Mail Stop 6010
January 31, 2006
Mr. Howard H. Pien
Vice President, Head of Corporate Business Development
Chiron Corporation
4560 Horton Street
Emeryville, California 94608
Re: Chiron Corporation
Revised Proxy Statement on Schedule 14A, Schedule 13E-3
File No. 0-12798, Filed January 11, 2006
Dear Ms. Hoover:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your documents in
response to these comments. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. We note your response to our prior comment 2 and your
additional
disclosure regarding Chiron`s agreement with Schering AG. Please
revise your disclosure on pages 13 and 14 under "Chiron Agreement
with Schering AG Relating to Betaseron" to disclose the fact that
Betaseron accounted for approximately 11% of Chiron`s consolidated
total revenues in 2004, 2003 and 2002, respectively as disclosed
in
Chiron`s 2004 Form 10-K.
2. Additionally, we note your statement that Novartis considered
the
existence of the clause "value-neutral" to its financial analysis.
Please revise to explain what this means. For example, if
Novartis
believed the clause to have no impact on its financial analysis,
then
revise to state this. Also, revise to disclose the status of this
change of control provision granting Schering the option to
acquire
or lease all of the property, contracts, facilities and equipment
of
Chiron used in the manufacture of Betaseron. Will Schering be
exercising its option?
Background of the Merger, pages 4-9
3. We note your response to our prior comment 10 that the Chiron
board of directors did not determine to put Chiron up for sale.
Please revise your disclosure on page 25, that the board "has not
considered alternatives to the merger," to clarify this fact.
4. Additionally, we note your response to comments 10 and 11.
However, we are reissuing the portion of these comments requesting
a
discussion of the long range strategic planning and updates to the
long range plan. Please revise to provide a substantive
description
of the long range strategic plan and the updates.
5. We note your response to our prior comment 13. Please revise
your
disclosure to explain why the on-going extensive remediation
efforts
with respect to Chiron`s Liverpool facility and FLUVIRIN
manufacturing generally made it an inopportune time for Chiron to
facilitate Novartis due diligence. Briefly explain the issues
relating to the Liverpool facility and FLUVIRIN manufacturing.
6. Please revise to provide the outcome of the FDA`s inspection of
the Liverpool facility and when Chiron and Novartis were informed
of
this outcome.
7. We note your response to our prior comment 15 and reissue that
comment in part. Your descriptions of some of the board meetings
still appear vague. See, for example, the meetings held on April
25,
2005 and May 26, 2005. You should describe in greater detail the
nature and substance of the discussions and deliberations
conducted.
8. Please elaborate on your disclosure that the "non-Novartis
directors determined that the Novartis offer was inadequate . . .
.."
In this regard, your disclosure should include a materially
complete
discussion of the aspects of your long-range plan and Chiron`s
prospects and the preliminary valuation and financial analysis
that
support the non-Novartis directors` conclusion that the $40.00
offer
was inadequate.
9. You disclose on page 7 that Novartis viewed the $40.00 offer as
attractive in light of the "risks associated with Chiron`s
business
and regulatory strategies." Please summarize the referenced
"risks."
10. We note your response to our prior comment 19 and reissue that
comment. Your disclosure on pages 6 and 7 states that valuation
presentations were "substantially consistent in methodology with
those described under `-Opinions of Chiron`s Financial Advisors.`"
Please revise your disclosure to briefly describe the relevant
presentations from Chiron`s financial advisors. To the extent
such
presentations materially differed from the final valuation or
presentation, please describe such differences in reasonable
detail.
11. We note your response to our prior comment 23 that Goldman
Sachs
did not prepare any report, opinion or appraisal for Novartis
related
to the merger. Please revise your disclosure to briefly describe
the
scope of the engagement by Novartis of Goldman Sachs. In this
regard, we note that Goldman Sachs "held discussions from time to
time concerning the valuation of Chiron." Please reconcile. To
the
extent that Goldman Sachs conducted presentations or discussion
and/or prepared reports, whether or not formal, for Novartis`
management in negotiating and analyzing a potential transaction,
we
remind you to disclose the appropriate disclosure required by Item
1015 of Regulation M-A in your preliminary proxy statement. Also,
we
remind you to file all relevant written materials, spreadsheets,
talking papers, board books, drafts, summaries or outlines
provided
to the board or representatives of Chiron, as exhibits pursuant to
Item 9 of Schedule 13E-3 and Item 1016(c) of Regulation M-A.
Fairness of the Merger; Recommendation of the Non-Novartis
Directors
of Chiron`s Board of Directors, pages 9-12
12. We note your response to our prior comment 25 and reissue that
comment in part. On page 11 you discuss why the Chiron board did
not
perform an analysis of net book value or liquidation value, but it
remains unclear whether the board considered going concern value.
