- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

Commission File Number: 0-12798

__CHIRON CORPORATION__
(Exact name of registrant as specified in its charter)

DELAWARE 94-2754624
-------- ---------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

4560 HORTON STREET, EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip code)

(510) 655-8730
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes __X__ No ______

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

TITLE OF CLASS OUTSTANDING AT OCTOBER 31, 1999
Common Stock, $0.01 par value 181,650,478

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

CHIRON CORPORATION
TABLE OF CONTENTS

PAGE NO.
PART I. FINANCIAL INFORMATION --------

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998............... 3

Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and
1998................................................... 4

Condensed Consolidated Statements of Comprehensive
Income for the three and nine months ended
September 30, 1999 and 1998............................ 5

Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998.......... 6

Notes to Condensed Consolidated Financial Statements.... 7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 28

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS................................. 28

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................. 29

SIGNATURES.................................................. 31

ITEM 1. FINANCIAL STATEMENTS

CHIRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 205,768 $ 513,315
Short-term investments in marketable debt securities...... 699,612 716,619
---------- ----------
Total cash and short-term investments................... 905,380 1,229,934
Accounts receivable, net.................................. 197,419 167,588
Inventories............................................... 95,149 79,862
Other current assets...................................... 78,086 153,558
---------- ----------
Total current assets.................................... 1,276,034 1,630,942
Noncurrent investments in marketable debt securities........ 647,631 360,069
Property, plant, equipment, and leasehold improvements, at
cost:
Land and buildings........................................ 143,022 141,452
Laboratory, production, and office equipment.............. 310,612 236,803
Leasehold improvements.................................... 69,226 84,607
Construction-in-progress.................................. 27,998 38,321
---------- ----------
550,858 501,183
Less accumulated depreciation and amortization............ (232,396) (198,102)
---------- ----------
Net property, plant, equipment, and leasehold
improvements.......................................... 318,462 303,081
Purchased technology, net................................... 12,518 14,753
Other intangible assets, net................................ 146,973 167,534
Investments in equity securities and affiliated companies... 35,794 27,456
Other assets................................................ 37,156 20,429
---------- ----------
$2,474,568 $2,524,264
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 44,562 $ 44,833
Accrued compensation and related expenses................. 46,739 40,727
Short-term borrowings and current portion of long-term
debt.................................................... 24,123 17,554
Note payable to Novartis.................................. 66,830 63,945
Current portion of unearned revenue....................... 36,413 41,893
Taxes payable............................................. 31,919 180,536
Other current liabilities................................. 120,606 167,947
---------- ----------
Total current liabilities............................... 371,192 557,435
Long-term debt.............................................. 350,736 338,158
Other noncurrent liabilities................................ 65,497 82,869
---------- ----------
Total liabilities....................................... 787,425 978,462
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock.............................................. 1,819 1,799
Additional paid-in capital................................ 2,039,149 1,979,615
Accumulated deficit....................................... (331,599) (437,873)
Accumulated other comprehensive (loss) income............. (7,351) 2,261
Treasury stock, at cost (432,712 shares).................. (14,875) --
---------- ----------
Total stockholders' equity.............................. 1,687,143 1,545,802
---------- ----------
$2,474,568 $2,524,264
========== ==========

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------

Revenues:
Product sales, net.......................... $ 114,006 $ 112,813 $ 308,295 $ 278,091
Equity in earnings of unconsolidated joint
businesses................................ 23,297 21,255 58,431 51,493
Collaborative agreement revenues............ 18,442 24,278 59,603 73,110
Royalty and license fee revenues............ 36,524 49,756 96,292 81,325
Other revenues.............................. 12,107 7,868 46,425 28,128
----------- ----------- ----------- -----------
Total revenues............................ 204,376 215,970 569,046 512,147
----------- ----------- ----------- -----------

Operating expenses:
Cost of sales............................... 53,580 51,063 138,215 124,462
Research and development.................... 75,473 67,348 216,732 196,238
Selling, general, and administrative........ 41,802 40,745 128,617 103,533
Write-off of purchased in-process
technologies.............................. -- -- -- 1,645
Restructuring and reorganization charges
(Note 3).................................. (1,290) 6,401 2,062 11,339
Other operating expenses.................... 2,471 3,179 7,164 8,142
----------- ----------- ----------- -----------
Total operating expenses.................. 172,036 168,736 492,790 445,359
----------- ----------- ----------- -----------

Income from operations........................ 32,340 47,234 76,256 66,788

Gain on sale of assets........................ -- 1,510 -- 7,751
Interest expense.............................. (6,158) (6,009) (17,866) (18,638)
Other income, net............................. 19,685 5,035 63,061 21,196
----------- ----------- ----------- -----------

Income from continuing operations before
income taxes................................ 45,867 47,770 121,451 77,097

Provision for income taxes.................... 826 13,856 18,938 15,539
----------- ----------- ----------- -----------

Income from continuing operations............. 45,041 33,914 102,513 61,558
----------- ----------- ----------- -----------

Discontinued operations (Note 2):
Income (loss) from discontinued
operations................................ -- 5,001 -- (8,107)
Gain on disposal of discontinued
operations................................ 23,288 45,520 26,297 110,852
----------- ----------- ----------- -----------

Net income.................................... $ 68,329 $ 84,435 $ 128,810 $ 164,303
=========== =========== =========== ===========

Basic earnings per share (Note 1):
Income from continuing operations........... $ 0.25 $ 0.19 $ 0.57 $ 0.35
=========== =========== =========== ===========
Net income.................................. $ 0.38 $ 0.47 $ 0.71 $ 0.93
=========== =========== =========== ===========

Diluted earnings per share (Note 1):
Income from continuing operations........... $ 0.24 $ 0.19 $ 0.55 $ 0.34
=========== =========== =========== ===========
Net income.................................. $ 0.36 $ 0.47 $ 0.69 $ 0.91
=========== =========== =========== ===========

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

CHIRON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------

Net income.................................... $ 68,329 $ 84,435 $ 128,810 $ 164,303
----------- ----------- ----------- -----------

Other comprehensive income (loss):

Foreign currency translation adjustment:
Change in foreign currency translation
adjustment during the period............ 6,236 7,893 (13,500) 6,910
Plus: reclassification adjustment for loss
included in discontinued operations..... -- -- -- 2,087
----------- ----------- ----------- -----------
Net foreign currency translation
adjustment.............................. 6,236 7,893 (13,500) 8,997
----------- ----------- ----------- -----------

Unrealized gains (losses) from investments:
Unrealized holding gains (losses) arising
during the period......................... 880 (2,375) 4,793 (8,744)
Reclassification adjustment for net losses
(gains) included in net income net of tax
benefit (provision) of $26 and $311 for
the three months ended September 30, 1999
and 1998, respectively, and ($531) and
($253) for the nine months ended
September 30, 1999 and 1998,
respectively.............................. 86 553 (905) (448)
----------- ----------- ----------- -----------
Net unrealized gains (losses) from
investments............................... 966 (1,822) 3,888 (9,192)
----------- ----------- ----------- -----------

Other comprehensive income (loss)............. 7,202 6,071 (9,612) (195)
----------- ----------- ----------- -----------

Comprehensive income.......................... $ 75,531 $ 90,506 $ 119,198 $ 164,108
=========== =========== =========== ===========

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

CHIRON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------

Net cash (used in) provided by operating activities......... $ (37,092) $ 85,766
----------- -----------

