CHIR Chiron (MM)

Chiron Corporation (Nasdaq:CHIR) today reported financial results for the third quarter of 2005. Chiron reported adjusted income from continuing operations of $73 million, or $0.38 per share, for the third quarter of 2005, compared to $53 million, or $0.27 per share (as restated), for the third quarter of 2004. Chiron reported GAAP income from continuing operations of $51 million, or $0.27 per share, for the third quarter of 2005, compared to $27 million, or $0.14 per share (as restated), for the third quarter of 2004. Three factors had a material impact on the quarterly comparison of financial results. As previously reported, following the suspension of Chiron's manufacturing license for its Liverpool facility in October 2004, Chiron's entire FLUVIRIN(R) influenza virus vaccine product inventory was written off in the third quarter of 2004, resulting in a $91 million charge to cost of sales. Also in the third quarter of 2004, Chiron recognized $46 million of royalty and license fee revenue resulting from a settlement with F. Hoffmann-La Roche related to a U.S. patent directed to NAT methods for HIV (Roche settlement), compared to $8 million recognized in the third quarter of 2005. Lastly, there was a lost contribution from sales of BEGRIVAC(R) influenza virus vaccine as there were no sales of BEGRIVAC vaccine in the third quarter of 2005, compared to $41 million of sales in the third quarter of 2004. "The third quarter marked a significant turning point for the company. The work underpinning the Liverpool remediation came to culmination with the return of FLUVIRIN vaccine to the U.S. market, and Chiron is now poised to provide possible solutions in the government's assessment of policy options to address influenza. At the same time, we continue to hit important clinical and commercial milestones in our BioPharmaceuticals and Blood Testing businesses, and we continue to foster opportunities for growth and value creation across all our businesses," said Howard Pien, chief executive officer of Chiron. Chiron uses adjusted financial statements to gain an understanding of the company's operating performance on a comparative basis. Adjusted amounts exclude special items relating to certain acquisitions and an impairment loss on acquired intangible assets, which may not be indicative of the company's trends or potential future performance. Please refer to the tables at the end of this press release for more detail on these items and a reconciliation of the adjusted financial information to GAAP financial information; this information is also located at www.chiron.com in the Investors section under Financial Reports. All references to per-share amounts are per diluted share. -0- *T Selected Financial Highlights (Amounts are both GAAP and adjusted) Third- Third- Quarter Quarter Change ($ millions) 2005 2004 --------------------------------------------- -------- -------- ------ Net product sales $367 $376 (2%) Total revenues 480 530 (9%) Cost of sales 169 241 Gross profit margin 54% 36% Research and development 107 103 4% Selling, general and administrative 117 112 5% --------------------------------------------- -------- -------- ------ *T Net product sales for the third quarter of 2005 decreased 2 percent, or $8 million, compared to the third quarter of 2004, primarily due to no sales of BEGRIVAC vaccine in the third quarter of 2005, compared to $41 million of sales of BEGRIVAC vaccine in the third quarter of 2004. The decline was partially offset by increases in sales of other influenza vaccines, rabies vaccines, PROCLEIX(R) NAT products, MENJUGATE(R) meningococcal C vaccine, TOBI(R) tobramycin inhalation solution, and BETASERON(R) interferon beta-1b. Revenues decreased 9 percent, or $50 million, primarily due to recognition of $46 million in the third quarter of 2004 relating to the Roche settlement, compared to recognition of $8 million in the third quarter of 2005 relating to the settlement. In addition, there were no BEGRIVAC vaccine product sales in the third quarter of 2005. Gross profit margin increased primarily due to the entire FLUVIRIN vaccine product inventory being written off in the third quarter of 2004, resulting in a $91 million charge to cost of sales. Research and development expenses increased primarily due to the cost of development efforts in the oncology franchise and the meningococcal vaccine franchise. This increase was partially offset by decreases from a variety of BioPharmaceutical and Blood Testing research and development programs that were completed or discontinued prior to the third quarter of 2005. Selling, general and administrative expenses increased due