See Instruction 2(iv) to Item 1014 of Regulation M-A. Please
expand
your disclosure to also address this factor or clarify which
analysis
satisfies this requirement. In addition, it appears that you
still
have not addressed each of these factors in your disclosure
regarding
the position of the Novartis Entities regarding fairness of the
merger.
13. We note your response to our prior comment 25 and reissue that
comment in part. Please provide the disclosure required by Item
1014
(d) of Regulation M-A.
14. We refer you to the list of factors that Chiron`s board took
into
account in reaching its determination that the transaction is fair
to
its unaffiliated security holders. Please expand your disclosure
to
provide a materially complete discussion of each material factor
forming the basis for Chiron`s board`s fairness determination.
For
example, but without limitation, explain how Chiron`s historical
and
current financial performance, results of operations, prospects,
long-term strategy and competitive position support the board`s
determination that the merger consideration is fair.
15.
We note that Chiron`s board based a portion of its fairness
determination on the detailed financial and valuation advice
provided
by its financial advisors and Chiron`s financial advisors` opinion
that the merger consideration of $45.00 was fair. If Chiron`s
board
relied on the analysis of its financial advisors to satisfy any of
its obligations under Item 1014, it must expressly adopt their
conclusion and analyses in order to fulfill its disclosure
obligation. If you intend to adopt the analysis of your financial
advisor, please revise your disclosure. Please note, however,
that a
filing person cannot insulate itself from liability by relying
upon
another`s analyses, which, by their terms, do not comply with the
specific disclosure requirements of Schedule 13E-3. See Item
1014(b)
of Regulation M-A and Question and Answer Nos. 5 and 21 of
Exchange
Act Release No. 17719.
Alternatively, to the extent that Chiron`s board did not adopt its
financial advisors` fairness analysis and opinion in considering
the
factors in Instruction 2 to Item 1014, please revise your
disclosure
to provide a materially complete description of the fairness
analysis
conducted by Chiron`s board. For example, expand your discussion
of
the implied per share valuations of Chiron compared to other
companies engaged in your industry, the ranges of value produced
by
discounted cash flow analysis based on Chiron`s long-range plan
and
the ranges of value produced by sum-of-the-parts analysis based on
management projections. How do each of these analyses support the
board`s fairness determination?
16. We note your response to prior comment 29. Although we
understand that the terms of the sale of securities were
negotiated
between unaffiliated board members and Novartis, we continue to
believe that the very nature of this transaction precludes you
from
characterizing this sale as being negotiated at "arm`s length."
Please remove the reference to arm`s length negotiations as
support
for Chiron`s determination that the transaction is fair to its
unaffiliated security holders. In this regard, we note that you
specifically rely upon this negotiated transaction to support the
board`s determination that the transaction is procedurally fair.
Also, it does not appear that you provide sufficient support for
your
conclusion that the transaction consideration increased as a
direct
result of "arm`s length" negotiations.
Novartis` Purpose and Reasons for the Merger, page 12
17. We refer you to prior comment 22. Please revise to summarize
the
"legal, regulatory and business issues" that Chiron was facing
when
Novartis decided it would be better positioned as a subsidiary of
a
larger company.
Fairness of the Merger Position of the Novartis Entities Regarding
Fairness of the Merger, page 12
18. We note that Novartis, Novartis Corporation and Novartis
Biotech
believe that the merger consideration "is fair in terms of price
to
Chiron`s stockholders and that the procedure followed in reaching
such price was also fair to those stockholders." Please note that
Item 1014(a) of Regulation M-A requires that the above referenced
filing persons make a fairness determination as to Chiron`s
"unaffiliated security holders." Please revise accordingly.
19. We refer you to prior comment 25. We remind you that each
filing
person`s opinion as to the fairness of the transaction to the
unaffiliated security holders is required. The factors upon which
this belief is based must be discussed in reasonable detail. In
this
regard, all of the factors listed in Instruction 2 to Item 1014 of
Regulation M-A are generally relevant to the fairness
determination
in a Rule 13e-3 transaction and should be discussed by each filing
person. We note that you fail to address many of these factors as
they relate to the fairness determination of Novartis. If the
board
did not consider one or more of the factors, state that and
explain
why the factor(s) were not deemed material or relevant. Also, to
the
extent applicable, include a discussion as to why each filing
person
determined that the transaction is fair despite the fact that it
does
not appear that the consideration was derived from or compared to
the
factors set forth in Instruction 2 to Item 1014. See Question and
Answer No. 20 of Exchange Act Release No. 34-17719.
20. We refer you to prior comment 27. Each filing person should
address the procedural safeguards identified in Item 1014 of
Regulation M-A. Please revise to address these factors as they
relate to Novartis` fairness determination or disclose the basis
for
their belief that the transaction is fair to unaffiliated security
holders in their absence.
