CHIR Chiron (MM)

Chiron Corporation (NASDAQ: CHIR) today reported financial results for the year ended December 31, 2005. OVERVIEW -- Chiron's FLUVIRIN(R) influenza virus vaccine returned to the U.S. market in 2005. The company sold approximately 13 million doses of the vaccine to its customers in 2005. -- Total revenues for the year ended December 31, 2005, increased 11 percent compared to the year ended December 31, 2004. -- Chiron continues to build on the company's promising pandemic influenza vaccine program. The company announced preliminary data from a clinical study of an investigational vaccine candidate, both with and without Chiron's adjuvant MF59, against an H9N2 avian influenza strain, as well as a contract to supply the U.S. government with candidate pre-pandemic influenza vaccines for a stockpile to protect against an H5N1 avian influenza virus strain. In the fourth quarter of 2005, Chiron also advanced clinical studies in the United States and Europe of cell culture-derived vaccine for seasonal influenza, which could also prove beneficial in a pandemic. -- Completion of the Novartis AG (Novartis) acquisition of Chiron, as announced on October 31, 2005, is expected in the first half of 2006, subject to approval by Chiron's stockholders and other customary closing conditions. Chiron reported adjusted income from continuing operations of $259 million, or $1.34 per share, for the year ended December 31, 2005, compared to adjusted income from continuing operations of $127 million, or $0.67 per share, for the year ended December 31, 2004. Chiron reported GAAP income from continuing operations of $187 million, or $0.97 per share, for the year ended December 31, 2005, compared to GAAP income from continuing operations of $54 million, or $0.28 per share, for the year ended December 31, 2004. "We are pleased with our achievements in the past year, particularly our return to the U.S. influenza vaccine market and advancements in our key programs such as pandemic influenza virus vaccines, cell-culture derived influenza vaccines and tifacogin. Thanks to the dedication and hard work of Chiron employees, we finished the year a much stronger company," said Howard Pien, chief executive officer of Chiron. The following factors had significant impact on the annual comparison of financial results: return of FLUVIRIN vaccine to the U.S. market in the fourth quarter of 2005; lost contribution from sales of BEGRIVAC(R) influenza virus vaccine in 2005; and a decrease in the effective tax rate to 11 percent on an adjusted and GAAP basis for the year ended December 31, 2005. Foreign exchange rates resulted in an approximate $0.01 decrease in adjusted earnings per share and an approximate $0.01 decrease in GAAP earnings per share for the year ended December 31, 2005. Chiron uses adjusted financial information to gain an understanding of the company's operating performance on a comparative basis. Adjusted amounts exclude special items relating to certain acquisitions and impairment losses on acquired intangible assets, which may not be indicative of the company's trends or potential future performance. Please refer to the tables at the end of this press release for more detail on these items and a reconciliation of the adjusted financial information to GAAP financial information; this information is also located at www.chiron.com in the Investors section under Financial Reports. All references to per-share amounts are per diluted share. -0- *T SELECTED FINANCIAL RESULTS Selected financial results, on an adjusted and GAAP basis, except where noted ($ millions) Year 2005 Year 2004 Change ---------------------------------------------------------------------- Net product sales $1,423 $1,268 12% Total revenues 1,921 1,723 11% Cost of sales 726 676 7% Gross profit margin 49% 47% Research and development 434 431 1% Selling, general and administrative 502 460 9% Income from continuing operations (adjusted) 259 127 104% Net income (adjusted) 259 152 71% Income from continuing operations (GAAP) 187 54 245% Net income (GAAP) 187 79 136% ---------------------------------------------------------------------- *T Net product sales for the year ended December 31, 2005, increased 12 percent, or $155 million, compared to the year ended December 31, 2004, primarily due to $96 million in sales of FLUVIRIN vaccine in 2005, compared to $2 million in sales of FLUVIRIN vaccine in 2004, which related to late sales from the 2003-2004 influenza season. In addition, net product sales increased due to higher sales of travel vaccines, PROCLEIX(R) NAT products, TOBI(R) tobramycin inhalation solution, meningococcal vaccines, and BETASERON(R) interferon beta-1b. These increases were partially offset by no sales of BEGRIVAC vaccine in 2005, compared to $53 million of sales in 2004. Total revenues increased 11 percent, or $198 million, primarily due to the increase in net product sales, and increases in both royalty and license fee revenues and revenues from the joint business contractual arrangement with Ortho-Clinical Diagnostics. Royalty and license fee revenues increased, primarily due to various settlements in 2005, including a favorable settlement with Centocor relating to certain patents, which resulted in the recognition of upfront payments and royalties, and a settlement with the Scottish National Blood Transfusion Service regarding certain Chiron hepatitis C (HCV) and HIV patents. BETAFERON(R) interferon beta-1b royalties increased primarily due to higher demand and price increases. Royalties related to NAT blood screening received from F. Hoffmann-La Roche Ltd. (Roche) increased due to higher applicable royalty rates as certain countries entered the EU and an increase in reported donations. Revenues from the joint business contractual arrangement with Ortho-Clinical Diagnostics increased primarily due to higher profitability realized by the joint business arrangement. Gross profit margin increased to 49 percent primarily due to the return of FLUVIRIN vaccine to the U.S. market in 2005. As previously reported, in the year ended December 31, 2004, the entire FLUVIRIN vaccine product inventory was written off, resulting in a $91 million charge