Cash flows from investing activities:
Purchases of investments in marketable debt securities.... (1,130,974) (371,343)
Proceeds from sale and maturity of investments in
marketable debt securities.............................. 867,365 192,406
Capital expenditures...................................... (55,742) (82,480)
Proceeds from disposal of discontinued operations......... 46,912 298,939
Proceeds from sale of assets.............................. -- 38,312
Business acquired, net of cash acquired................... -- (54,770)
Purchases of investments in equity securities and
affiliated companies.................................... -- (6,000)
Other, net................................................ (11,108) (23,314)
----------- -----------
Net cash used in investing activities................... (283,547) (8,250)
----------- -----------

Cash flows from financing activities:
Net proceeds from (repayment of) short-term borrowings.... 7,934 (129,800)
Proceeds from issuance of debt............................ 8,114 --
Repayment of debt and capital leases...................... (1,987) (1,693)
Proceeds from issuance of common stock.................... 31,683 35,962
Proceeds from reissuance of treasury stock................ 36,408 --
Payments to acquire treasury stock........................ (69,060) --
----------- -----------
Net cash provided by (used in) financing activities..... 13,092 (95,531)
----------- -----------
Net decrease in cash and cash equivalents............... (307,547) (18,015)
Cash and cash equivalents at beginning of the period........ 513,315 98,483
----------- -----------

Cash and cash equivalents at end of the period.............. $ 205,768 $ 80,468
=========== ===========

THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The information presented in the accompanying Condensed Consolidated
Financial Statements at September 30, 1999, and for the three and nine months
ended September 30, 1999 and 1998, is unaudited, but includes all normal
recurring adjustments which the management of Chiron Corporation ("Chiron" or
the "Company") believes to be necessary for fair presentation of the periods
presented.

For the three and nine months ended September 30, 1999, the Company's
results include a $2.0 million and $8.4 million reduction, respectively, in
other operating expenses resulting from a change in estimated tax accruals
related to certain employee payments recorded in 1995 in connection with the
Novartis transaction. For the three and nine months ended September 30, 1999,
the Company's results also include a $23.3 million and $26.3 million adjustment,
respectively, to the gain on disposal of discontinued operations resulting from
net tax benefits of adjustments to the sales price of Chiron Diagnostics, the
disposal of most of the Claremont facility and adjustments to certain deductions
and credits based on the filing of the Company's 1998 income tax returns, as
well as changes in estimated accruals created at the time of disposal.

For the three and nine months ended September 30, 1998, the Company's
results include a $3.3 million and $9.3 million reduction, respectively, in cost
of sales due to a change in estimated property tax accruals created in prior
periods. For the nine months ended September 30, 1998, the Company's results
include a $3.6 million reduction in restructuring and reorganization charges due
to a revised estimate of property and other tax-related accruals recorded in
1995 in connection with the idling of the Puerto Rico facility and a $2.0
million reduction in selling, general, and administrative expenses due to
changes in estimated accruals created in prior periods.

During the second quarter of 1999, the Company completed the implementation
of an integrated information system. As a result, certain previously reported
amounts have been reclassified to conform with the current period presentation.
The condensed consolidated balance sheet amounts at December 31, 1998 have been
derived from audited financial statements. Interim results are not necessarily
indicative of results for a full year. This information should be read in
conjunction with Chiron's audited consolidated financial statements for the year
ended January 3, 1999, which are included in the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission.

In the first quarter of 1998, Chiron completed the sale of its ophthalmics
business ("Chiron Vision") to Bausch & Lomb Incorporated ("B&L"), and in the
fourth quarter of 1998, Chiron completed the sale of its IN VITRO diagnostics
business ("Chiron Diagnostics") to Bayer Corporation ("Bayer") (see Note 2). The
accompanying Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 reflect the after-tax results of Chiron
Diagnostics as discontinued operations.

On March 31, 1998, in an acquisition accounted for under the purchase method
of accounting, Chiron acquired the remaining 51% interest in Chiron Behring
GmbH & Co ("Chiron Behring"), not previously owned, from Hoechst AG. Beginning
in the second quarter of 1998, the results of Chiron Behring were consolidated
with those of the Company.

Prior to January 1999, the results of Chiron's Italian subsidiary ("Chiron
S.p.A.") were reported on a one-month lag. In the first quarter of 1999, the
results of Chiron S.p.A. were brought current. As a result, during the first
quarter of 1999, the Company recorded a loss of approximately $5.2 million for
the month of December 1998 as a component of "Accumulated deficit" in the
accompanying Condensed Consolidated Balance Sheets.

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FISCAL YEAR

Effective with the beginning of fiscal year 1999, the Company changed its
fiscal year from a 52 or 53-week year ending on the Sunday nearest the last day
in December to coincide with a calendar year ending on December 31. In 1998, the
Company's fiscal year was a 53-week year ending on January 3, 1999 and the third
fiscal quarter was a 13-week period ending on September 27, 1998. For
presentation purposes, the 1998 dates used in the condensed consolidated
financial statements and notes refer to the fiscal month-end.

INVENTORIES

Inventories are stated at the lower of cost or market using the moving
weighted-average cost method as of September 30, 1999. For the period ending
December 31, 1998, vaccine inventories were valued using the last-in, first-out
("LIFO") method. In the second quarter of 1999, the Company changed its
inventory valuation methodology for vaccine inventories from LIFO to the moving
weighted-average cost method. The effect of this change in methodology was not
material to the financial statements. Inventories consist of the following (in
thousands):

SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------

Finished goods.......................................... $19,036 $12,301
Work-in-process......................................... 58,765 54,333
Raw materials........................................... 17,348 13,228
------- -------
$95,149 $79,862
======= =======

INCOME TAXES

The 1999 estimated annual tax provision is expected to be approximately 27%
of pretax income from continuing operations, prior to the recognition of
deferred tax assets through a reduction in the valuation allowance associated
with such assets. The actual tax provision for the three and nine months ended
September 30, 1999 includes the reduction in the state deferred tax asset
valuation allowance of $9.1 million and $14.4 million, respectively. The
valuation allowance was reduced because management believes that it is more
likely than not that the deferred tax assets to which the valuation allowance
related will be realized. In addition, in the third quarter of 1999, the Company
recorded as additional paid-in capital approximately $27.9 million resulting
from the tax benefits related to the Company's stock option plans.

Income tax expense for the nine months ended September 30, 1998 was based on
actual year-to-date effective tax rate on pretax income from continuing
operations of approximately 20%, after taking into account federal deferred tax
assets recognized through a reduction in the valuation allowance associated with
such assets. The actual 1998 annual effective tax rate of 20% reflects the
deferred tax assets that were recognized during the second half of 1998 through
a reduction in the valuation allowance associated with such assets.

PER SHARE DATA

Basic earnings per share is based upon the weighted-average number of common
shares outstanding. Diluted earnings per share is based upon the
weighted-average number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares could result from (i) the assumed
exercise of outstanding stock options, warrants, and equivalents, which are
included under the treasury-stock method;

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(ii) performance units to the extent that dilutive shares are assumed issuable;
and (iii) convertible debentures, which are included under the if-converted
method.

