAL OFFICER

DATE: May 9, 2000 BY: /s/ DAVID V. SMITH
---------------------------------------
David V. Smith
VICE PRESIDENT; CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CHIRON CORPORATION'S
UNAUDITED CONSOLIDATED BALANCE SHEET DATED MARCH 31, 2000 AND UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 380,326
<SECURITIES> 1,035,288<F1>
<RECEIVABLES> 235,602<F5>
<ALLOWANCES> 15,569
<INVENTORY> 92,368
<CURRENT-ASSETS> 1,483,850
<PP&E> 528,856
<DEPRECIATION> 229,947
<TOTAL-ASSETS> 2,404,039
<CURRENT-LIABILITIES> 563,120
<BONDS> 93,062<F2>
0
0
<COMMON> 1,819
<OTHER-SE> 1,692,885<F3>
<TOTAL-LIABILITY-AND-EQUITY> 2,404,039
<SALES> 157,606
<TOTAL-REVENUES> 216,745
<CGS> 51,251
<TOTAL-COSTS> 51,251
<OTHER-EXPENSES> 75,441<F4>
<LOSS-PROVISION> 2,019
<INTEREST-EXPENSE> 5,026
<INCOME-PRETAX> 58,161
<INCOME-TAX> 18,077
<INCOME-CONTINUING> 40,084
<DISCONTINUED> 152
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,236
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.21
<FN>
<F1>CONSISTS OF SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT AND
EQUITY SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES AND NOTES PAYABLE, NET OF
CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, COST OF
TREASURY STOCK AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, RESTRUCTURING AND REORGANIZATION
CHARGES AND OTHER OPERATING EXPENSES.
<F5>CONSISTS OF ACCOUNTS RECEIVABLE AND CURRENT AND NONCURRENT PORTIONS OF NOTES
RECEIVABLE.
</FN>

</TABLE>