to cost of sales. The increase in gross profit margin was partially offset by FLUVIRIN remediation costs in 2005, no sales of BEGRIVAC influenza virus vaccine in 2005 due to a product sterility issue, and inventory write-offs in 2005. Research and development expenses increased primarily due to the cost of development efforts in Chiron's oncology and meningococcal vaccine franchises, tifacogin, and cell culture-derived influenza vaccine. This increase was partially offset by decreases from a variety of research and development programs that were discontinued prior to 2005. Selling, general and administrative expenses increased due to a broad range of activities, including Novartis transaction-related costs, the pre-launch program for CUBICIN(R) daptomycin in Europe, higher employee-related costs, compliance with the Sarbanes-Oxley Act and higher FLUVIRIN vaccine-related legal costs. The effective tax rate was 11 percent on an adjusted and GAAP basis for the year ended December 31, 2005, compared to 25 percent on an adjusted basis and 28 percent on a GAAP basis for the year ended December 31, 2004. The decrease was primarily due to lower profits in certain ex-U.S. locations and the transfer of certain product rights in 2004. Chiron does not consider this tax rate to be indicative of the company's effective tax rate going forward. BLOOD TESTING Total Blood Testing revenues were $556 million for the year ended December 31, 2005, an increase of 12 percent compared to the year ended December 31, 2004. -0- *T Selected Blood Testing Revenues ($ millions) Year 2005 Year 2004 Change ---------------------------------------------------------------------- Ortho-Clinical Diagnostics $31 $28 12% PROCLEIX(R) NAT products 273 250 9% ------------------------------- Blood Testing net product sales 305 278 10% Revenues from joint business contractual arrangement 137 118 16% Royalty and license fee revenues 106 89 19% Total Blood Testing revenues (1) $556 $494 12% ---------------------------------------------------------------------- (1) Total Blood Testing revenues consist of net product sales from Chiron's joint business contractual arrangement with Ortho-Clinical Diagnostics and from Chiron's PROCLEIX NAT products, revenues from Chiron's joint business contractual arrangement with Ortho-Clinical Diagnostics, collaborative agreement revenues, royalty and license fee revenues, and other revenues. Totals may not sum due to rounding and the inclusion of only selected financial information. *T -- PROCLEIX NAT products: The increase in sales was primarily due to continued geographic expansion and the introduction of the PROCLEIX(R) ULTRIO(R) Assay and PROCLEIX(R) TIGRIS(R) System into a number of markets outside of the United States. -- Joint business contractual arrangement with Ortho-Clinical Diagnostics: The increase in revenues was primarily due to increased profitability realized by the joint business. -- Royalty and license fee revenues related to NAT blood screening: The increase was primarily due to increased royalties from Roche due to an increase in applicable royalty rates as certain countries entered the EU and an increase in reported donations. In addition, royalties increased due to various licensing agreements and settlements with entities such as the Scottish National Blood Transfusion Service, the German Red Cross, and LabCorp. Royalty and license fee revenues also increased due to payments recognized in 2005 relating to the Blood Testing share of a settlement entered into in 2004 with Roche regarding Chiron's HIV patent in the United States for use in clinical diagnostics and blood screening (the 2004 Roche settlement). This was partially offset by recognition in 2004 of a lump-sum payment and deferred amounts related to the 2004 Roche settlement. The gross profit margin for Blood Testing products was 41 percent for the year ended December 31, 2005, compared to 42 percent for the year ended December 31, 2004. The decrease was primarily due to the cost of additional PROCLEIX TIGRIS System support and service. VACCINES Vaccines net product sales were $582 million for the year ended December 31, 2005, an increase of 22 percent compared to the year ended December 31, 2004. -0- *T Selected Vaccines Revenues ($ millions) Year 2005 Year 2004 Change ---------------------------------------------------------------------- Influenza vaccines $225 $153 47% Meningococcal vaccines 43 28 56% Travel vaccines 148 97 52% Pediatric and other vaccines 166 201 (17%) ------------------------------- Vaccines net product sales 582 479 22% Total Vaccines revenues (1) $604 $510 18% ---------------------------------------------------------------------- (1) Total Vaccines revenues consist of net product sales, collaborative agreement revenues, royalty and license fee revenues, and other revenues. Totals may not sum due to rounding and the inclusion of only selected financial information. *T -- Influenza vaccines: The increase in influenza vaccines sales was due to the return of FLUVIRIN vaccine to the U.S. market. Sales of FLUVIRIN vaccine were $96 million in 2005, compared to $2 million in 2004, which related to sales from the 2003-2004 influenza season. Sales of other influenza vaccines were $129 million in 2005, a decrease of 15 percent compared to 2004, primarily due to no sales of BEGRIVAC vaccine in 2005, compared to $53 million of sales in 2004. This decrease was partially offset by increased sales of other influenza vaccines. -- Meningococcal vaccines: The increase in meningococcal vaccines was primarily due to increased sales of MENZB(TM) meningococcal B vaccine to the Ministry of Health in New Zealand and an increase in tender sales of MENJUGATE(R) meningococcal C vaccine. -- Travel vaccines: The increase in travel vaccines sales was primarily due to an increase in sales of ENCEPUR(R) tick-borne encephalitis vaccine and RABAVERT(R)/RABIPUR(R) rabies vaccines. The increase in ENCEPUR vaccine sales was due to overall market growth and marketing initiatives that increased the company's market share. In addition, ENCEPUR vaccine sales in 2004 were lower due to sales that took place in the fourth quarter of 2003. Sales of RABAVERT/RABIPUR