The following table sets forth the computation for basic and diluted
earnings per share on income from continuing operations (in thousands, except
per share data):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------

Income (Numerator):
Income from continuing operations available to common
stockholders........................................ $ 45,041 $ 33,914 $102,513 $ 61,558
Plus: Interest on 1.9% convertible debentures, net of
taxes............................................... 1,936 -- 1,936 --
-------- -------- -------- --------
Income available to common stockholders, plus assumed
conversions......................................... $ 46,977 $ 33,914 $104,449 $ 61,558
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding............ 181,419 177,820 181,160 177,086
Effect of dilutive securities:
Options and equivalents............................. 4,686 1,937 3,948 2,447
Warrants............................................ 319 135 265 170
1.9% convertible debentures......................... 8,785 -- 2,928 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions................................. 195,209 179,892 188,301 179,703
-------- -------- -------- --------
Basic earnings per share................................ $ 0.25 $ 0.19 $ 0.57 $ 0.35
======== ======== ======== ========
Diluted earnings per share.............................. $ 0.24 $ 0.19 $ 0.55 $ 0.34
======== ======== ======== ========

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following table sets forth the computation of basic and diluted earnings
per share on net income (in thousands, except per share data):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------

Income (Numerator):
Net income available to common stockholders........... $ 68,329 $ 84,435 $128,810 $164,303
Plus: Interest on 1.9% convertible debentures, net of
taxes............................................... 1,936 -- 1,936 --
-------- -------- -------- --------
Income available to common stockholders, plus assumed
conversions......................................... $ 70,265 $ 84,435 $130,746 $164,303
-------- -------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding............ 181,419 177,820 181,160 177,086
Effect of dilutive securities:
Options and equivalents............................. 4,686 1,937 3,948 2,447
Warrants............................................ 319 135 265 170
1.9% convertible debentures......................... 8,785 -- 2,928 --
-------- -------- -------- --------
Weighted-average common shares outstanding, plus
assumed conversions................................. 195,209 179,892 188,301 179,703
-------- -------- -------- --------
Basic earnings per share................................ $ 0.38 $ 0.47 $ 0.71 $ 0.93
======== ======== ======== ========
Diluted earnings per share.............................. $ 0.36 $ 0.47 $ 0.69 $ 0.91
======== ======== ======== ========

For the three months ended September 30, 1999 and 1998, options to purchase
1,950,000 and 14,717,000 shares, respectively, and for the nine months ended
September 30, 1999 and 1998, options to purchase 6,121,000 and 13,821,000
shares, respectively, with exercise prices greater than the average market price
of common stock, were excluded from the respective computations of diluted
earnings per share as their inclusion would be antidilutive.

Also excluded from the computations of dilutive earnings per share were
3,240,000 and 12,026,000 shares for the three and nine months ended
September 30, 1999 and the three and nine months ended September 30, 1998,
respectively, of common stock issuable upon conversion of the Company's
convertible subordinated debentures as the interest, net of tax, per common
share obtainable on conversion exceeds basic earnings per share.

TREASURY STOCK

Treasury stock is stated at cost. Gains on reissuance of treasury stock are
credited to additional paid-in capital. Losses on reissuance of treasury stock
are charged to additional paid-in capital to the extent of available net gains
on reissuance of treasury stock. Otherwise, losses are charged to accumulated
deficit. For the three and nine months ended September 30, 1999, the Company
charged losses of $17.3 million to accumulated deficit.

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 2--DISCONTINUED OPERATIONS

On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision to B&L for approximately $300.0 million in cash,
subject to certain post-closing adjustments. The sale was completed under the
terms of a Stock Purchase Agreement (the "B&L Agreement"), dated as of
October 21, 1997, between Chiron and B&L. Chiron Vision's cash and cash
equivalents totaling $2.7 million, certain Chiron Vision real estate assets (the
"real estate assets") with a carrying value of $25.1 million and Chiron Vision's
future noncancelable operating lease costs totaling $1.1 million were retained
by the Company upon the completion of the sale. The Company has provided
customary indemnities under the terms of the B&L Agreement.

For a period of three years following the completion of the sale, Chiron
Vision has the right to use a portion of the real estate assets, which were
occupied at closing, on a rent-free basis. As of September 30, 1999 and
December 31, 1998, the real estate assets, which represent all of the remaining
net assets of Chiron's discontinued operations, are recorded in the accompanying
Condensed Consolidated Balance Sheets as "Other current assets". In July 1999,
the Company sold a portion of these real estate assets and recognized a gain of
$4.8 million, which includes a net income tax benefit of $2.9 million related to
cumulative differences in the basis of the assets sold.

On November 30, 1998, Chiron completed the sale of its IN VITRO diagnostics
business to Bayer for $1,013.8 million in cash, subject to certain post-closing
adjustments. The sale was completed under the terms of a Stock Purchase
Agreement (the "Bayer Agreement"), dated as of September 17, 1998, between
Chiron and Bayer. The results of operations for Chiron Diagnostics are reported
as a discontinued operation for the three and nine months ended September 30,
1998 in the accompanying Condensed Consolidated Statements of Operations. Chiron
has provided customary indemnities under the terms of the Bayer Agreement.

For the three and nine months ended September 30, 1998, Chiron Diagnostics
recognized total revenues of $134.6 million and $412.8 million, respectively.
For the three and nine months ended September 30, 1998, "Income (loss) from
discontinued operations" are reported net of income tax provisions of less than
$0.1 million and $3.0 million, respectively. For the three months ended
September 30, 1999 and 1998, and for the nine months ended September 30, 1999
and 1998, "Gain on disposal of discontinued operations" includes the sale of the
real estate assets and income tax benefits of $15.3 million, $45.5 million,
$16.0 million and $14.3 million, respectively.

For the three months ended September 30, 1999, basic and diluted earnings
per share from discontinued operations was $0.13 and $0.12, respectively. For
the three months ended September 30, 1998, basic and diluted earnings per share
from discontinued operations was $0.28. For the nine months ended September 30,
1999, basic and diluted earnings per share from discontinued operations was
$0.14. For the nine months ended September 30, 1998, basic and diluted earnings
per share from discontinued operations was $0.58 and $0.57, respectively.

NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES

In 1999 and 1998, the Company recorded restructuring and reorganization
charges related to the integration of its worldwide vaccines operations, the
closure of its Puerto Rico and St. Louis facilities and the ongoing
rationalization of its business operations. The integration of its worldwide
vaccines operations consisted of termination and other employee-related costs
recognized in connection with the elimination of 28 positions in the Company's
Italian manufacturing facility and facility-related costs. The closure of its
Puerto Rico and St. Louis, Missouri facilities and the ongoing rationalization
of its business operations consisted of termination and

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES (CONTINUED)

other employee-related costs recognized in connection with the elimination of
400 positions in manufacturing, research and development, sales, marketing, and
other administrative functions, and facility-related costs.

In the nine months ended September 30, 1999, the Company recorded
restructuring and reorganization charges of $2.1 million, which included a
benefit of $1.3 million recorded in the third quarter of 1999 and a charge of
$3.4 million recorded in the first quarter of 1999. The benefit of $1.3 million
related to revised estimates of property and other tax-related accruals recorded
in connection with the idling of the St. Louis facility, as well as revised
estimates of termination and other employee-related costs recorded in connection
with the elimination of 400 positions. As of September 30, 1999, 301 of these
400 positions had been eliminated. The charge of $3.4 million related to
termination and other employee-related costs recognized in connection with the
elimination of 28 positions at the Company's Italian manufacturing facility. As
of September 30, 1999, 20 of these 28 positions had been eliminated.

In the nine months ended September 30, 1998, the Company recorded
restructuring and reorganization charges of $11.3 million, of which $6.4 million
was recognized in the third quarter of 1998, related to the integration of its
worldwide vaccines operations, closure of its Puerto Rico and St. Louis
facilities and the ongoing rationalization of its business operations.