to a broad range of activities, including the pre-launch program for CUBICIN(R) daptomycin for injection in Europe, higher employee-related costs and corporate governance. The effective tax rate was 22 percent on an adjusted basis and a GAAP basis for the third quarter of 2005, compared to 25 percent on an adjusted basis and 31 percent on a GAAP basis for the third quarter of 2004. The tax rate decreased primarily due to lower than expected revenues from FLUVIRIN vaccine and BEGRIVAC vaccine, which are realized in high-tax jurisdictions. The change is expected to be a non-recurring event impacting adjusted and GAAP tax rates in 2005. BLOOD TESTING Total Blood Testing revenues were $138 million for the third quarter of 2005, a decrease of 2 percent compared to the third quarter of 2004. -0- *T Selected Blood Testing Revenues Third- Third- Quarter Quarter ($ millions) 2005 2004 Change --------------------------------------------- -------- -------- ------ Ortho-Clinical Diagnostics $7 $7 (1%) PROCLEIX(R) NAT products 71 64 11% -------- -------- ------ Blood Testing net product sales 78 71 10% Revenues from joint business arrangement 36 34 6% Royalty and license fee revenues 23 34 (34%) Total Blood Testing revenues(a) $138 $141 (2%) --------------------------------------------- -------- -------- ------ (a) 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 product line, revenues from Chiron's joint business 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 for the third quarter of 2005 compared to the third quarter of 2004 was primarily due to the introduction of the PROCLEIX(R) ULTRIO(R) Assay and PROCLEIX(R) TIGRIS(R) System into a number of markets abroad and an increase in donations in the United States. -- Joint business 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 decrease was primarily due to recognition in the third quarter of 2004 of the Blood Testing share of the Roche settlement and the license fee under Chiron's license agreements with the Blood Transfusion Centers of the German Red Cross (Blutspendediensten des Deutsche Rotes Kreuz, or DRK). This was partially offset by 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 several settlements entered into prior to the third quarter of 2005. The gross profit margin for Blood Testing products was 42 percent for the third quarter of 2005, compared to 43 percent for the third quarter of 2004. The decrease was primarily due to the cost of additional PROCLEIX TIGRIS System support and service. VACCINES Vaccines net product sales were $153 million for the third quarter of 2005, a decrease of 12 percent compared to the third quarter of 2004. -0- *T Selected Vaccines Revenues Third- Third- Quarter Quarter Change ($ millions) 2005 2004 --------------------------------------------- -------- -------- ------ Influenza vaccines $60 $93 (35%) Meningococcal vaccines 12 9 31% Travel vaccines 35 26 32% Pediatric and other vaccines 46 44 3% -------- -------- ------ Vaccines net product sales 153 173 (12%) Total Vaccines revenues(a) $157 $180 (13%) --------------------------------------------- -------- -------- ------ (a) 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 decrease in influenza vaccines sales was due to no sales of BEGRIVAC vaccine in the third quarter of 2005, compared to $41 million of sales in the third quarter of 2004, partially offset by increased sales of other influenza vaccine products. -- Meningococcal vaccines: The increase in MENJUGATE vaccine sales was primarily due to a tender sale in Spain, partially offset by a decline in tender sales to the United Kingdom and Canada. -- Travel vaccines: The increase in travel vaccines sales was primarily due to an increase in sales of rabies vaccine due to increased demand as a result of a product recall from another supplier, an increase in price, and an increase in tender sales in Europe. -- Pediatric and other vaccines: The increase in pediatric and other vaccines sales was primarily due to an increase in sales of diphtheria, pertussis and tetanus vaccine concentrate, partially offset by a decline in polio vaccine sales due to product write-offs and product unavailability as a result of manufacturing upgrades. The gross profit margin for Vaccines products was 45 percent for the third quarter of 2005, compared to 9 percent for the third quarter of 2004. The increase was primarily due to the entire FLUVIRIN vaccine product inventory being written off in the third quarter of 2004, resulting in a $91 million charge to cost of sales in that quarter. The absence of any sales of BEGRIVAC vaccine and costs related to remediation activities for FLUVIRIN vaccine and BEGRIVAC vaccine