rabies vaccines increased in 2005, primarily due to an increase in demand driven by a product recall from another supplier, a price increase, and an increase in tender sales in Europe and Asia. -- Pediatric and other vaccines: The decrease in pediatric and other vaccines sales was primarily due to a decline in polio vaccine sales and mumps, measles and rubella vaccine sales due to product unavailability as a result of manufacturing upgrades. In addition, certain other vaccine sales declined due to remediation efforts at Chiron's Liverpool manufacturing facility, which resulted in an interruption of production. These decreases were partially offset by an increase in sales of diphtheria, pertussis and tetanus vaccine concentrate. The gross profit margin for Vaccines products was 32 percent for the year ended December 31, 2005, compared to 23 percent for the year ended December 31, 2004. The increase was primarily due to the return of FLUVIRIN vaccine to the U.S. market in 2005. As previously reported, in the year ended December 31, 2004, the entire FLUVIRIN vaccine product inventory was written off, resulting in a $91 million charge to cost of sales. The increase in gross profit margin was partially offset by FLUVIRIN remediation costs, no sales of BEGRIVAC vaccine in 2005, inventory write-offs, and decreased sales of pediatric vaccines. BIOPHARMACEUTICALS BioPharmaceuticals net product sales were $536 million for the year ended December 31, 2005, an increase of 5 percent compared to the year ended December 31, 2004. -0- *T Selected BioPharmaceuticals Revenues ($ millions) Year 2005 Year 2004 Change ---------------------------------------------------------------------- TOBI(R) tobramycin inhalation solution $233 $213 9% PROLEUKIN(R) (aldesleukin) for injection 124 129 (5%) BETASERON(R) interferon beta-1b 142 131 9% BioPharmaceuticals net product sales (1) 536 512 5% BETAFERON(R) interferon beta-1b royalties 60 52 16% Total BioPharmaceuticals revenues (2) $629 $596 6% ---------------------------------------------------------------------- (1) Net product sales include sales from TOBI, PROLEUKIN, BETASERON and other products. (2) Total BioPharmaceuticals revenues consist of net product sales, collaborative agreement revenues, royalty and license fee revenues, and other revenues. Totals may not sum due to the inclusion of only selected financial information. *T -- TOBI: The increase in TOBI product sales was primarily due to price increases and increased patient demand in both the United States and Europe, partially offset by wholesaler ordering patterns. -- PROLEUKIN: The decrease in PROLEUKIN product sales was primarily due to decreased patient demand in the United States and Europe, partially offset by price increases. -- BETASERON: The increase in BETASERON product sales to Berlex Inc. (and its parent company Schering AG) for marketing and resale was primarily due to price increases and a shift from third-party to in-house production, partially offset by a reduction in shipments to Berlex and inventory ordering patterns. -- BETAFERON royalties: The increase in BETAFERON royalties was due to an increase in demand and price, partially offset by a shift from third-party to in-house production. The gross profit margin for BioPharmaceuticals products was 72 percent for the year ended December 31, 2005, consistent with the year ended December 31, 2004. ROYALTY AND LICENSE FEE REVENUES Total royalty and license fee revenues include royalties and license fees attributed to the Blood Testing, Vaccines and BioPharmaceuticals businesses. These revenues also include other royalty and license fee revenues, which consist primarily of royalties from Roche and Bayer HealthCare AG for clinical diagnostic products. -0- *T Selected Royalty and License Fee Revenues ($ millions) Year 2005 Year 2004 Change ---------------------------------------------------------------------- Blood Testing $106 $89 19% Vaccines 5 5 (1%) BioPharmaceuticals 73 72 2% Other 133 124 7% ------------------------------- Total royalty and license fee revenues (1) $317 $290 9% ---------------------------------------------------------------------- (1) Totals may not sum due to rounding. *T -- Total royalty and license fee revenues: In addition to the variances in Blood Testing, Vaccines and BioPharmaceuticals royalty and license fee revenues for 2005 compared to 2004 as explained above, other royalty and license fee revenues increased. The increase was primarily due to a 2005 settlement with Centocor relating to certain patents, which resulted in the recognition of upfront payments and royalties, and increased royalties from Roche due to an increase in reported sales. The increase was partially offset by recognition in 2004 of a lump-sum payment and deferred amounts related to the 2004 Roche Settlement. FINANCIAL GUIDANCE The company will not provide 2006 financial guidance at this time. RECENT NOVARTIS-RELATED EVENTS -- On October 31, 2005, Chiron announced that the company had entered into a definitive merger agreement with Novartis under which Novartis would acquire all of the shares of Chiron that it does not currently own for $45.00 per Chiron share, or a total of approximately $5.1 billion, in cash. The non-Novartis board of directors of Chiron determined that the merger is fair and in the best interests of Chiron's stockholders and unanimously recommend that the stockholders of Chiron adopt the merger agreement. The company's proxy statement, which contains detailed information about the merger, including the background and reasons for the non-Novartis directors' recommendation, is expected to be mailed to Chiron stockholders in the near future, subject to completion of review by the U.S. Securities and Exchange Commission. -- On December 6, 2005, Chiron announced that the U.S. Federal Trade Commission approved early termination of the antitrust waiting period under the Hart-Scott-Rodino Act for the proposed acquisition of the company by Novartis. -- Under provisions of the 1994 Subscription Agreement with Novartis, as amended, on October 30, 2005, Chiron exercised its right to have Novartis purchase newly issued shares of Chiron common stock. On