The current status of the accrued restructuring and reorganization charges
is summarized as follows (in thousands):

AMOUNT
AMOUNT OF AMOUNT OF UTILIZED AMOUNT TO
ACCRUAL AT TOTAL TOTAL THROUGH BE UTILIZED
DECEMBER 31, RESTRUCTURING RESTRUCTURING SEPTEMBER 30, IN FUTURE
1998 CHARGE BENEFIT 1999 PERIODS
------------- ------------- ------------- -------------- -----------

Employee-related costs............... $15,390 $2,826 $ (832) $10,803 $6,581
Other facility-related costs......... 3,931 1,099 (1,031) 1,789 2,210
------- ------ ------- ------- ------
19,321 3,925 (1,863) 12,592 8,791
Discontinued operations.............. 4,475 -- -- 3,789 686
------- ------ ------- ------- ------
$23,796 $3,925 $(1,863) $16,381 $9,477
======= ====== ======= ======= ======

The liabilities related to restructuring and reorganization charges are
expected to be substantially settled within 12 months of accruing the related
charges.

NOTE 4--AGREEMENT WITH HOECHST AG

Effective July 1, 1996, Chiron purchased a 49% interest in the human vaccine
business of Behringwerke AG, a subsidiary of Hoechst AG. The total acquisition
price, which was paid in cash, was approximately $120.0 million, including costs
directly related to the acquisition. Of the acquisition price, approximately
$97.0 million was allocated to various intangible assets such as goodwill,
trademarks, and patents, and is being amortized on a straight-line basis over
lives ranging from five to 20 years.

From July 1, 1996 through March 31, 1998 (period of joint ownership), Chiron
and Hoechst AG operated the vaccine business as a joint venture under the name
Chiron Behring GmbH & Co. Chiron accounted for its 49% interest under the equity
method and recognized revenues of $2.4 million as a component of "Equity in
earnings of unconsolidated joint businesses" in the accompanying Condensed
Consolidated Statements of Operations for the nine months ended September 30,
1998.

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 4--AGREEMENT WITH HOECHST AG (CONTINUED)

In the second quarter of 1998, in an acquisition accounted for under the
purchase method of accounting, Chiron acquired the remaining 51% interest in
Chiron Behring from Hoechst AG. The purchase price of approximately $113.1
million, including acquisition costs, was allocated to the acquired assets and
liabilities assumed based upon their estimated fair value on the date of
acquisition. In connection with the acquisition, liabilities assumed were as
follows (in thousands):

Cash acquired............................................... $ 57,119
Fair value of all other assets acquired..................... 206,922
Carrying value of original investment in Chiron Behring..... (117,157)
Cash paid................................................... (111,889)
Acquisition costs........................................... (1,180)
---------
Liabilities assumed......................................... $ 33,815
=========

At the time of acquisition, Chiron expensed $1.6 million of purchased
in-process technologies. Other purchased intangible assets of approximately
$135.0 million, including goodwill, trademarks, patents, and customer list, are
being amortized over their estimated useful lives of four to 17 years on a
straight-line basis. Chiron Behring's operating results were included in
Chiron's consolidated operating results beginning in the second quarter of 1998.

The following unaudited pro forma information presents the results of
continuing operations of Chiron and Chiron Behring for the nine months ended
September 30, 1998 with pro forma adjustments as if Chiron's acquisition of the
remaining 51% interest in Chiron Behring had been consummated as of January 1,
1998. The pro forma information does not purport to be indicative of what would
have occurred had the acquisition been made as of that date or of results that
may occur in the future. The unaudited pro forma information is as follows (in
thousands, except per share data):

NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------

Total revenues.............................................. $546,108
Income from continuing operations........................... $ 79,227
Pro forma earnings per share from continuing operations:
Basic..................................................... $ 0.45
Diluted................................................... $ 0.44

NOTE 5--SEGMENT INFORMATION

Chiron is organized based on the products and services that it offers. Under
this organizational structure, the Company has the following three reportable
segments: (i) biopharmaceuticals, (ii) vaccines, and (iii) blood testing. The
biopharmaceuticals segment consists of products and services related to
therapeutics, with an emphasis on oncology, serious infectious diseases, and
cardiovascular diseases as well as the development and acquisition of
technologies related to recombinant proteins, gene therapy, small molecules and
genomics. The vaccines segment consists principally of products and services
related to adult and pediatric vaccines sold primarily in Germany and Italy, and
also sold in other international markets. The blood testing segment consists of
an alliance with Gen-Probe Incorporated ("Gen-Probe") and Chiron's one-half
interest in the pretax operating earnings of its joint business with
Ortho-Clinical Diagnostics, Inc. ("Ortho"), a Johnson & Johnson company.
Chiron's alliance with Gen-Probe is focused on developing and selling products
using nucleic acid

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 5--SEGMENT INFORMATION (CONTINUED)

testing ("NAT") to screen blood and plasma for infection by viruses. Chiron's
joint business with Ortho sells a line of immunodiagnostic tests, other than
nucleic acid tests, required to screen blood for hepatitis viruses and
retroviruses, and provides supplemental tests and microplate-based instrument
systems to automate test performance and data collection.

Certain revenues and expenses, particularly Novartis research and
development funding, certain royalty revenues, and unallocated corporate
expenses, are not viewed by management as belonging to any one reportable
segment. As a result, these items have been aggregated into an "Other" segment,
as permitted by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131").

The accounting policies of the Company's reportable segments are the same as
those described in Note 1--The Company and Summary of Significant Accounting
Policies. Chiron evaluates the performance of its segments based on each
segment's income (loss) from continuing operations, excluding certain special
items, such as the write-off of purchased in-process technologies and
restructuring and reorganization charges, which are shown as reconciling items
in the table below.

The following segment information excludes all significant intersegment
transactions as these transactions are eliminated for management reporting
purposes (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------

REVENUES
Biopharmaceuticals, includes equity in earnings of
unconsolidated joint businesses of $33 and $0 for the
three and nine months ended September 30, 1998,
respectively............................................. $ 59,921 $ 69,773 $215,576 $222,868
Vaccines, includes equity in earnings of unconsolidated
joint businesses of $319 and ($485) for the three months
ended September 30, 1999 and 1998, respectively, and $963
and $304 for the nine months ended September 30, 1999 and
1998, respectively....................................... 84,692 72,217 188,873 142,295
Blood testing, includes equity in earnings of
unconsolidated joint businesses of $22,978 and $21,707
for the three months ended September 30, 1999 and 1998,
respectively, and $57,468 and $51,189 for the nine months
ended September 30, 1999 and 1998, respectively.......... 32,943 28,302 83,594 69,706
Other...................................................... 26,820 45,678 81,003 77,278
-------- -------- -------- --------
Total revenues............................................. $204,376 $215,970 $569,046 $512,147
======== ======== ======== ========

CHIRON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999
(UNAUDITED)

NOTE 5--SEGMENT INFORMATION (CONTINUED)

The following segment information excludes all significant intersegment
transactions as these transactions are eliminated for management reporting
purposes (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------

INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals........................................ $(22,941) $10,306 $(27,708) $ 23,953
Vaccines.................................................. 13,187 (719) (3,093) (35,758)
Blood testing............................................. 21,167 19,555 47,765 47,889
Other..................................................... 19,637 24,493 61,354 43,688
-------- ------- -------- --------
Segment income from operations.......................... 31,050 53,635 78,318 79,772
Operating income (expense) reconciling items:
Write-off of purchased in-process technologies.......... -- -- -- (1,645)
Restructuring and reorganization charges................ 1,290 (6,401) (2,062) (11,339)
-------- ------- -------- --------
Income from operations.................................... 32,340 47,234 76,256 66,788
Gain on sale of assets.................................. -- 1,510 -- 7,751
Interest expense........................................ (6,158) (6,009) (17,866) (18,638)
Other income, net....................................... 19,685 5,035 63,061 21,196
-------- ------- -------- --------
Income from continuing operations before income taxes..... $ 45,867 $47,770 $121,451 $ 77,097
======== ======= ======== ========

NOTE 6--CONTINGENCIES

The Company is party to various claims, investigations, and legal
proceedings arising in the ordinary course of business. These claims,
investigations, and legal proceedings relate to intellectual property rights,
contractual rights and obligations, employment matters, claims of product
liability, and other issues. While there is no assurance that an adverse
determination of any of such matters could not have a material adverse impact in
any future period, management does not believe, based upon information known to
it, that the final resolution of any of these matters will have a material
adverse effect upon the Company's consolidated financial position and annual
results of operations and cash flows.

