The Health Care M&A Monthly: Novartis Offers to Buy Rest of Chiron Corp. for $4.5 Billion

Influenza pandemics have been traveling the world long before globalization spread business and industry over the face of the earth. Western Europe is currently worried by the possibility of avian flu reaching it from Southeast Asia. And, as autumn approaches, we are bracing for another season of a flu epidemic that could easily circle the globe.
Business follows opportunity, and the possible outbreak of these diseases on a worldwide scale does represent a distinct opportunity, if your company happens to manufacture and distribute vaccines on a global basis. It is estimated that the flu vaccine market could double to $3.6 billion by 2010, while the market for all vaccines could reach $10 billion as early as 2007.
With this in mind, Novartis AG (NYSE: NVS) has made an offer to buy the 57.8% it does not already own in Chiron Corp. (NASDAQ: CHIR), a vaccine maker, for about $4.5 billion. If consummated, this deal would strengthen NVS’ position among the world’s top five vaccine makers, currently Merck (NYSE: MRK), GlaxoSmithKline (NYSE: GSK), Wyeth (NYSE: WYE), Sanofi-Aventis (NYSE: SNY) and Novartis in fifth place.
Based in Emeryville, California, Chiron is about more than just vaccines. The company also derives its revenue from blood-testing, biopharmaceuticals and cancer therapeutics, as well as from royalty and licensing fees. Among the various corporate relationships it has forged over the years, CHIR has a decade-old history with Novartis that is well-defined by a variety of collaborations and agreements. On a trailing 12-month basis, CHIR generated revenue of $1.66 billion, EBITDA of $194 million and a net loss of $4.6 million. In the most recent quarter, biopharmaceuticals accounted for 37% of CHIR’s revenue, blood-testing for 32% and vaccines for 24%.
The big black mark on Chiron’s corporate performance, accounting in large part for its recent loss, resulted from the contamination found in its English and German flu vaccine-manufacturing facilities last year, a setback that caused it to shut them down, severely curtail vaccine production and leave the market in short supply. Just before that time, CHIR’s stock had been trading at $46 a share. But in the year since, the stock has not been able to make it to the $40 level—until, that is, NVS made its move.
Novartis is offering $40 in cash per share for the 57.8% of CHIR it does not already own, which works out to $4.48 billion. This purchase price implies a price tag of $7.75 billion for a 100% interest in CHIR, which in turn yields a price to revenue multiple of 4.7x. NVS’s bid offers CHIR shareholders a modest 10% premium over the stock’s prior-day trading price. However, the independent members of Chiron’s board have rejected Novartis’ offer as "inadequate," a view reinforced by a market which sent CHIR’s stock to above $42 per share. At press time, we had yet to hear from NVS as to what its next step would be. The number of moves and countermoves the players can make in this game, however, is somewhat limited. First of all, with NVS already owning over 42% of CHIR’s stock, no one else is going to enter the fray against NVS as a white knight.
Second, due to a number of agreements between the two, Novartis is effectively precluded from taking certain actions when it makes a buy-out offer such as the present one (for some light reading, try out the "Governance Agreement" and the "Proxy Solicitation and Voting Trust Agreement" in Chiron’s 10-K). If CHIR balks, as it seems to have done, NVS can request binding arbitration to determine a "third-party value" for CHIR, but CHIR can then delay that move for a year. If NVS doesn’t like the third-party valuation when it is presented, it can turn it down—but just once. If NVS then decided to make a second run at CHIR, it would have to abide by the price determined by the arbitrator. A tender offer is theoretically possible, but unlikely given the existing agreements between the two. And so on... The upshot is that we expect NVS will want to get this deal done and shore up its position in the global vaccine market. To do so, the company may raise its offer to between $44 and $46 per share, raising the price to the low $5 billion range.
In the meanwhile, Novartis is pressing ahead with several other deals. First, Germany’s SeBo GmbH is selling development and commercialization rights to its hyperphosphatemia treatment for patients in kidney dialysis to Novartis for an undisclosed amount. The product, a novel oral phosphate binder, is in Phase I clinical development, and will be developed by the transplantation and immunology business unit of Novartis. Second, NexMed (NASDAQ: NEXM) is licensing its experimental nail lacquer treatment for onychomycosis, or nail fungus, to Novartis for up to $51 million, including a $4 million upfront cash payment and $47 million in development and regulatory milestone payments. This topical treatment, if it comes to market, would complement NVS’s oral Lamisil treatment. By reducing the amount of drug absorbed into the blood stream, it would make NexMed’s candidate safer; however, the drug will not be ready for commercial sale until at least 2008. Third, Novartis is paying $56.8 million in an upfront payment to buy a 19.9% stake in Alnylam Pharmaceuticals (NASDAQ: ALNY) to help that company develop and market its RNA interference technology.