December 8, 2005, Chiron announced that the company sold 6,896,552 newly issued shares of its common stock at a price of $43.50 per share to a subsidiary of Novartis, for $300 million in the aggregate, following receipt of necessary regulatory approvals. -- On January 23, 2006, the Committee on Foreign Investments in the United States (CFIUS) advised Chiron that it had concluded its review of the proposed acquisition of Chiron by Novartis and determined that there are no issues of national security sufficient to warrant an investigation under the Defense Production Act. RECENT PRODUCT AND PIPELINE-RELATED EVENTS Blood Testing -- The U.S. Food and Drug Administration (FDA) approved the PROCLEIX(R) West Nile Virus Assay for use on the PROCLEIX(R) System to screen whole blood donations. The assay, which was developed in collaboration with Gen-Probe Incorporated, has been used to screen more than 29 million units of blood on an investigational-use-only basis since June 2003 and has intercepted more than 1,500 West Nile virus-positive donations. Vaccines -- Chiron initiated a Phase 1/Phase 2 study of an investigational cell culture-derived vaccine for seasonal influenza in the United States. The company also completed enrollment of a second Phase 3 study of investigational cell culture-derived influenza vaccine in Europe. A first pivotal Phase 3 study of cell culture-derived influenza vaccine in Europe, conducted in 2004, met the safety and immunogenicity endpoints of the study. -- Chiron won a contract to supply the U.S. government with a candidate pre-pandemic influenza vaccine for a stockpile to protect against an H5N1 avian influenza virus strain. Under the agreement with the Department of Health and Human Services (HHS), Chiron will provide a bulk stockpile of the candidate H5N1 influenza vaccine. The amount payable to Chiron under the agreement depends upon the amount of bulk vaccine actually delivered, which is subject to manufacturing factors such as yield, throughput and total manufacturing time. -- Chiron announced preliminary promising data from a clinical study of its investigational vaccine against an H9N2 avian influenza strain. The trial was supported by the National Institute of Allergy and Infectious Diseases (NIAID), part of the U.S. National Institutes of Health (NIH). The study explored the safety and immunogenicity of four different doses of the investigational vaccine with and without Chiron's adjuvant MF59. All vaccine formulations containing the adjuvant MF59 proved highly immunogenic, inducing antibody levels believed to confer protection against the influenza strain, including at the lowest antigen dose tested, 3.75 micrograms. BioPharmaceuticals -- The European Commission granted marketing approval for CUBICIN(R) (daptomycin) in the 25 member states of the European Union, Iceland, Liechtenstein and Norway. Under the approval, CUBICIN is a first-in-class intravenous antibiotic indicated for the treatment of complicated skin and soft-tissue infections (cSSTI) caused by Gram-positive bacteria. -- An independent Data Monitoring Committee (DMC) recommended the continuation of Chiron's CAPTIVATE study, an ongoing Phase 3 clinical trial of tifacogin for the treatment of patients with severe community-acquired pneumonia. The DMC made its recommendation following a planned interim analysis of clinical data from the study. The study data remains blinded to Chiron, and a detailed analysis will not be available until the trial has been completed. The committee identified no safety concerns, confirming safety assessments conducted when patient enrollment reached 300 and 600. EARNINGS CONFERENCE CALL Chiron will hold a conference call and webcast on Tuesday, January 31, 2006, at 4:45 p.m. EST to review its 2005 results of operations and business highlights. In addition, the company may address forward-looking questions concerning business and financial matters and trends affecting the company. To access either the live call or the one-year webcast archive, please log on to www.chiron.com/webcast. Please connect to the website at least 15 minutes prior to the conference call to ensure adequate time to download any necessary software. Alternatively, please call (800) 819-7026 from the United States or Canada or (706) 643-7768 from other locations. Replay by phone is available approximately two hours after the completion of the call through 11:55 p.m. EST, Tuesday, February 7, 2006. To access the replay, please call (800) 642-1687 from the United States or Canada or (706) 645-9291 from other locations. The conference ID number is 4436756. ABOUT CHIRON Chiron delivers innovative and valuable products to protect human health by advancing pioneering science across the landscape of biotechnology. The company works to deliver on the limitless promise of science and make a positive difference in people's lives. For more information about Chiron, please visit www.chiron.com. FINANCIAL INFORMATION 2005 financial information in PDF format http://www.chiron.com/investors/8701/chiron_financial.pdf 2005 financial information online http://www.chiron.com/investors/finreports/index.html This news release contains forward-looking statements, including statements regarding product development initiatives, new product indications, new product marketing, and clinical trials, that involve risks and uncertainties and are subject to change. A discussion of the company's operations and financial condition, including factors that may affect its business and future prospects that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, is contained in documents the company has filed with the SEC, including the Form 10-K for the year ended December 31, 2004, and the Form 10-Q for the quarter ended September 30, 2005, and will be contained in all subsequent periodic filings made with the SEC. These documents identify important factors that could cause the company's actual performance to differ from current expectations, including, among others, additional adverse developments resulting from the previous suspension of Chiron's UK license to manufacture FLUVIRIN(R) influenza virus vaccine, the announcement of such suspension and the litigation and investigations relating to those matters, the outcome of clinical trials, regulatory review and approvals, manufacturing capabilities, competition, intellectual property protections and defenses, litigation, stock-price and interest-rate volatility, and marketing effectiveness. There can be no assurance that Chiron will successfully develop and receive approval to market new products or achieve market acceptance for such new products. No assurance can be given that the transaction contemplated by the merger agreement with Novartis AG will be consummated. In addition, the company may engage in business opportunities, the successful completion of which is subject to certain risks, including approval by Novartis AG, stockholder and regulatory approvals, and the integration of operations. Chiron does not undertake an obligation to update the forward-looking information the company is giving today. 