NOTE 7--SUBSEQUENT EVENTS

In February 1999, the Company's Board of Directors authorized the repurchase
of up to 2.5 million shares of Chiron common stock from time to time on the open
market to offset the dilution associated with the operation of the Company's
stock option and employee stock purchase plans and the granting of share rights.
Effective October 7, 1999, the Company's Board of Directors approved a 4.0
million share increase, thereby bringing the total number of shares authorized
for repurchase to 6.5 million shares.

On November 1, 1999, the Company entered into a patent and license
agreement. Under this agreement, the Company will pay $12.5 million, consisting
of $5.0 million in cash and $7.5 million as a forgiveable note payable to the
licensor, in licensing fees. In addition, the Company may make total payments of
$12.0 million if certain development objectives are met.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS.
THESE INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE
EVENTS OR PERFORMANCE, AND ALL OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS
OF HISTORICAL FACT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS
SUCH AS "BELIEVES", "ANTICIPATES", "EXPECTS", "ESTIMATES", "PROJECTS", "WILL",
"MAY", "MIGHT", AND WORDS OF A SIMILAR NATURE. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT REFLECT MANAGEMENT'S CURRENT BELIEFS AND EXPECTATIONS
ON THE DATE OF THIS REPORT. ACTUAL RESULTS, PERFORMANCE OR OUTCOMES MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. SOME OF THE
IMPORTANT FACTORS WHICH, IN THE VIEW OF CHIRON CORPORATION ("CHIRON" OR THE
"COMPANY"), COULD CAUSE ACTUAL RESULTS TO DIFFER ARE DISCUSSED UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY ANNOUNCE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT FACTS OR CIRCUMSTANCES OF WHICH MANAGEMENT BECOMES AWARE AFTER THE DATE
THEREOF.

THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I, ITEM
1,"FINANCIAL STATEMENTS", OF THIS QUARTERLY REPORT ON FORM 10-Q AND PART II,
ITEMS 7, 7A, AND 8, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS", "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK", AND "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA", RESPECTIVELY,
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 3, 1999.

Chiron is a biotechnology company that participates in three global
healthcare businesses: biopharmaceuticals, vaccines, and blood testing. The
biopharmaceuticals segment consists of products and services related to
therapeutics, with an emphasis on oncology, serious infectious diseases, and
cardiovascular diseases as well as the development and acquisition of
technologies related to recombinant proteins, gene therapy, small molecules and
genomics. The vaccines segment consists principally of adult and pediatric
vaccines sold primarily in Germany and Italy, and also sold in other
international markets. The blood testing segment consists of an alliance with
Gen-Probe Incorporated ("Gen-Probe") and Chiron's one-half interest in the
pretax operating earnings of its joint business with Ortho-Clinical
Diagnostics, Inc. ("Ortho"), a Johnson & Johnson company. Chiron's alliance with
Gen-Probe is focused on developing and selling products using nucleic acid
testing ("NAT") to screen blood and plasma for infection by viruses. Chiron's
joint business with Ortho sells a line of immunodiagnostic tests, other than
nucleic acid tests, required to screen blood for hepatitis viruses and
retroviruses, and provides supplemental tests and microplate-based instrument
systems to automate test performance and data collection.

On December 29, 1997, Chiron completed the sale of its ophthalmics business
("Chiron Vision") to Bausch & Lomb Incorporated ("B&L") and on November 30,
1998, Chiron completed the sale of its IN VITRO diagnostics business ("Chiron
Diagnostics") to Bayer Corporation ("Bayer"). The Company's Condensed
Consolidated Statements of Operations reflect the after-tax results of Chiron
Diagnostics as discontinued operations for the three and nine months ended
September 30, 1998.

On March 31, 1998, in an acquisition accounted for under the purchase method
of accounting, Chiron acquired the remaining 51% interest in Chiron Behring GmbH
& Co ("Chiron Behring") from Hoechst AG. Beginning in the second quarter of
1998, the results of Chiron Behring were consolidated with those of the Company.

RESULTS OF OPERATIONS

REVENUES

BIOPHARMACEUTICAL PRODUCT SALES For the three months ended September 30,
1999 and 1998, product sales from the biopharmaceuticals segment were $36.6
million and $46.8 million, respectively. For the nine months ended
September 30, 1999 and 1998, biopharmaceutical product sales were $134.6 million
and $144.1 million, respectively. In 1999 and 1998, biopharmaceutical product
sales consisted principally of Proleukin-Registered Trademark-(aldesleukin,
interleukin-2), Betaseron-Registered Trademark- (interferon beta-1b) and PDGF
(recombinant human platelet-derived growth factor -rhPDGF-BB).

PROLEUKIN-REGISTERED TRADEMARK- Chiron sells Proleukin-Registered
Trademark- directly in the U.S. and certain international markets. For the three
months ended September 30, 1999 and 1998, sales of Proleukin-Registered
Trademark- were $18.7 million and $22.3 million, respectively. For the nine
months ended September 30, 1999 and 1998, sales of Proleukin-Registered
Trademark- were $81.8 million and $66.2 million, respectively. Management
believes that the third quarter 1999 decrease in Proleukin-Registered Trademark-
product sales as compared with 1998 is primarily due to a shift in purchases by
distributors from the third quarter 1999 to the second quarter 1999 in
anticipation of the July 1999 price increase. Impacting the year-to-date
increase in Proleukin-Registered Trademark- product sales are continued volume
growth in existing indications, price increases which occurred during the
period, and expansion into additional countries. The Company continues to pursue
the use of Proleukin-Registered Trademark- for additional indications, including
human immunodeficiency virus ("HIV"). The Company also anticipates further
geographic expansion of Proleukin-Registered Trademark- into additional
countries.

BETASERON-REGISTERED TRADEMARK- Chiron manufactures Betaseron-Registered
Trademark- for Berlex Laboratories, Inc. ("Berlex") and its parent company,
Schering AG of Germany. Chiron earns a partial payment for Betaseron-Registered
Trademark- upon shipment to Berlex and Schering AG and a subsequent additional
payment upon sales by Berlex and Schering AG. Accordingly, Chiron's revenues
from Betaseron-Registered Trademark- tend to fluctuate based upon the inventory
management practices of Berlex and Schering AG. For the three months ended
September 30, 1999 and 1998, revenues from Betaseron-Registered Trademark- were
$17.9 million and $15.3 million, respectively. For the nine months ended
September 30, 1999 and 1998, revenues from Betaseron-Registered Trademark- were
$46.5 million and $46.6 million, respectively. Management believes that the
increase in Betaseron-Registered Trademark- revenues in the third quarter 1999
as compared with the third quarter 1998 is primarily related to the approval of
Betaseron-Registered Trademark- for secondary progressive multiple sclerosis in
Europe, Canada and Australia in 1999.

