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Stock Analyst Update

Chiron's Upside Surprise Lacks Bite

Lower spending, not higher revenue growth, drove earnings excess.

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What Happened?
Biotech firm Chiron (CHIR) announced third-quarter earnings per share of $0.23 Wednesday, $0.06 higher than Wall Street's consensus estimate of $0.17. The primary driver of this upside was lower-than-expected operating expenses. In particular, spending on research and development dropped about 8% from the same period a year ago. On the conference call, management said the decline was temporary and due to the timing of expenses on certain research trials. It indicated that R&D spending is expected to return to normal levels in the coming quarters. Management also said that it now expects sales of Proleukin, Chiron's cancer therapy, to be flat for the year.

What It Means for Investors
Despite the upside surprise, we do not believe that Chiron is a particularly appealing pick in the biotech sector. Its current lineup of biotherapeutic products doesn't include any blockbuster growers--a fact reinforced by management's downward guidance on Proleukin. A large portion of sales growth thus far in 2000 has come from the one-time sale of $100 million of the Menjugate vaccine to the United Kingdom for a nationwide vaccination program. Also, with the halt of rhIGF-I testing for osteoarthritis in July, the company's pipeline of new products is weak relative to those of other biotech companies.

Shares dropped about 15% in midday trading Thursday on the news of the earnings release, making Chiron one of the cheaper stocks among mature biotech companies. However, even with the decline, we think investors would do well to look elsewhere in the biotech sector until Chiron shows signs of sustained improvement in its pipeline.

Emily Hall does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.