The vaccine division at Chiron Corp. is getting a boost in the form of a £542 million (US$878 million) purchase of PowderJect Pharmaceuticals plc.

Both companies' boards have approved the deal, in which Chiron proposed to pay cash for all of PowderJect's outstanding shares. Chiron is offering 550 pence per share, a 14 percent premium to PowderJect's closing price of 482.5 pence on April 25 - the day before PowderJect first reported that an outside company had floated an offer. The per-share bid is slightly ahead of Friday's closing price of 530 pence but a considerable premium to Chiron's informal offer of 450 pence per share that PowderJect rebuffed last November.

Beyond its immediate financial impact, the acquisition is expected to build near-term value in expanding the reach of both companies' influenza vaccine franchises. PowderJect, which owns the largest FDA-approved flu vaccine manufacturing facility in Europe, sells one of two U.S.-approved injectable flu vaccines - Fluvirin. Chiron is the second largest supplier of flu vaccines outside the U.S.

"When you lay the geographic footprints on top of each other, there is not a lot of overlap," John Gallagher, Chiron's media relations manager, told BioWorld Today. "In particular, what's promising for Chiron is the opportunity to enter the U.S. marketplace."

The Emeryville, Calif.-based business has been looking for a vehicle to expand the presence of its vaccines within the U.S., and is looking to drive the acquisition toward that goal. Though Chiron's vaccine unit features more than 30 products, it sells just one stateside - a rabies vaccine.

"The acquisition of PowderJect would provide us with the opportunity and infrastructure not only to expand our flu franchise into the U.S., but also to launch new products from a strong platform," Gallagher said. "Those include products in research and development such as meningococcal vaccines and novel vaccines for viral diseases such as hepatitis C and HIV."

The two companies said the combination of the world's fifth and sixth biggest vaccine companies would create the second-largest flu vaccine company worldwide, with a combined turnover of more than $1.5 billion. Together they feature a combined capacity of 65 million flu vaccine doses per year - more than 20 percent of the world market - and Chiron plans to expand Oxford, UK-based PowderJect's output.

"The acquisition essentially allows Chiron to catapult and augment its vaccine business," Jennifer Chao, an analyst with RBC Capital Markets in New York, told BioWorld Today. "The combined union produces incredible worldwide leverage across manufacturing and commercial platforms."

Located just outside of London, Chiron's vaccine unit already markets Fluad, Begrivac and Agrippal S1 outside the U.S., and with PowderJect's products in the mix, flu vaccines would become the division's largest single product category in terms of sales. Flu vaccines contributed $240 million of revenue to Chiron in 2002, with sales projected to increase to more than $480 million in 2006, on a combined basis. In total, Chiron's vaccine business generated $645 million in revenue in 2002.

"I would say that it's not necessarily the sexiest acquisition," Chao said. "But when you take a look at Chiron's shareholder base, this is the type of acquisition they like. It's something that pays off in the very near term. For an acquisition that basically is three times PowderJect's total revenue, it seems to make good sense from Chiron's standpoint."

Down the road, the competitive landscape will tighten as FluMist, an intranasal product from Gaithersburg, Md.-based MedImmune Inc., enters the market. But Chiron said the product's marketing could create an overall increase in flu vaccine demand.

While flu vaccines have traditionally been produced in chicken eggs, Chiron also is racing to develop cell culture-based flu vaccines, with a product scheduled to enter Phase II trials this year. Outside of flu vaccines, Chiron markets pediatric and travel vaccines, as well as infectious disease vaccines, including Menjugate, for meningococcal C disease.

PowderJect also produces vaccines for cholera, yellow fever and smallpox. Much of its pipeline centers on its needle-less delivery technology for flu and DNA vaccines.

Chiron expects the deal to be neutral to its earnings this year and result in a 10 percent year-over-year accretion next year. Last week, PowderJect proposed the first ever dividend by a UK biotechnology company of 3 pence per share, as it reported pre-tax profits of £25.3 million for the year ended March 31. The dividend is on hold pending the Chiron deal. For the year its revenue totaled about £160 million.

For the first quarter ended March 31, Chiron reported net product sales in its vaccine division of $68 million, a $10 million uptick from the prior-year period. Including its other two divisions, blood testing and biopharmaceuticals, the company reported pro-forma income from continuing operations of $56 million compared to $41 million in last year's first quarter. (See BioWorld Today, April 25, 2003.)

"There's no doubt that this kind of an acquisition really does stabilize Chiron's revenue source in the sense that its biopharmaceuticals division seems to be lagging and its blood diagnostics division is clearly growing a bit slower than we had originally anticipated," Chao said. "So this bolsters growth for them in the near to longer term, and is probably their most viable strategy in terms of driving their long-term growth."

After the purchase, Chiron expects to have more than $400 million in remaining cash reserves.

With an inducement fee of £4.2 million payable by PowderJect if the deal does not go through, any other offers are unlikely. Chiron already has approval from the PowderJect board, which holds 8.7 percent of the shares in aggregate, and from PowderJect CEO Paul Drayson and his family, which own 10.4 percent.

PowderJect originally was spun out of Oxford University in 1993 to commercialize a needle-free powder injection device, though development problems led it to change direction and move into vaccine manufacturing. The company eventually sold the injection technology, retaining rights to use it in powdered vaccines and in DNA vaccines.

UBS Warburg is advising Chiron on the acquisition, while PowderJect's adviser is Credit Suisse First Boston.

Chiron's stock (NASDAQ:CHIR) fell 80 cents Monday to close at $40.25. PowderJect's shares closed at 544.59 pence Monday, up 14.59 pence, on the London Stock Exchange.