2005 financial results included in this press release are preliminary and quarterly information is unaudited. NOTE: BEGRIVAC, ENCEPUR, FLUVIRIN, MENJUGATE, MENZB, PROCLEIX, PROLEUKIN, RABAVERT, RABIPUR, TOBI and ULTRIO are trademarks of Chiron. BETASERON and BETAFERON are trademarks of Schering AG. TIGRIS is a trademark of Gen-Probe Incorporated. CUBICIN is a trademark of Cubist Pharmaceuticals. -0- *T CHIRON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended December 31, -------------------------------------- 2005 -------------------------------------- Adjusted (1) Adjustments Actual ------------ ------------ ------------ Revenues: Product sales, net $ 475,267 $ - $ 475,267 Revenues from joint business arrangement 33,547 - 33,547 Collaborative agreement revenues 1,955 - 1,955 Royalty and license fee revenues 89,697 - 89,697 Other revenues 15,173 - 15,173 ------------ ------------ ------------ Total revenues 615,639 - 615,639 ------------ ------------ ------------ Operating expenses: Cost of sales 215,116 - 215,116 Research and development 109,271 - 109,271 Selling, general and administrative 125,777 - 125,777 Amortization expense - (11,969) 11,969 Impairment loss on acquired intangible assets - (1,136) 1,136 Other operating expenses 7,692 - 7,692 ------------ ------------ ------------ Total operating expenses 457,856 (13,105) 470,961 ------------ ------------ ------------ Income (loss) from operations 157,783 13,105 144,678 Loss on disposal of assets (319) - (319) Interest expense (7,683) - (7,683) Interest and other income, net 19,644 - 19,644 Minority interest (498) - (498) ------------ ------------ ------------ Income (loss) from continuing operations before income taxes 168,927 13,105 155,822 Provision for (benefit of) income taxes 5,085 (6,552) 11,637 ------------ ------------ ------------ Income (loss) from continuing operations 163,842 19,657 144,185 ============ ============ ============ Net income (loss) $ 163,842 $ 19,657 $ 144,185 ============ ============ ============ Basic earnings (loss) per share: Income (loss) from continuing operations $ 0.86 $ 0.76 ============ ============ Net income (loss) $ 0.86 $ 0.76 ============ ============ Diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.81 $ 0.71 ============ ============ Net income (loss) $ 0.81 $ 0.71 ============ ============ Shares used in calculating basic earnings (loss) per share 190,679 190,679 ============ ============ Shares used in calculating diluted earnings (loss) per share 205,008 205,008 ============ ============ Three Months Ended December 31, -------------------------------------- 2004 -------------------------------------- Adjusted (2) Adjustments Actual ------------ ------------ ------------ Revenues: Product sales, net $ 330,467 $ - $ 330,467 Revenues from joint business arrangement 25,336 - 25,336 Collaborative agreement revenues 3,577 - 3,577 Royalty and license fee revenues 68,177 - 68,177 Other revenues 6,838 - 6,838 ------------ ------------ ------------ Total revenues 434,395 - 434,395 ------------ ------------ ------------ Operating expenses: Cost of sales 177,136 - 177,136 Research and development 129,392 - 129,392 Selling, general and administrative 137,727 - 137,727 Amortization expense - (21,426) 21,426 Impairment loss on acquired intangible assets - - - Other operating expenses 4,804 - 4,804 ------------ ------------ ------------ Total operating expenses 449,059 (21,426) 470,485 ------------ ------------ ------------ Income (loss) from operations (14,664) 21,426 (36,090) Loss on disposal of assets (2,092) - (2,092) Interest expense (6,653) - (6,653) Interest and other income, net 14,390 - 14,390 Minority interest (385) - (385) ------------ ------------ ------------ Income (loss) from continuing operations before income taxes (9,404) 21,426 (30,830) Provision for (benefit of) income taxes (2,351) 5,356 (7,707) ------------ ------------ ------------ Income (loss) from continuing operations (7,053) 16,070 (23,123) ============ ============ ============ Net income (loss) $ (7,053) $ 16,070 $ (23,123) ============ ============ ============ Basic earnings (loss) per share: Income (loss) from continuing operations $ (0.04) $ (0.12) ============ ============ Net income (loss) $ (0.04) $ (0.12) ============ ============ Diluted earnings (loss) per share: Income (loss) from continuing operations $ (0.04) $ (0.12) ============ ============ Net income (loss) $ (0.04) $ (0.12) ============ ============ Shares used in calculating basic earnings (loss) per share 186,813 186,813 ============ ============ Shares used in calculating diluted earnings (loss) per share 186,813 186,813 ============ ============ (1) Adjusted amounts exclude (a) the amortization expense on acquired intangible assets related to the acquisitions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals and (b) an impairment loss of $1.1 million on acquired intangible assets from our acquisition of PowderJect Pharmaceuticals related to a contract manufacturing agreement. (2) Adjusted amounts exclude the amortization expense on acquired intangible assets related to the acquisitions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals. CHIRON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Year Ended December 31, -------------------------------------- 