Chiron Corp. reported robust third-quarter earnings, topping the Street's estimate by 14 cents per share, but also said it was dropping three late-stage programs, leaving some questioning the depth of its pipeline.

The mixed news shaved 7.4 percent off Chiron's stock (NASDAQ:CHIR), which fell $3.04 Thursday to close at $38.32.

Chiron is well above those companies floundering for cash and trying to prove their science in biotechnology's lower tier, but SG Cowen analyst Yaron Werber told BioWorld Today the question now is the longer-term potential of Chiron's pipeline.

"We think the company is healthy and it's certainly well capitalized and well run, from an operational standpoint," Werber said. "Going forward, though, they will have to acquire a pipeline. If you look at their stock, they have not been getting the kinds of multiples some of the other companies have been getting and that's because of the lack of a growth catalyst."

There was growth in the third quarter, however. Chiron reported pro forma net income from continuing operations of $89 million, or 46 cents per share, stomping on consensus estimates of 32 cents per share. In 2001's third quarter, the company reported earnings of $58 million, or 30 cents per share.

Chiron, of Emeryville, Calif., has three aspects to its business: biopharmaceuticals, vaccines and blood testing. Of those, the vaccines division brought in the most revenue, netting product sales of $126 million in the third quarter. The biopharmaceuticals division reported net product sales - including royalties - of $115 million. Blood testing revenues were $89 million.

The cash reserves are there, too - Chiron ended the third quarter with cash and short-term investments of $945.4 million. With approved products such as TOBI (tobramycin solution for inhalation), Betaseron and Proleukin, a score of vaccines on the market, and sales of its HIV-1/HCV blood assay, Procleix, climbing, Chiron is firmly entrenched in several biotechnology markets. But public companies are about investors, investors want growth, and where that growth will come from is unclear to Werber and SG Cowen.

Long-Term Pipeline Depth Questioned

A note authored by Werber and Eric Schmidt suggests Chiron "may have achieved a high point that it is unlikely to eclipse for some time. Management admitted that earnings next year are unlikely to grow in line with its 20 percent long-term forecast, reflecting tough compares and slowing product sales. The question for investors is whether earnings beyond 2003 are capable of meeting [Chiron's] long-term growth target of 20 percent."

But although Goldman Sachs dropped its rating on Chiron from "market outperform" to "market perform," other analysts are behind Chiron, at least in the long run.

Dennis Harp, analyst with Deutsche Bank-North America in New York, dropped his EPS estimates for Chiron in 2004 and 2005, but left it at $2.55 for 2006. His estimates for this year and 2003 also remain unchanged. And his firm reiterated its "buy" rating and set a 12-month target of $53.

The paring of Chiron's pipeline included a Phase III trial of recombinant human interleukin-2 in HIV patients. The trial, called SILCAAT, wasn't due to complete until 2007 and was experiencing problems.

"The improvement in HIV therapy, especially HAART [highly active antiretroviral therapies], have been a benefit to patients, but they have been complicating the trial," said John Gallagher, media relations manager at Chiron. "It's harder and harder to measure differences from patients that are getting IL-2 and those who are not.

"We've had to increase enrollment from 1,400 to 2,000," he added, saying that with the primary endpoint of the trial being first-AIDS definition or death, and with those events decreasing significantly, it gave the trial a required duration that made it "unfeasible for Chiron to continue."

Chiron is reviewing data and considering a regulatory submission that might allow approval of IL-2 only in a subset of patients who do not achieve immunological response while on HAART therapy.

Also cut was PA-1806, a product for Gram-negative infections in cystic fibrosis patients. The drug is in Phase II development, but Chiron "couldn't come up with an effective [inhaled] formulation," Gallagher said. But it has TOBI, another inhaled antibiotic, on the market and is developing PA-2794, which should be in Phase I trials next year.

The third halted program was for the hepatitis B product HBV-MF59, also in Phase II trials. Although Gallagher said the company still believes in the product, "there are real challenges in doing clinical trials and marketing in Asia," which is where the product mostly is being tested. And Chiron doesn't want to develop the product alone.

"We looked hard for a partner and were just unsuccessful in finding one," he told BioWorld Today. "We would entertain any serious discussions with a partner, but as far as we are concerned, the program has been terminated."

Acquisition Rumor Mill Points To UK

The company's pipeline includes Proleukin in four clinical trials, and Chiron is investigating a vaccine for meningitis B. It is investigating combining its Procleix assay with an HBV assay. But for SG Cowen's Werber, Chiron needs to do more.

"[The cut programs] aren't going to hurt Chiron in that none of them were meaningful in the short-term sense," Werber said. "But the rest of the pipeline is pretty bare and pretty early. They need to look at doing an acquisition or a meaningful licensing, and significantly increase their R&D expenditure."

While Chiron isn't commenting, rumors and reports suggest the company has bid on PowderJect Pharmaceuticals plc, of London, although PowderJect has said only that is has received preliminary offers from "certain parties." PowderJect markets seven vaccines through two subsidiaries, Evans Vaccines and SBL Vaccines. The merger would certainly be synergistic, and Werber said speculation is that discussions are still ongoing between the companies.

All that's ahead. For now, Chiron is boasting a strong third quarter in an economic environment that has many others in the biotechnology sector searching for two nickels to rub together.

"We are really pleased. Things are operating efficiently," Gallagher said. "We are seeing all three [divisions] contribute to our growth and this shows the value of the diverse business model we have."