had a negative impact on gross margin for the third quarter of 2005. BIOPHARMACEUTICALS BioPharmaceuticals net product sales were $137 million for the third quarter of 2005, an increase of 4 percent compared to the third quarter of 2004. -0- *T Selected BioPharmaceuticals Revenues Third- Third- Quarter Quarter Change ($ millions) 2005 2004 --------------------------------------------- -------- -------- ------ TOBI(R) tobramycin inhalation solution $58 $56 4% PROLEUKIN(R) (aldesleukin) for injection 31 32 (2%) BETASERON(R) interferon beta-1b 37 35 5% BioPharmaceuticals net product sales(a) 137 132 4% BETAFERON(R) interferon beta-1b royalties 13 13 0% Total BioPharmaceuticals revenues(b) $155 $148 5% --------------------------------------------- -------- -------- ------ (a) Net product sales include sales from TOBI, PROLEUKIN, BETASERON and other products. (b) 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 for the third quarter of 2005 compared to the third quarter of 2004 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 and wholesaler ordering patterns, 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, a shift from third-party to in-house production and timing of clinical product, partially offset by a reduction in shipments to Berlex and inventory ordering patterns. -- BETAFERON royalties: BETAFERON royalties in the third quarter of 2005 were consistent with BETAFERON royalties the third quarter of 2004 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 71 percent for the third quarter of 2005, compared to 67 percent for the third quarter of 2004. The increase in gross profit margin was primarily due to favorable product mix and increased utilization of facilities over the prior year. ROYALTY AND LICENSE FEE REVENUES Total royalty and license fee revenues include royalties and license fees attributed to Blood Testing, Vaccines and BioPharmaceuticals. These revenues also include other royalty and license fee revenues, which consist primarily of royalties from Roche, Roche Molecular Systems and Bayer HealthCare AG for clinical diagnostic products. -0- *T Selected Royalty and License Fee Revenues Third- Third- Quarter Quarter ($ millions) 2005 2004 Change --------------------------------------------- -------- -------- ------ Blood Testing $23 $34 (34%) Vaccines 1 1 4% BioPharmaceuticals 17 15 12% Other 30 61 (51%) Total royalty and license fee revenues(a) $71 $111 (37%) --------------------------------------------- -------- -------- ------ (a) 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 the third quarter of 2005 compared to the third quarter of 2004 as explained above, other royalty and license fee revenues decreased. The decrease was primarily due to the Roche settlement, which was entered into in the third quarter of 2004. In relation to this settlement in the third quarter of 2005, $3 million related to blood screening and thus was recognized as Blood Testing royalty and license fee revenues, and $5 million related to clinical diagnostics and thus was recognized as other royalty and license fee revenues. In the third quarter of 2004, $10 million of the Roche settlement was recognized as Blood Testing royalty and license fee revenues, and $36 million was recognized as other royalty and license fee revenues. RECENT EVENTS -- Chiron has received all necessary approvals from the U.S. Food and Drug Administration (FDA) and the UK Medicines and Healthcare products Regulatory Agency (MHRA) to start supplying FLUVIRIN vaccine to the U.S. market. Subsequent to the third quarter of 2005, Chiron announced that it began delivering FLUVIRIN vaccine to customers in the United States for the 2005-2006 influenza season. The company expects that the total number of FLUVIRIN vaccine doses it will produce for the 2005-2006 influenza season will be below its previously stated range announced on July 27, 2005, due to production delays related to remediation as well as lower production output associated with adaptation to new processes and procedures implemented in remediation. Accordingly, Chiron expects that its financial results for 2005 will be below its previously stated guidance. Chiron expects to have more information on FLUVIRIN vaccine production totals and financial guidance in the weeks ahead. -- The FDA notified Chiron's collaborator Gen-Probe Incorporated that it considers the PROCLEIX TIGRIS System "not substantially equivalent" to the PROCLEIX Enhanced Semi-Automated System (eSAS) for screening donated human blood with the PROCLEIX ULTRIO Assay. The FDA made this determination in response to Gen-Probe's 510(k) application for the TIGRIS System. Gen-Probe has discussed the