2005 -------------------------------------- Adjusted (3) Adjustments Actual ------------ ------------ ------------ Revenues: Product sales, net $ 1,423,180 $ - $ 1,423,180 Revenues from joint business arrangement 136,701 - 136,701 Collaborative agreement revenues 13,084 - 13,084 Royalty and license fee revenues 317,006 - 317,006 Other revenues 31,394 - 31,394 ------------ ------------ ------------ Total revenues 1,921,365 - 1,921,365 ------------ ------------ ------------ Operating expenses: Cost of sales 726,121 - 726,121 Research and development 433,891 - 433,891 Selling, general and administrative 501,579 - 501,579 Purchased in-process research and development - - - Amortization expense - (66,206) 66,206 Impairment loss on acquired intangible assets - (15,658) 15,658 Other operating expenses 20,515 - 20,515 ------------ ------------ ------------ Total operating expenses 1,682,106 (81,864) 1,763,970 ------------ ------------ ------------ Income from operations 239,259 81,864 157,395 Loss on disposal of assets (1,108) - (1,108) Interest expense (30,615) - (30,615) Interest and other income, net 86,692 - 86,692 Minority interest (2,221) - (2,221) ------------ ------------ ------------ Income from continuing operations before income taxes 292,007 81,864 210,143 Provision for income taxes 32,710 9,170 23,540 ------------ ------------ ------------ Income from continuing operations 259,297 72,694 186,603 ============ ============ ============ Gain from discontinued operations, net of taxes - - - ------------ ------------ ------------ Net income $ 259,297 $ 72,694 $ 186,603 ============ ============ ============ Basic earnings per share: Income from continuing operations $ 1.38 $ 0.99 ============ ============ Net income $ 1.38 $ 0.99 ============ ============ Diluted earnings per share: Income from continuing operations $ 1.34 $ 0.97 ============ ============ Net income $ 1.34 $ 0.97 ============ ============ Shares used in calculating basic earnings per share 188,448 188,448 ============ ============ Shares used in calculating diluted earnings per share 199,280 198,704 ============ ============ Year Ended December 31, -------------------------------------- 2004 -------------------------------------- Adjusted (4) Adjustments Actual ------------ ------------ ------------ Revenues: Product sales, net $ 1,268,303 $ - $ 1,268,303 Revenues from joint business arrangement 118,246 - 118,246 Collaborative agreement revenues 18,044 - 18,044 Royalty and license fee revenues 289,561 - 289,561 Other revenues 29,201 - 29,201 ------------ ------------ ------------ Total revenues 1,723,355 - 1,723,355 ------------ ------------ ------------ Operating expenses: Cost of sales 675,944 - 675,944 Research and development 431,128 - 431,128 Selling, general and administrative 459,502 - 459,502 Purchased in-process research and development - (9,629) 9,629 Amortization expense - (84,503) 84,503 Impairment loss on acquired intangible assets - - - Other operating expenses 12,844 - 12,844 ------------ ------------ ------------ Total operating expenses 1,579,418 (94,132) 1,673,550 ------------ ------------ ------------ Income from operations 143,937 94,132 49,805 Loss on disposal of assets (3,247) - (3,247) Interest expense (26,093) - (26,093) Interest and other income, net 56,797 - 56,797 Minority interest (1,968) - (1,968) ------------ ------------ ------------ Income from continuing operations before income taxes 169,426 94,132 75,294 Provision for income taxes 42,357 21,126 21,231 ------------ ------------ ------------ Income from continuing operations 127,069 73,006 54,063 ============ ============ ============ Gain from discontinued operations, net of taxes 24,854 - 24,854 ------------ ------------ ------------ Net income $ 151,923 $ 73,006 $ 78,917 ============ ============ ============ Basic earnings per share: Income from continuing operations $ 0.68 $ 0.29 ============ ============ Net income $ 0.81 $ 0.42 ============ ============ Diluted earnings per share: Income from continuing operations $ 0.67 $ 0.28 ============ ============ Net income $ 0.80 $ 0.41 ============ ============ Shares used in calculating basic earnings per share 187,545 187,545 ============ ============ Shares used in calculating diluted earnings per share 190,202 190,202 ============ ============ (3) Adjusted amounts exclude (a) the amortization expense on acquired intangible assets related to the acquisitions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals, (b) an impairment loss of $14.5 million on acquired intangible assets from our acquisition of PowderJect Pharmaceuticals related to a yellow fever vaccine and (c) an impairment loss of $1.1 million on acquired intangible assets from our acquisition of PowderJect Pharmaceuticals related to a contract manufacturing agreement. (4) Adjusted amounts exclude (a) the amortization expense on acquired intangible assets related to the acquisitions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals and (b) Purchased in-process research and development related to the Sagres acquisition. CHIRON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) December 31, December 31, 2005 2004 ------------- ------------- Assets ------------------------------------------- Current assets: Cash, cash equivalents and short-term investments $ 680,128 $ 603,621 Accounts receivable, net of allowances 477,402 402,094 Inventories, net of reserves 237,636 221,154 Other current assets 195,096 167,154 ------------- ------------- Total current assets 1,590,262 1,394,023 Non-current investments in marketable debt securities 728,663 409,421 Property, plant, equipment and leasehold improvements, net 860,928 799,415 Other non-current assets 1,546,114 1,702,644 ------------- ------------- Total assets $ 4,725,967 $ 4,305,503 ============= ============= Liabilities and stockholders' equity ------------------------------------------- Current liabilities $ 516,714 $ 434,444 Long-term debt 939,233 936,652 Long-term portion of capital lease 156,661 156,952 Non-current unearned revenue 27,359 26,175 Other non-current liabilities 84,829 140,226 Minority interest 10,904 9,350 Stockholders' equity 2,990,267 2,601,704 ------------- ------------- Total liabilities and stockholders' equity $ 4,725,967 $ 4,305,503 ============= ============= CHIRON CORPORATION SUPPLEMENTAL SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER SHARE (Unaudited) (In thousands, except per share data) Three Months Ended December 31, 2005 2004 ------------------- ------------------- Adjusted Actual Adjusted Actual ------------------- ------------------- Computation for earnings (loss) per share -- continuing operations Income (loss) (Numerator): Income (loss) from continuing operations $163,842 $144,185 $ (7,053) $(23,123) Plus: Interest on 1.625% convertible debentures, net of taxes 1,586 1,586 - - Plus: Interest on Liquid Yield Option Notes, net of taxes 147 147 - - --------- --------- --------- --------- Income (loss) from continuing operations, plus impact from assumed conversions $165,575 $145,918 $ (7,053) $(23,123) ======================================= Shares (Denominator): Weighted-average common shares outstanding 190,679 190,679 186,813 186,813 Additional shares from exercise of right under an agreement with Novartis (5) 3,448 3,448 - - Effect of dilutive securities: Stock options and equivalents 3,001 3,001 - - 1.625% convertible debentures 7,306 7,306 - - Liquid Yield Option Notes 574 574 - - --------- --------- --------- --------- Weighted-average common shares outstanding, plus impact from assumed conversions 205,008 205,008 186,813 186,813 ======================================= Basic earnings (loss) per share from continuing operations $ 0.86 $ 0.76 $ (0.04) $ (0.12) ========= ========= ========= ========= Diluted earnings (loss) per share from continuing operations $ 0.81 $ 0.71 $ (0.04) $ (0.12) ========= ========= ========= ========= Computation for earnings (loss) per share -- net income (loss) Income (loss) (Numerator): Net income (loss) $163,842 $144,185 $ (7,053) $(23,123) Plus: Interest on 1.625% convertible debentures, net of taxes 1,586 1,586 - - Plus: Interest on Liquid Yield Option Notes, net of taxes 147 147 - - --------- --------- --------- --------- Net income (loss), plus impact from assumed conversions $165,575 $145,918 $ (7,053) $(23,123) ======================================= Shares (Denominator): Weighted-average common shares outstanding 190,679 190,679 186,813 186,813 Additional shares from exercise of right under an agreement with Novartis (5) 3,448 3,448 - - Effect of dilutive securities: Stock options and equivalents 3,001 3,001 - - 1.625% convertible debentures 7,306 7,306 - - Liquid Yield Option Notes 574 574 - - --------- --------- --------- --------- Weighted-average common shares outstanding, plus impact from assumed conversions 205,008 205,008 186,813 186,813 ======================================= Basic earnings (loss) per share from net income $ 0.86 $ 0.76 $ (0.04) $ (0.12) ========= ========= ========= ========= Diluted earnings (loss) per share from net income $ 0.81 $ 0.71 $ (0.04) $ (0.12) ========= ========= ========= ========= (5) On October 30, 2005 we exercised our right under an agreement with Novartis (as successor to Ciba-Geigy), dated as of November 20, 1994, as amended, to require Novartis or its affiliate to purchase shares of our common stock for an aggregate purchase price of $300.0 million at a per share purchase price of $43.50. On December 8, 2005, we closed on a sale of $300.0 million in newly issued shares of our common stock at a price of $43.50 per share to a subsidiary of Novartis. For purposes of calculating diluted earnings per share, the issued shares of this transaction are considered outstanding from October 30, 2005. As a result, the calculation of diluted earnings per share for the fourth quarter of 2005 included an additional 3.4 million shares. CHIRON CORPORATION SUPPLEMENTAL SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (Unaudited) (In thousands, except per share data) Year Ended December 31, 2005 2004 ------------------- ------------------- Adjusted Actual Adjusted Actual ------------------- ------------------- Computation for earnings per share -- continuing operations Income (Numerator): Income from continuing operations $259,297 $186,603 $127,069 $ 54,063 Plus: Interest on 1.625% convertible debentures, net of taxes 6,357 6,357 - - Plus: Interest on Liquid Yield Option Notes, net of taxes 586 - - - --------- --------- --------- --------- Income from continuing operations, plus impact from assumed conversions $266,240 $192,960 $127,069 $ 54,063 ======================================= Shares (Denominator): Weighted-average common shares outstanding 188,448 188,448 187,545 187,545 Additional shares from exercise of right under an agreement with Novartis (6) 1,061 1,061 - - Effect of dilutive securities: Stock options and equivalents 1,887 1,887 2,657 2,657 1.625% convertible debentures 7,308 7,308 - - Liquid Yield Option Notes 576 - - - --------- --------- --------- --------- Weighted-average common shares outstanding, plus impact from assumed conversions 199,280 198,704 190,202 190,202 ======================================= Basic earnings per share from continuing operations $ 1.38 $ 0.99 $ 0.68 $ 0.29 ========= ========= ========= ========= Diluted earnings per share from continuing operations $ 1.34 $ 0.97 $ 0.67 $ 0.28 ========= ========= ========= ========= Computation for earnings per share -- net income Income (Numerator): Net income $259,297 $186,603 $151,923 $ 78,917 Plus: Interest on 1.625% convertible debentures, net of taxes 6,357 6,357 - - Plus: Interest on Liquid Yield Option Notes, net of taxes 586 - - - --------- --------- --------- --------- Net income, plus impact from assumed conversions $266,240 $192,960 $151,923 $ 78,917 ======================================= Shares (Denominator): Weighted-average common shares outstanding 188,448 188,448 187,545 187,545 Additional shares from exercise of right under an agreement with Novartis (6) 1,061 1,061 - - Effect of dilutive securities: Stock options and equivalents 1,887 1,887 2,657 2,657 1.625% convertible debentures 7,308 7,308 - - Liquid Yield Option Notes 576 - - - --------- --------- --------- --------- Weighted-average common shares outstanding, plus impact from assumed conversions 