21. Please briefly describe the loss of market share in vaccines,
the
lack of success in various research and development projects and
various human resources difficulties. Also, explain how this
supports Novartis` determination as to fairness.
22. Please include a detailed discussion of the financial analyses
performed by Novartis referred to in the third bullet point on
page
13. Your discussion should disclose all of the projections and
assumptions underlying the analyses.
23. We note that one of the factors the Chiron board of directors
considered in determining that the consideration was fair was the
premium over the historical market prices. Were these premiums
compared to premiums received by shareholders in similar
transactions? If so, these details should be discussed.
24. We note that Novartis considered the 23% premium over the
closing
price of Chiron`s common stock in determining that the merger
consideration was fair. Did Novartis compare the premium to
premiums
paid in similar transactions?
Opinions of Chiron`s Financial Advisors, pages 14-23
25. We refer you to your response to prior comment 34. Regardless
of
the fact that the Credit Suisse First Boston opinion and the
Morgan
Stanley opinion are attached as Annexes to the proxy statement and
incorporated by reference, the summary of these opinions should
not
be qualified in their entirety by the full text of the opinions.
The
summaries should contain a materially complete description of the
opinions. Please revise.
26. We note your response to comment 36. Please revise to include
the statement that there have been no material events since the
date
of the opinions in your proxy statement.
27. We note your response to our prior comment 39 and reissue that
comment. Your revised disclosure that "The financial advisors
concluded that this range was appropriate based on their analysis
of
each of the companies considered and their similarity to Chiron"
is
not sufficient. How did the financial advisors reach that
conclusion? Please disclose the criteria and assumptions used in
selecting the P/E multiples for Chiron. Also, revise your
disclosure
to provide a detailed discussion of the comparable company
analysis.
Since P/E multiples were calculated for each of the companies
identified, you should disclose the P/E multiple for each company.
Did the financial advisors use the P/E multiples of the comparable
companies to determine the appropriate range of P/E multiples for
Chiron or did they use the mean and/or median? If they used the
mean/median, please disclose these values. Please revise your
disclosure to explain and to provide the P/E multiples that were
used
to determine the appropriate range of multiples for Chiron.
Additionally, your response states that the financial advisors
considered the growth rates for each of the comparable companies,
revise your discussion to disclose these growth rates and to
explain
how they were used.
28. We note that the companies selected for the selected company
analysis were selected based on their similarity to Chiron in size
of
commercial operations, business mix and maturity and focus of
research and development efforts. We note the same criteria were
used to select a subset of these companies for the discounted cash
flow analysis. Please revise to explain how the same criteria
were
used to select the subset.
29. Please revise the discussion of the Discounted Cash flow
analysis
- - Chiron Sum of the parts to disclose the mean and median weighted
average cost of capital for each company grouping and on a
combined
overall basis and explain how these were used to determine the
discount rate range and the growth rate range.
30. We note your statement in response to comment 44 that Credit
Suisse First Boston and Morgan Stanley examined certain selected
precedent transaction but that these transactions were not
considered
in the assessment of Chiron`s valuation performed by Credit Suisse
First Boston and Morgan Stanley. Please revise to include this
information in the proxy statement. Additionally, describe the
supplemental information provided to the Chiron board of directors
and explain why the information was not considered in assessing
Chiron`s valuation. If Chiron`s board considered this
supplemental
information, it should be discussed in "Fairness of the Merger;
Recommendation of the Non-Novartis Directors of Chiron`s Board of
Directors."
31. We note that Credit Suisse First Boston and Morgan Stanley
presented information about the Glaxo Smith Kline agreement to
acquire ID Biomedical. Please explain whether the Chiron Board
considered this agreement as a comparison in determining whether
the
terms of the merger consideration were fair. If they did consider
this agreement, please revise to include a discussion.
Where You Can Find More Information, pages 61-62
32. We note your reference to your "Quarterly Reports on Form 10-
Q,
as amended, for the quarters ended March 31, 2005, June 30, 2005
and
September 30, 2005." The "as amended" reference is erroneous and
should be removed.
* * * *
As appropriate, please amend your filings in response to
these
comments. You may wish to provide us with marked copies of the
amendments to expedite our review. Please furnish a cover letter
with your amendments that keys your responses to our comments and
provides any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendments and
responses to our comments.
You may contact Amy Bruckner at (202) 551-3657 or Mary Mast
at
(202) 551-3613 if you have questions regarding comments on the
financial statements and related matters. Please contact Sonia
Barros at (202) 551-3655, or Suzanne Hayes at (202) 551-3675 with
any
other questions.
Sincerely,
Jeffrey Riedler
Assistant Director
cc: Alison S. Ressler, Esq.
Patrick S. Brown, Esq.
Sullivan & Cromwell LLP
1888 Century Park East, Suite 2100
Los Angeles, California 90067-1725
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Ms. Jessica M. Hoover
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