'Unsolicited' Novartis bid knocked back

Novartis will have to pay more money if it wants to buy out Chiron after independent directors at the troubled US vaccine producer rejected its $4.5bn offer.

In announcing the refusal, Chiron board members also spelled out that they had not solicited the Novartis bid, as implied by the Swiss pharma company last week. Details of a regulatory filing Novartis made to the US Securities and Exchange Commission (SEC) last week stated that the firm was approached by unidentified, independent Chiron board members and asked to help overcome `serious issues'.

ìAfter thorough analysis and consideration of Novartis' offer to acquire the shares of Chiron it does not already own for $40 per share in cash, the independent directors of Chiron have determined that this offer is inadequate,î the company said in a statement.

Novartis spokesman John Gilardi declined to comment on the announcement.

Novartis made its offer to acquire a 58 per cent stake in Chiron, which it sees as a foothold onto the expanding vaccines market. Novartis already owns 42 per cent of Chiron, which had its flu vaccine production licence revoked in October last year after contamination problems were discovered at its Speke plant near Liverpool.

The offer came on September 1, one day after the US Food and Drug Administration (FDA) issued a favourable inspection report on the Speke manufacturing facility. Chiron says it can start supplying the vaccine again by the 2005-2006 flu season.

With Novartis already the largest owner of Chiron, the chances of other potential buyers entering to stoke up a bidding war are remote.

Analysts gave a mixed reaction to the news. Some said they were not surprised at the rebuff as the offer only constituted a 10 per cent premium on Chiron's share price at the time of bidding and expected Novartis to come back with a sweetened bid.

ìA price tag of $45 a share would still be reasonable, representing an increase of around 13 per cent from the initial offer,î said Karl Heinz Koch, analyst at the Zurich-based bank Lombard Odier Darier Hentsch.

Maintaining a `Buy' rating on Novartis, Michael Leacock, pharma analyst at Nomura International said a tie up between the two companies would add expertise in Novartis' core area of pharmaceuticals.

ìAs it stands, at $40 a share, the deal is neutral according to our estimates for earnings, given the relatively rate of return Novartis is currently earning on its net liquidity,î he said. ìShould Novartis raise that significantly then the deal becomes rather less attractive. I would not be surprised if the net result was a modestly improved offer to seal the deal."

He added that Chiron would provide Novartis with full access to around 5 per cent of the global vaccines market, greater scale in biopharmaceutical production and exposure to the fast growing nucleic acid testing business.

Helvea analyst Andrew Fellows said the $40 a share offer values Chiron at $7.8bn, or 15 per cent above current market cap, which ìappears to be a rich and full priceî.

ìWe view this transaction with some scepticism,î he added.

Before its manufacturing problems, Chiron had been expected to generate annual sales of up to $400m from flu vaccines such as Fluvirin, but analyst estimates have now been shaved to $200m.

Merrill Lynch analysts said it was feasible that Novartis could provide ìdirection, manufacturing expertise and reduce operating costs.î