PDGF Chiron manufactures PDGF for Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson ("J&J") company. PDGF is the active ingredient in
Regranex-Registered Trademark-(becaplermin) Gel, a treatment for diabetic foot
ulcers. Regranex-Registered Trademark- Gel was approved by the FDA in
December 1997 and was launched commercially in early 1998. Sales of PDGF to J&J
decreased $9.8 million from the three months ended September 30, 1998 to the
three months ended September 30, 1999 and $27.2 million from the nine months
ended September 30, 1998 to the nine months ended September 30, 1999. The third
quarter 1999 and year-to-date activity in PDGF sales are primarily related to a
lack of orders from J&J in 1999 and an increase in the product returns allowance
in the third quarter 1999. The increase to the product returns allowance is
primarily due to additional historical return information, now that PDGF has
been in the commercial market for over 12 months. As Regranex-Registered
Trademark- is the first product of its kind, the Company believes it will take
time for the market to fully develop. In addition, Chiron's sales of PDGF will
tend to fluctuate based upon the inventory management practices of J&J.
Regranex-Registered Trademark- Gel was recently approved for use in the
treatment of diabetic foot ulcers in Canada and Europe. However, even with these
approvals, Chiron's sales to date have largely filled J&J's initial inventory
requirements for product launch, and as a result, no significant sales of PDGF
to J&J are expected until the second quarter of 2000.

VACCINE PRODUCT SALES Chiron sells pediatric and adult vaccines in Germany,
Italy, other international markets, and in the U.S. Certain of the Company's
vaccine products, particularly its flu vaccine, are seasonal and typically have
higher sales in the third quarter of the year. For the three months ended
September 30, 1999 and 1998, vaccine product sales were $70.6 million and $60.7
million, respectively. The increase in product sales for the three months ended
September 30, 1999 as compared with the same period in 1998 is primarily due to
the change in timing of reporting the results of the Company's Italian
subsidiary. Historically, the results of the Company's Italian subsidiary were
reported on a one-month lag; however, during the first quarter 1999, the Company
eliminated the lag such that these results are now reported on a current basis.
As a result of this change, the Company recorded a significant amount of flu
vaccine sales during the third quarter 1999, which were historically recorded
during the fourth quarter.

For the nine months ended September 30, 1999 and 1998, vaccine product sales
were $153.8 million and $119.1 million, respectively. The increase in sales for
the nine months ended September 30, 1999 as compared with the same period in
1998 is primarily due to the change in timing of reporting the results of the
Company's Italian subsidiary (see above) and Chiron's acquisition of the
remaining 51% interest in, and consolidation of, Chiron Behring during the
second quarter of 1998. Also affecting vaccine product sales for the nine months
ended September 30, 1999 was a one-time $4.2 million sale of adult influenza
vaccine to Argentina in the first quarter 1999.

In August 1999, Chiron filed an application for approval to market
Menjugate-TM-, its vaccine against meningococcal meningitis caused by the
bacterium N. MENINGITIDIS serogroup C, in the United Kingdom. The Company has
received orders for Menjugate-TM- shipments, which are scheduled to begin in
March 2000. These orders are subject to final approval by the United Kingdom's
Medicines Control Agency ("MCA"). There can be no assurance as to the receipt of
regulatory approval or the timing of any such regulatory approval.

BLOOD TESTING PRODUCT SALES During the second quarter 1999, the Company
began recognizing revenues for sales of its nucleic acid tests that are used to
screen blood and plasma under an investigational new drug ("IND") application in
the U.S. Product sales related to these tests were $2.0 million and $3.9 million
for the three and nine months ended September 30, 1999, respectively.

As with any new product, there can be no assurance that healthcare providers
will adopt the Company's nucleic acid testing technology. In addition, sales of
the Company's nucleic acid tests may be affected by the presence of a
competitive product, the availability of reimbursement from the government and
government regulations relating to the pricing of healthcare products.

EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES For the three months
ended September 30, 1999 and 1998, Chiron recognized equity in earnings of
unconsolidated joint businesses of $23.3 million and $21.3 million,
respectively. For the nine months ended September 30, 1999 and 1998, Chiron
recognized equity in earnings of unconsolidated joint businesses of $58.4
million and $51.5 million, respectively. In 1999, equity in earnings of
unconsolidated joint businesses consisted substantially of revenues generated by
Chiron's joint business with Ortho. In 1998, equity in earnings of
unconsolidated joint businesses also included one quarter of earnings from
Chiron's 49% share of the after-tax operating results of Chiron Behring.

CHIRON-ORTHO JOINT BUSINESS For the three months ended September 30, 1999
and 1998, Chiron's earnings from its joint business with Ortho were $23.0
million and $21.7 million, respectively. For the nine months ended
September 30, 1999 and 1998, these earnings were $57.5 million and $51.2
million, respectively. The overall fluctuations in earnings from the joint
business are primarily due to certain adjustments made during the first quarters
of 1999 and 1998. In the first quarter 1999, an annual inventory adjustment
resulted in a charge of $0.7 million as compared with a charge of $4.1 million
recognized in the first quarter 1998. Also contributing to the increase in
earnings in 1999 as compared with 1998, were higher foreign affiliate profits
and a first-quarter 1998 one-time contract termination fee.

CHIRON BEHRING On July 1, 1996, Chiron acquired a 49% interest in Chiron
Behring. On March 31, 1998, Chiron acquired the remaining 51% interest in Chiron
Behring (refer to Note 4 of "Notes to Condensed Consolidated Financial
Statements"). From July 1, 1996 through the first quarter 1998, equity in
earnings of unconsolidated joint businesses included Chiron's 49% share of the
after-tax operating results of Chiron Behring. Chiron's share of earnings from
the joint business, including amortization of intangibles, was $2.4 million for
the three months ended March 31, 1998. Beginning in the second quarter 1998,
Chiron Behring's results were consolidated with those of the Company.

COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received for research services as they are performed and fees
received upon the achievement of specified milestones. For the three months
ended September 30, 1999 and 1998, Chiron recognized collaborative agreement
revenues of $18.4 million and $24.3 million, respectively. For the nine months
ended September 30, 1999 and 1998, collaborative agreement revenues were $59.6
million and $73.1 million, respectively. The decrease in collaborative agreement
revenues in 1999 as compared with 1998 is partially due to a contractual
decrease in payments received by the Company under a November 1996 consent
agreement between Chiron, Novartis AG ("Novartis"), and the Federal Trade
Commission related to the Herpes Simplex Virus-thymidine kinase (HSV-tk) gene in
the field of gene therapy (for more information, refer to the Company's Annual
Report on Form 10-K for the year ended January 3, 1999).

The remaining decrease is primarily due to an agreement with Novartis, under
which Novartis agreed to provide research funding for certain projects through
1999 (for more information, refer to the Company's Annual Report on Form 10-K
for the year ended January 3, 1999). In September 1999, Chiron and Novartis
determined to amend this agreement. This amendment will increase the aggregate
maximum amount of funding provided by Novartis from $250.0 million to $265.0
million. Under this agreement, for the three months ended

September 30, 1999 and 1998, Chiron recognized collaborative agreement revenues
of $10.0 million and $15.6 million, respectively. For the nine months ended
September 30, 1999 and 1998, revenues recognized under this agreement were $39.0
million and $47.2 million, respectively.