determination with the FDA and is scheduling a series of meetings to resolve the outstanding issues. -- In conjunction with the recently held European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) meeting, the University of Basel in Switzerland announced results from the BENEFIT (BETAFERON/BETASERON in Newly Emerging Multiple Sclerosis For Initial Treatment) clinical study. Study results showed that BETAFERON/BETASERON interferon beta-1b 250 mcg treatment delayed the onset of clinically definite multiple sclerosis by one year (363 days) in patients with first clinical signs of multiple sclerosis compared to placebo. -- Chiron and XOMA Ltd. announced the initiation of a second clinical trial of CHIR-12.12, a novel, fully human, antagonist antibody that targets the CD40 antigen. The Phase I trial is for patients with multiple myeloma, a type of cancer that is associated with expression of the CD40 antigen on the cancer cell surface. -- Chiron and Nektar Therapeutics announced the initiation of clinical testing in the Phase III program evaluating tobramycin inhalation powder (TIP), an investigational inhaled antibiotic. The TIP Phase III program includes two clinical trials and will evaluate the efficacy and safety of TIP in the treatment of lung infections caused by Pseudomonas aeruginosa in patients living with cystic fibrosis. The first trial, called ASPIRE I, is now underway. THIRD-QUARTER 2005 EARNINGS CONFERENCE CALL Chiron will hold a conference call and webcast on Tuesday, October 25, 2005, at 4:45 p.m. EDT to review its third-quarter 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, November 1, 2005. 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 1067243. 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. Download financial information in PDF format: http://www.chiron.com/investors/7819/chiron_financial.pdf View financial information online: http://www.chiron.com/investors/finreports/index.html This news release contains forward-looking statements, including statements regarding earnings and sales growth, supply of influenza virus vaccines that Chiron expects to deliver in future influenza seasons, improvements to manufacturing facilities, 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 June 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 from October 5, 2004, through March 2, 2005, 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, intellectual property protections and defenses, litigation, stock-price and interest-rate volatility, marketing effectiveness and the severity of the 2005-2006 influenza season. There can be no assurance that additional issues with respect to FLUVIRIN vaccine or Chiron's manufacturing generally will not arise in the future, or additional doses of FLUVIRIN vaccine will satisfy Chiron's internal release procedures and/or FDA influenza vaccine lot release procedures. The company may face additional competition in the influenza market in the future and challenges in distribution arrangements as a result of previous vaccine developments. 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. NOTE: BEGRIVAC, FLUVIRIN, MENJUGATE, PROCLEIX, PROLEUKIN, 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 September 30, ----------------------------------------------------- 2005 2004 Restated (3) -------------------------- -------------------------- Adjusted Adjust- Actual Adjusted Adjust- Actual (1) ments (2) ments -------------------------- -------------------------- Revenues: Product sales, net $367,175 $- $367,175 $375,549 $- $375,549 Revenues from joint business arrangement 36,093 - 36,093 34,017 - 34,017 Collaborative agreement revenues 3,149 - 3,149 4,124 - 4,124 Royalty and license fee revenues 70,726 - 70,726 111,396 - 111,396 Other revenues 2,470 - 2,470 4,450 - 4,450 -------- ------- --------- -------- ------- --------- Total revenues 479,613 - 479,613 529,536 - 529,536 -------- ------- --------- -------- ------- --------- Operating expenses: Cost of sales 168,726 - 168,726 241,044 - 241,044 Research and development 107,309 - 107,309 103,000 - 103,000 Selling, general and administrative 117,152 - 117,152 112,013 - 112,013 Purchased in- process research and development - - - - (9,629) 9,629 Amortization expense - (12,361) 12,361 - (20,566) 20,566 Impairment loss on acquired intangible assets - (14,522) 14,522 - - - Other operating expenses 3,621 - 3,621 1,280 - 1,280 -------- ------- --------- -------- ------- --------- Total operating expenses 396,808 (26,883) 423,691 457,337 (30,195) 487,532 -------- ------- --------- -------- ------- --------- Income from operations 82,805 26,883 55,922 72,199 30,195 42,004 Interest expense (7,759) - (7,759) (7,063) - (7,063) Interest and other income, net 18,514 - 18,514 5,369 - 5,369 Minority interest (531) - (531) (504) - (504) -------- ------- --------- -------- ------- --------- Income from continuing operations before income taxes 93,029 26,883 66,146 70,001 30,195 39,806 Provision for income taxes 20,172 5,337 14,835 17,500 5,141 12,359 -------- ------- --------- -------- ------- --------- Income from continuing operations 72,857 21,546 51,311 52,501 25,054 27,447 ======== ======= ========= ======== ======= ========= Loss from discontinued operations, net of taxes - - - (450) - (450) -------- ------- --------- -------- ------- --------- Net income $72,857 $21,546 $51,311 $52,051 $25,054 $26,997 ======== ======= ========= ======== ======= ========= Basic earnings per share: Income from continuing operations $0.39 $0.27 $0.28 $0.15 ========= ========= ========= ========= Net income $0.39 $0.27 $0.28 $0.14 ========= ========= ========= ========= Diluted earnings per share: Income from continuing operations $0.38 $0.27 $0.27 $0.14 ========= ========= ========= ========= Net income $0.38 $0.27 $0.27 $0.14 ========= ========= ========= ========= Shares used in calculating basic earnings per share 188,039 188,039 187,368 187,368 ========= ========= ========= ========= Shares used in calculating diluted earnings per share 197,802 197,802 197,894 190,014 ========= ========= ========= ========= (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 $14.5 million on acquired intangible assets from our acquisition of PowderJect related to a yellow fever vaccine. (2) Adjusted amounts exclude (a) the amortization expense on acquired intangible assets related to the acquistions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals and (b) Purchased in-process research and development related to the Sagres acquisition. (3) Chiron determined that certain sales of a travel vaccine recorded as revenues in the second quarter of 2004 should not have been recorded as revenue at that time, and that portions of those sales should have been recorded as revenues in the third and fourth quarters of 2004 and possibly in later quarters. On a GAAP and adjusted basis, as a result of the restatement, for the three months ended September 30, 2004, product sales were increased by $5.6 million, cost of sales were increased by $0.9 million and income taxes were increased by $1.2 million. This resulted in a $3.5 million increase in income from continuing operations and net income and a $0.01 increase of diluted income from continuing operations per share ($0.14 per share instead of the $0.13 per share as previously reported on a GAAP basis and $0.27 per share instead of $0.26 per share as previously reported on an adjusted basis). Note: Due to rounding, quarterly earnings (loss) per share amounts may not sum fully to yearly earnings per share amounts. CHIRON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Nine Months Ended September 30, --------------------------------------------------------- 2005 2004 Restated (6) ---------------------------- ---------------------------- Adjusted Adjust- Actual Adjusted Adjust- Actual (4) ments (5) ments ---------------------------- ---------------------------- Revenues: Product sales, net $947,913 $- $947,913 $937,836 $- $937,836 Revenues from joint business arrangement 103,154 - 103,154 92,910 - 92,910 Collaborative agreement revenues 11,129 - 11,129 14,467 - 14,467 Royalty and license fee revenues 227,309 - 227,309 221,384 - 221,384 Other revenues 16,221 - 16,221 22,363 - 22,363 ---------- ----------------- ---------- ------- --------- Total revenues 1,305,726 - 1,305,726 1,288,960 - 1,288,960 ---------- ----------------- ---------- ------- --------- Operating expenses: Cost of sales 511,005 - 511,005 498,808 - 498,808 Research and development 324,620 - 324,620 301,736 - 301,736 Selling, general and admini- strative 375,802 - 375,802 321,775 - 321,775 Purchased in- process research and development - - - - (9,629) 9,629 Amortization expense - (54,237) 54,237 - (63,077) 63,077 Impairment loss on acquired intangible assets - (14,522) 14,522 - - - Other operating expenses 12,823 - 12,823 8,040 - 8,040 ---------- ----------------- ---------- ------- --------- Total operating expenses 1,224,250 (68,759)1,293,009 1,130,359 (72,706)1,203,065 ---------- ----------------- ---------- ------- --------- Income from operations 81,476 68,759 12,717 158,601 72,706 85,895 Interest expense (22,932) - (22,932) (19,440) - (19,440) Interest and other income, net 66,259 - 66,259 41,252 - 41,252 Minority interest (1,723) - (1,723) (1,583) - (1,583) ---------- ----------------- ---------- ------- --------- Income