199,280 198,704 190,202 190,202 ======================================= Basic earnings per share from net income $ 1.38 $ 0.99 $ 0.81 $ 0.42 ========= ========= ========= ========= Diluted earnings per share from net income $ 1.34 $ 0.97 $ 0.80 $ 0.41 ========= ========= ========= ========= (6) On October 30, 2005, we exercised our right under an agreement with Novartis (as successor to Ciba-Geigy), dated as of November 20, 1994, as amended, to require Novartis or its affiliate to purchase shares of our common stock for an aggregate purchase price of $300.0 million at a per share purchase price of $43.50. On December 8, 2005, we closed on a sale of $300.0 million in newly issued shares of our common stock at a price of $43.50 per share to a subsidiary of Novartis. For purposes of calculating diluted earnings per share, the issued shares of this transaction are considered outstanding from October 30, 2005. As a result, the calculation of diluted earnings per share for the year included an additional 1.1 million shares. CHIRON CORPORATION SUPPLEMENTAL REVENUE SUMMARY (Unaudited) (In thousands, except percentages) ---------------------------------------------------------------------- Current Prior Change Quarter Quarter from Change Q4 2005 Q3 2005 Prior QTR % ---------------------------------------------------------------------- Product Sales Blood Testing Ortho $ 9,825 $ 7,023 $ 2,802 40% NAT 72,195 70,677 1,518 2% --------------------------------------- Total Blood Testing 82,020 77,700 4,320 6% Vaccines Influenza vaccines 161,955 60,321 101,634 168% Meningococcal vaccines 8,968 11,635 (2,667) (23)% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 23,722 35,012 (11,290) (32)% Pediatric/Other vaccines 50,574 45,800 4,774 10% --------------------------------------- Total Vaccines 245,219 152,768 92,451 61% Biopharmaceuticals Proleukin 31,259 31,028 231 1% TOBI 65,199 57,890 7,309 13% Betaseron (7) 40,545 36,927 3,618 10% Other 11,025 10,862 163 2% --------------------------------------- Total Biopharmaceuticals 148,028 136,707 11,321 8% TOTAL PRODUCT SALES, NET $475,267 $367,175 $108,092 29% ======================================= Revenues from joint business arrangement $ 33,547 $ 36,093 $ (2,546) (7)% Collaborative agreement revenues 1,955 3,149 (1,194) (38)% Royalty and license fee revenues 89,697 70,726 18,971 27% Other revenues 15,173 2,470 12,703 514% --------------------------------------- TOTAL REVENUES $615,639 $479,613 $136,026 28% ======================================= Gross Margins Blood Testing 38% 42% (4)% Vaccines 48% 45% 3% Biopharmaceuticals 76% 71% 5% ----------------------------- TOTAL GROSS MARGINS 55% 54% 1% ============================= ---------------------------------------------------------------------- (7) Excludes Betaferon Royalty $ 14,122 $ 13,413 $ 709 5% ---------------------------------------------------------------------- Change Prior from Year Prior Change Q4 2004 Year % ------------------------------------------------------------ Product Sales Blood Testing Ortho $ 7,904 $ 1,921 24% NAT 63,705 8,490 13% ----------------------------- Total Blood Testing 71,609 10,411 15% Vaccines Influenza vaccines 44,015 117,940 268% Meningococcal vaccines 9,309 (341) (4)% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 21,159 2,563 12% Pediatric/Other vaccines 57,656 (7,082) (12)% ----------------------------- Total Vaccines 132,139 113,080 86% Biopharmaceuticals Proleukin 30,713 546 2% TOBI 53,276 11,923 22% Betaseron (7) 33,639 6,906 21% Other 9,091 1,934 21% ----------------------------- Total Biopharmaceuticals 126,719 21,309 17% TOTAL PRODUCT SALES, NET $330,467 $144,800 44% ============================= Revenues from joint business arrangement $ 25,336 $ 8,211 32% Collaborative agreement revenues 3,577 (1,622) (45)% Royalty and license fee revenues 68,177 21,520 32% Other revenues 6,838 8,335 122% ----------------------------- TOTAL REVENUES $434,395 $181,244 42% ============================= Gross Margins Blood Testing 40% (2)% Vaccines 28% 20% Biopharmaceuticals 70% 6% ------------------- TOTAL GROSS MARGINS 46% 9% =================== ------------------------------------------------------------ (7) Excludes Betaferon Royalty $ 12,798 $ 1,324 10% ------------------------------------------------------------ CHIRON CORPORATION SUPPLEMENTAL YTD REVENUE SUMMARY (Unaudited) (In thousands, except percentages) Year Ended December 31, Change from Change 2005 2004 Prior Year % ---------------------------------------------------------------------- Product Sales Blood Testing Ortho $ 31,298 $ 27,844 $ 3,454 12% NAT 273,407 249,809 23,598 9% ----------------------------------------------- Total Blood Testing 304,705 277,653 27,052 10% Vaccines Influenza vaccines 225,355 153,413 71,942 47% Meningococcal vaccines 43,361 27,739 15,622 56% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 147,507 96,864 50,643 52% Pediatric/Other vaccines 165,994 200,948 (34,954) (17)% ----------------------------------------------- Total Vaccines 582,217 478,964 103,253 22% Biopharmaceuticals Proleukin 123,549 129,377 (5,828) (5)% TOBI 232,624 212,876 19,748 9% Betaseron (8) 142,238 130,572 11,666 9% Other 37,847 38,861 (1,014) (3)% ----------------------------------------------- Total Biopharmaceuticals 536,258 511,686 24,572 5% TOTAL PRODUCT SALES, NET $1,423,180 $1,268,303 $ 154,877 12% =============================================== Revenues from joint business arrangement $ 136,701 $ 118,246 $ 18,455 16% Collaborative agreement revenues 13,084 18,044 (4,960) (27)% Royalty and license fee revenues 317,006 289,561 27,445 9% Other revenues 31,394 29,201 2,193 8% ----------------------------------------------- TOTAL REVENUES $1,921,365 $1,723,355 $ 198,010 11% =============================================== Gross Margins Blood Testing 41% 42% (1)% Vaccines 32% 23% 9% Biopharmaceuticals 72% 72% 0% ----------------------------------- TOTAL GROSS MARGINS 49% 47% 2% =================================== ---------------------------------------------------------------------- (8) Excludes Betaferon Royalty $ 59,955 $ 51,564 $ 8,391 16% ---------------------------------------------------------------------- *T