from continuing operations before income taxes 123,080 68,759 54,321 178,830 72,706 106,124 Provision for income taxes 27,625 15,722 11,903 44,708 15,770 28,938 ---------- ----------------- ---------- ------- --------- Income from continuing operations 95,455 53,037 42,418 134,122 56,936 77,186 ========== ================= ========== ======= ========= Gain from discontinued operations, net of taxes - - - 24,854 - 24,854 ---------- ----------------- ---------- ------- --------- Net income $95,455 $53,037 $42,418 $158,976 $56,936 $102,040 ========== ================= ========== ======= ========= Basic earnings per share: Income from continuing operations $0.51 $0.23 $0.71 $0.41 ========== ========== ========== ========== Net income $0.51 $0.23 $0.85 $0.54 ========== ========== ========== ========== Diluted earnings per share: Income from continuing operations $0.50 $0.22 $0.70 $0.40 ========== ========== ========== ========== Net income $0.50 $0.22 $0.83 $0.53 ========== ========== ========== ========== Shares used in calculating basic earnings per share 187,564 187,564 187,751 187,751 ========== ========== ========== ========== Shares used in calculating diluted earnings per share 189,064 189,064 198,134 190,901 ========== ========== ========== ========== (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) An impairment loss of $14.5 million on acquired intangible assets from our acquisition of PowderJect related to a yellow fever vaccine. (5) Adjusted amounts exclude (a) the amortization expense on acquired intangible assets related to the acquistions of PathoGenesis, Chiron Behring, Pulmopharm and PowderJect Pharmaceuticals and (b) Purchased in-process research and development related to the Sagres acquisition. (6) Chiron determined that certain sales of a travel vaccine recorded as revenues in the second quarter of 2004 should not have been recorded as revenue at that time, and that portions of those sales should have been recorded as revenues in the third and fourth quarters of 2004 and possibly in later quarters. On a GAAP and an adjusted basis, as a result of the restatement, for the nine months ended September 30, 2004, product sales were reduced by $8.3 million, cost of sales were reduced by $0.6 million and income taxes were reduced by $1.9 million. This resulted in a $5.8 million reduction in income from continuing operations and net income on a GAAP and an adjusted basis. The restatement also resulted in a $0.03 reduction of diluted income from continuing operations per share on a GAAP basis ($0.40 per share instead of the $0.43 per share as previously reported) and a $0.03 reduction of diluted income from continuing operations per share on an adjusted basis ($0.70 per share instead of the $0.73 per share as previously reported). Note: Due to rounding, quarterly earnings (loss) per share amounts may not sum fully to yearly earnings per share amounts CHIRON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September December 30, 31, 2005 2004 ----------- ----------- Assets ----------------------------------------------- Current assets: Cash, cash equivalents and short-term investments $580,106 $603,621 Accounts receivable, net of allowances 383,925 402,094 Inventories, net of reserves 268,566 221,154 Other current assets 209,525 167,154 ----------- ----------- Total current assets 1,442,122 1,394,023 Non-current investments in marketable debt securities 437,650 409,421 Property, plant, equipment and leasehold improvements, net 824,097 799,415 Other non-current assets 1,512,937 1,702,644 ----------- ----------- Total assets $4,216,806 $4,305,503 =========== =========== Liabilities and stockholders' equity ----------------------------------------------- Current liabilities $459,522 $434,444 Long-term debt 938,449 936,652 Long-term portion of capital lease 156,723 156,952 Non-current unearned revenue 25,146 26,175 Other non-current liabilities 105,612 140,226 Minority interest 10,679 9,350 Stockholders' equity 2,520,675 2,601,704 ----------- ----------- Total liabilities and stockholders' equity $4,216,806 $4,305,503 =========== =========== CHIRON CORPORATION SUPPLEMENTAL SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (Unaudited) (In thousands, except per share data) Three Months Ended September 30, 2005 2004 Restated ---------------- ---------------- Adjusted Actual Adjusted Actual ---------------- ---------------- Computation for earnings per share - continuing operations Income (Numerator): Income from continuing operations $72,857 $51,311 $52,501 $27,447 Plus: Interest on 1.625% convertible debentures, net of taxes 1,589 1,589 1,570 - Plus: Interest on Liquid Yield Option Notes, net of taxes 147 147 143 - ---------------- ---------------- Income from continuing operations, plus impact from assumed conversions $74,593 $53,047 $54,214 $27,447 ================ ================ Shares (Denominator): Weighted-average common shares outstanding 188,039 188,039 187,368 187,368 Effect of dilutive securities: Stock options and equivalents 1,883 1,883 2,646 2,646 1.625% convertible debentures 7,306 7,306 7,306 - Liquid Yield Option Notes 574 574 574 - ---------------- ---------------- Weighted-average common shares outstanding, plus impact from assumed conversions 197,802 197,802 197,894 190,014 ================ ================ Basic earnings per share from continuing operations $0.39 $0.27 $0.28 $0.15 ================ ================ Diluted earnings per share from continuing operations $0.38 $0.27 $0.27 $0.14 ================ ================ Computation for earnings per share - net income Income (Numerator): Net income $72,857 $51,311 $52,051 $26,997 Plus: Interest on 1.625% convertible debentures, net of taxes 1,589 1,589 1,570 - Plus: Interest on Liquid Yield Option Notes, net of taxes 147 147 143 - ---------------- ---------------- Net income, plus impact from assumed conversions $74,593 $53,047 $53,764 $26,997 ================ ================ Shares (Denominator): Weighted-average common shares outstanding 188,039 188,039 187,368 187,368 Effect of dilutive securities: Stock options and equivalents 1,883 1,883 2,646 2,646 1.625% convertible debentures 7,306 7,306 7,306 - Liquid Yield Option Notes 574 574 574 - ---------------- ---------------- Weighted-average common shares outstanding, plus impact from assumed conversions 197,802 197,802 197,894 190,014 ================ ================ Basic earnings per share from net income $0.39 $0.27 $0.28 $0.14 ================ ================ Diluted earnings per share from net income $0.38 $0.27 $0.27 $0.14 ================ ================ CHIRON CORPORATION SUPPLEMENTAL SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (Unaudited) (In thousands, except per share data) Nine Months Ended September 30, 2005 2004 Restated ---------------- ------------------ Adjusted Actual Adjusted Actual ---------------- ------------------ Computation for earnings per share - continuing operations Income (Numerator): Income from continuing operations $95,455 $42,418 $134,122 $77,186 Plus: Interest on 1.625% convertible debentures, net of taxes - - 4,710 - ---------------- ------------------ Income from continuing operations, plus impact from assumed conversions $95,455 $42,418 $138,832 $77,186 =============== =================== Shares (Denominator): Weighted-average common shares outstanding 187,564 187,564 187,751 187,751 Effect of dilutive securities: Stock options and equivalents 1,500 1,500 3,150 3,150 1.625% convertible debentures - - 7,233 - ---------------- ------------------ Weighted-average common shares outstanding, plus impact from assumed conversions 189,064 189,064 198,134 190,901 ================ ================== Basic earnings per share from continuing operations $0.51 $0.23 $0.71 $0.41 ================ ================== Diluted earnings per share from continuing operations $0.50 $0.22 $0.70 $0.40 ================ ================== Computation for earnings per share - net income Income (Numerator): Net income $95,455 $42,418 $158,976 $102,040 Plus: Interest on 1.625% convertible debentures, net of taxes - - 4,710 - ---------------- ------------------ Net income, plus impact from assumed conversions $95,455 $42,418 $163,686 $102,040 ================ ================== Shares (Denominator): Weighted-average common shares outstanding 187,564 187,564 187,751 187,751 Effect of dilutive securities: Stock options and equivalents 1,500 1,500 3,150 3,150 1.625% convertible debentures - - 7,233 - ---------------- ------------------ Weighted-average common shares outstanding, plus impact from assumed conversions 189,064 189,064 198,134 190,901 ================ ================== Basic earnings per share from net income $0.51 $0.23 $0.85 $0.54 ================ ================== Diluted earnings per share from net income $0.50 $0.22 $0.83 $0.53 ================ ================== CHIRON CORPORATION SUPPLEMENTAL QTR REVENUE SUMMARY (ADJUSTED) (Unaudited) (In thousands) Current Prior Change Quarter Quarter from Change Q3 2005 Q2 2005 Prior QTR % ---------------------------------------------------------------------- Product Sales Blood Testing Ortho $7,023 $7,988 $(965) (12.1)% NAT 70,677 66,104 4,573 6.9% ---------------------------------- Total Blood Testing 77,700 74,092 3,608 4.9% Vaccines Influenza vaccines 60,321 (492) 60,813 12360.4% Meningococcal vaccines 11,635 13,605 (1,970) (14.5)% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 35,012 45,014 (10,002) (22.2)% Pediatric/Other vaccines 45,800 39,127 6,673 17.1% ---------------------------------- Total Vaccines 152,768 97,254 55,514 57.1% Biopharmaceuticals Proleukin 31,028 31,727 (699) (2.2)% TOBI 57,890 56,600 1,290 2.3% Betaseron(a) 36,927 38,132 (1,205) (3.2)% Other 10,862 5,770 5,092 88.2% ---------------------------------- Total Biopharmaceuticals 136,707 132,229 4,478 3.4% TOTAL PRODUCT SALES, NET $367,175 $303,575 $63,600 21.0% ================================== Revenues from joint business arrangement $36,093 $31,003 $5,090 16.4% Collaborative agreement revenues 3,149 3,453 (304) (8.8)% Royalty and license fee revenues 70,726 76,522 (5,796) (7.6)% Other revenues 2,470 4,204 (1,734) (41.2)% ---------------------------------- TOTAL REVENUES $479,613 $418,757 $60,856 14.5% ================================== Gross Margins Blood Testing 42% 40% 2% Vaccines 45% 6% 39% Biopharmaceuticals 71% 68% 3% ---------------------------------- TOTAL GROSS MARGINS 54% 41% 13% ================================== ---------------------------------------------------------------------- (a) Excludes Betaferon Royalty $13,413 $16,943 $(3,530) (20.8)% ---------------------------------------------------------------------- Restated Change Quarter from Change Q3 2004 Prior Year % ---------------------------------------------------------------------- Product Sales Blood Testing Ortho $7,098 $(75) (1.1)% NAT 63,629 7,048 11.1% ------------------------- Total Blood Testing 70,727 6,973 9.9% Vaccines Influenza vaccines 93,486 (33,165)(35.5)% Meningococcal vaccines 8,865 2,770 31.2% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 26,434 8,578 32.5% Pediatric/Other vaccines 44,491 1,309 2.9% ------------------------- Total Vaccines 173,276 (20,508)(11.8)% Biopharmaceuticals Proleukin 31,739 (711) (2.2)% TOBI 55,734 2,156 3.9% Betaseron(a) 35,171 1,756 5.0% Other 8,902 1,960 22.0% ------------------------- Total Biopharmaceuticals 131,546 5,161 3.9% TOTAL PRODUCT SALES, NET $375,549 $(8,374) (2.2)% ========================= Revenues from joint business arrangement $34,017 $2,076 6.1% Collaborative agreement revenues 4,124 (975)(23.6)% Royalty and license fee revenues 111,396 (40,670)(36.5)% Other revenues 4,450 (1,980)(44.5)% ------------------------- TOTAL REVENUES $529,536 $(49,923) (9.4)% ========================= Gross Margins Blood Testing 43% (1)% Vaccines 9% 36% Biopharmaceuticals 67% 4% ------------------------- TOTAL GROSS MARGINS 36% 18% ========================= ---------------------------------------------------------------------- (a) Excludes Betaferon Royalty $13,374 $39 0.3% ---------------------------------------------------------------------- CHIRON CORPORATION SUPPLEMENTAL YTD REVENUE SUMMARY (ADJUSTED) (Unaudited) (In thousands) Nine Months Ended Change Change September 30, from 2004 Prior 2005 Restated Year % ---------------------------------------------------------------------- Product Sales Blood Testing Ortho $21,473 $19,940 $1,533 7.7% NAT 201,212 186,104 15,108 8.1% ------------------------------------- Total Blood Testing 222,685 206,044 16,641 8.1% Vaccines Influenza vaccines 63,400 109,398 (45,998)(42.0)% Meningococcal vaccines 34,393 18,430 15,963 86.6% Travel vaccines (TBE, Rabies, Arilvax and Dukoral) 123,785 75,705 48,080 63.5% Pediatric/Other vaccines 115,420 143,292 (27,872)(19.5)% ------------------------------------- Total Vaccines 336,998 346,825 (9,827) (2.8)% Biopharmaceuticals Proleukin 92,290 98,664 (6,374) (6.5)% TOBI 167,425 159,600 7,825 4.9% Betaseron(a) 101,693 96,933 4,760 4.9% Other 26,822 29,770 (2,948) (9.9)% ------------------------------------- Total Biopharmaceuticals 388,230 384,967 3,263 0.8% TOTAL PRODUCT SALES, NET $947,913 $937,836 $10,077 1.1% ===================================== Revenues from joint business arrangement $103,154 $92,910 $10,244 11.0% Collaborative agreement revenues 11,129 14,467 (3,338)(23.1)% Royalty and license fee revenues 227,309 221,384 5,925 2.7% Other revenues 16,221 22,363 (6,142)(27.5)% ------------------------------------- TOTAL REVENUES $1,305,726 $1,288,960 $16,766 1.3% ===================================== Gross Margins Blood Testing 42% 42% 0% Vaccines 21% 21% 0% Biopharmaceuticals 70% 72% (2)% ------------------------------ TOTAL GROSS MARGINS 46% 47% (1)% ============================== ---------------------------------------------------------------------- (a) Excludes Betaferon Royalty $45,833 $38,766 $7,067 18.2% ---------------------------------------------------------------------- *T