Collaborative agreement revenues tend to fluctuate based on the amount of
research services performed, the status of projects under collaboration, and the
achievement of milestones. Due to the nature of the Company's collaborative
agreement revenues, results in any one period are not necessarily indicative of
results to be achieved in the future. The Company's ability to generate
additional collaborative agreement revenues may depend, in part, on its ability
to initiate and maintain relationships with potential and current collaborative
partners. There can be no assurance that such relationships will be established
or that current collaborative agreement revenues will not decline. In
particular, the research funding agreement with Novartis (see above) expires by
its terms on December 31, 1999, and there can be no assurance that new
relationships will be established.

ROYALTY AND LICENSE FEE REVENUES The Company receives royalties and license
fees for products or technologies that are marketed, distributed, or used by
third parties. For the three months ended September 30, 1999 and 1998, Chiron
recognized royalty and license fee revenues of $36.5 million and $49.8 million,
respectively. For the nine months ended September 30, 1999 and 1998, royalty and
license fee revenues were $96.3 million and $81.3 million, respectively. The
increase in royalty and license fee revenues in 1999 as compared with 1998 is
primarily due to a cross-license agreement with Bayer whereby Chiron agreed to
grant to Bayer rights under certain Chiron patents, including rights under
patents relating to HIV and hepatitis C virus. In exchange for these rights,
Bayer paid to Chiron a license fee of $100.0 million, which is refundable in
decreasing amounts over a period of three years. During the three and nine
months ended September 30, 1999, Chiron recognized license fee revenues of $10.0
million and $30.0 million, respectively, which represent the portions of the
$100.0 million payment that became nonrefundable during the periods. For the
three months ended September 30, 1999, other items contributing to royalty and
license fee revenues were $7.3 million of royalties generated from Schering AG's
European sales of Betaferon-Registered Trademark- and $5.8 million of royalties
related to Chiron's vaccine products. For the nine months ended September 30,
1999, other items contributing to royalty and license fee revenues were $21.4
million of royalties generated from Schering AG's European sales of
Betaferon-Registered Trademark-, $9.9 million of royalties related to insulin
products, and $15.4 million related to vaccine products. In the third quarter
1998, Chiron recognized $24.0 million related to a license fee received from
SmithKline Beecham to use certain human vaccine product technologies. In the
first quarter 1998, Chiron recognized $5.0 million related to a license fee
received from Pharmacia & Upjohn Company to research, develop, manufacture, and
commercialize therapeutic products for the treatment of hepatitis C virus in
humans.

Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. Results in any one
period are not necessarily indicative of results to be achieved in the future.
In addition, the Company's ability to generate additional royalty and license
fee revenues may depend, in part, on its ability to market and capitalize on its
technologies. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenue will not decline.

OTHER REVENUES For the three months ended September 30, 1999 and 1998,
Chiron recognized other revenues of $12.1 million and $7.9 million,
respectively. For the nine months ended September 30, 1999 and 1998, these
revenues were $46.4 million and $28.1 million, respectively. Contributing to the
increase in other revenues were contract manufacturing revenues which increased
to $2.2 million in the third quarter 1999 from $0.1 million in the comparable
period in 1998 as a result of a new contract manufacturing agreement. Also
included in other revenues during the third quarters 1999 and 1998 were
approximately $6.8 million and $5.9 million, respectively, of commission
revenues received on sales of hepatitis B products and immunoglobulin products.

For the nine months ended September 30, 1999, other revenues primarily
consisted of a $9.7 million milestone payment related to the FDA's approval of
DepoCyt-Registered Trademark- in April 1999, $10.7 million related to contract
manufacturing and $18.0 million related to commission revenues. For the nine
months ended September 30, 1998, other revenues primarily consisted of $9.8
million of revenues related to Aredia-Registered Trademark- (pamidronate
disodium for injection) recognized under an arrangement which terminated in
April 1998, pursuant to which Chiron promoted Aredia-Registered Trademark- on
behalf of Novartis, and $12.2 million of commission revenues.

In October 1999, SkyePharma, Inc. ("SkyePharma"), the manufacturer of
DepoCyt-Registered Trademark-, discovered two DepoCyt-Registered Trademark- lots
that did not meet manufacturing specifications and, as a result, recalled all
DepoCyt-Registered Trademark- vials from these lots. The commercial supply of
this product is on hold while the Company and SkyePharma investigate the cause.
Management of the Company does not believe that this event will have a material
impact on the results of operations for fiscal year 1999. The impact of this
event on future shipments of DepoCyt-Registered Trademark- is not yet known.

The Company's other revenues may fluctuate due to the nature of the revenues
recognized and the timing of events giving rise to these revenues. There can be
no guarantee that the Company will be successful in obtaining additional
revenues or that these revenues will not decline.

COSTS AND EXPENSES

GROSS PROFIT For the three months ended September 30, 1999 and 1998, gross
profit as a percentage of net product sales was 53% and 55%, respectively. For
each of the nine months ended September 30, 1999 and 1998, gross profit as a
percentage of net product sales was 55%. In the third quarter 1999, Chiron
recognized a $2.7 million reduction in sales related to the PDGF product returns
allowance. Excluding this reduction, gross profit as a percentage of sales would
have been 54% for the three months ended September 30, 1999. In the third
quarter 1998, Chiron recognized a $3.3 million reduction in cost of goods sold
related to a change in estimated property tax accruals created in prior periods.
Excluding this reduction, gross profit as a percentage of net product sales
would have been 53% for the three months ended September 30, 1998. Also
impacting Chiron's gross profit for the nine months ended September 30, 1998 was
a $6.0 million reduction in cost of goods sold related to a change in estimated
property tax accruals created in prior periods. Excluding this reduction, gross
profit as a percentage of net product sales would have been 53% for the nine
months ended September 30, 1998.

The increase in gross profit margins in the third quarter 1999 as compared
to the third quarter 1998 is primarily related to a significant improvement in
vaccine product gross profit due to manufacturing efficiencies resulting from
increased production and a favorable mix of vaccine product sales. The increase
in gross profit margins during the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998 is primarily related to
(i) a slight increase in sales of biopharmaceutical products as a percentage of
sales and biopharmaceutical product gross profit; and (ii) a significant
improvement in vaccine product gross profit due to manufacturing efficiencies
resulting from increased production and a favorable mix of vaccine product
sales.

The Company's gross profit percentages may fluctuate significantly in future
periods as the Company's product mix continues to evolve.

RESEARCH AND DEVELOPMENT For the three months ended September 30, 1999 and
1998, Chiron recognized research and development expenses of $75.5 million and
$67.3 million, respectively. For the nine months ended September 30, 1999 and
1998, Chiron's research and development expenses were $216.7 million and $196.2
million, respectively. The Company's research and development expenses may
fluctuate from period to period depending upon the stage of certain projects and
the level of clinical trial-related activities. The increase in research and
development spending in 1999 as compared with 1998 was due, in part, to $2.6
million and $3.0 million milestone payments made during the third and second
quarters of 1999, respectively, related to the Company's collaboration agreement
with Medivir AB. Also contributing to the increase in research and development
expense was the furtherance of the Company's clinical trials related to
Proleukin-Registered Trademark- for HIV, Insulin-Like Growth Factor-1 ("IGF-1")
for osteoarthritis, Fibroblast Growth Factor ("FGF") for coronary artery disease
and Tissue Factor Pathway Inhibitor ("TFPI") for sepsis.

In November 1999, Chiron entered into a patent and license agreement
relating to FGF. Under this agreement, the Company will pay $12.5 million,
consisting of $5.0 million in cash and $7.5 million as a forgiveable note
payable, in licensing fees to Scios, Inc. In addition, Chiron may make total
payments of $12.0 million if certain development objectives are met.

SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended
September 30, 1999 and 1998, Chiron recognized selling, general, and
administrative ("SG&A") expenses of $41.8 million and $40.7 million,
respectively. For the nine months ended September 30, 1999 and 1998, Chiron
recognized SG&A expenses of

$128.6 million and $103.5 million, respectively. The increase in SG&A expenses
in 1999 as compared with 1998 is primarily due to the acquisition and
consolidation of Chiron Behring, which contributed $10.2 million to SG&A
expenses. SG&A expenses also increased as a result of the Company's worldwide
implementation of its integrated information system in April 1999, the launch of
DepoCyt-Registered Trademark- and the nucleic acid testing segment of its blood
testing business, and certain patent defense legal costs.

OTHER OPERATING EXPENSES In the nine months ended September 30, 1999, the
Company recorded restructuring and reorganization charges of $2.1 million, which
included a benefit of $1.3 million recorded in the third quarter 1999 and a
charge of $3.4 million recorded in the first quarter 1999. The benefit of $1.3
million related to revised estimates of property and other tax-related accruals
recorded in connection with the idling of the St. Louis facility, as well as
revised estimates of termination and other employee-related costs recorded in
connection with the elimination of 400 positions. As of September 30, 1999, 301
of these 400 positions had been eliminated. The charge of $3.4 million related
to termination and other employee-related costs recognized in connection with
the elimination of 28 positions at the Company's Italian manufacturing facility.
As of September 30, 1999, 20 of these 28 positions had been eliminated. In the
nine months ended September 30, 1998, the Company recorded restructuring and
reorganization charges of $11.3 million, of which $6.4 million was recognized in
the third quarter 1998, related to the integration of its worldwide vaccines
operations, closure of its Puerto Rico and St. Louis facilities and the ongoing
rationalization of its business operations.

During the three and nine months ended September 30, 1999, Chiron recognized
a reduction in other operating expenses of $2.0 million and $8.4 million,
respectively, resulting from a change in estimated tax accruals related to
certain employee payments recorded in 1995 under a series of agreements between
Chiron and Novartis (for more information, refer to the Company's Annual Report
on Form 10-K for the year ended January 3, 1999).

NON-OPERATING INCOME AND EXPENSE

Other income, net, primarily consists of interest and investment income on
the Company's cash and investment balances and other non-operating gains and
losses. For the three months ended September 30, 1999 and 1998, Chiron
recognized interest and investment income of $20.2 million and $5.7 million,
respectively. For the nine months ended September 30, 1999 and 1998, interest
and investment income totaled $60.9 million and $20.0 million, respectively. The
increase in interest and investment income in 1999 as compared with 1998 is
primarily due to higher average cash and investment balances attributable to the
net cash proceeds received from the sale of Chiron Diagnostics in
November 1998. Interest expense remained fairly constant at $6.2 million and
$6.0 million for the three months ended September 30, 1999 and 1998,
respectively, and $17.9 million and $18.6 million for the nine months ended
September 30, 1999 and 1998, respectively.

INCOME TAXES

NEW ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, SFAS 133
was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS 133". As a result of this
amendment, SFAS 133 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.

In accordance with SFAS 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. The Company is currently evaluating the effect that
implementation of SFAS 133 will have on its results of operations and financial
position and anticipates that it will implement SFAS 133 during the first fiscal
quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings, issuance of common stock, and
off-balance sheet financing. Chiron's cash and investments in marketable debt
securities, which totaled $1.6 billion at September 30, 1999, are invested in a
diversified portfolio of investment grade financial instruments, including money
market instruments, corporate notes and bonds, government or government agency
securities, and other debt securities. By policy, the amount of credit exposure
to any one institution is limited; however, these investments are generally not
collateralized and primarily mature within three years.

SOURCES AND USES OF CASH

Chiron had cash and cash equivalents of $205.8 million and $80.5 million at
September 30, 1999 and 1998, respectively. Through the nine months ended
September 30, 1999, net cash used in operating activities was $37.1 million as
compared with net cash provided by operating activities of $85.8 million in
1998. Through the nine months ended September 30, 1999, the Company paid $179.7
million in estimated taxes primarily related to the sale of the Company's IN
VITRO diagnostics business. This use of cash was partially offset by $54.0
million in federal and state tax refunds received and net income of $128.8
million for the nine months ended September 30, 1999.

Through the nine months ended September 30, 1999, net cash used in investing
activities consisted of purchases of investments in marketable debt securities
of $1.1 billion, capital expenditures of $55.7 million, and other uses of cash
of $11.1 million. Partially offsetting these uses of cash were proceeds from the
sale and maturity of investments in marketable debt securities of $867.4 million
and proceeds from disposal of discontinued operations of $46.9 million.

Through the nine months ended September 30, 1999, net cash provided by
financing activities primarily consisted of $68.1 million from the issuance of
common stock and the reissuance of treasury stock related to stock option
exercises, $7.9 million related to short-term borrowings and $8.1 million in
proceeds from the issuance of long-term debt. This was partially offset by $2.0
million related to the repayment of debt and capital leases and $69.1 million
related to the acquisition of treasury stock.

In February 1999, the Company's Board of Directors authorized the repurchase
of up to 2.5 million shares of Chiron common stock from time to time on the open
market to offset the dilution associated with the operation of the Company's
stock option and employee stock purchase plans and the granting of share rights.
In October 1999, the Board of Directors approved a 4.0 million share increase,
thereby bringing the total number of shares authorized for repurchase to 6.5
million shares. As of September 30, 1999, 2.5 million shares had been
repurchased.

The Company is currently evaluating a number of business development
opportunities. To the extent that the Company is successful in reaching
agreements with third parties, these transactions may involve the expenditure of
a significant amount of the Company's current investment portfolio.

BORROWING ARRANGEMENTS

Under a revolving, committed, unsecured credit agreement with a major
financial institution, Chiron can borrow up to $100.0 million in the U.S. This
credit facility is guaranteed by Novartis under a November 1994 Investment
Agreement, provides various interest rate options, and matures in
February 2003. There were no

borrowings outstanding under this credit facility at September 30, 1999. Chiron
also has credit facilities outside the U.S. which allow for total borrowings of
$63.1 million. Under these credit facilities, $22.7 million of borrowings were
outstanding at September 30, 1999.

In September 1999, Chiron and Novartis determined to amend the
November 1994 Investment Agreement. This amendment will reduce the maximum
amount of Chiron obligations that Novartis will guarantee from $725.0 million to
$702.5 million.

YEAR 2000

Chiron is dependent on a number of computer systems and applications to
conduct its business. In the past, many computer programs were written using two
digits rather than four to identify the relevant year. These programs may not be
able to distinguish between 21st and 20th century dates (for example, "00" may
be read as the year 1900 when the year 2000 is intended). This could result in
significant system failures or miscalculations. Accordingly, the Company has
developed a comprehensive risk-based plan designed to make its computer hardware
and communication systems, software applications, and facilities and other
non-information technology-related functions Year 2000 compliant. The plan
covers three phases including (i) planning, (ii) assessment, and
(iii) implementation. The Company has completed the planning and assessment
phases and has substantially completed the implementation phase. With regard to
the Company's computer hardware and communication systems, Chiron has completed
its initial technology refresh program which was developed in conjunction with
International Business Machines, Inc. ("IBM") to update and standardize the
Company's computer hardware and communication systems. In the third quarter
1999, the Company continued its technology refresh program, which it will
complete in November 1999. With regard to the Company's software applications,
the Company has identified critical and non-critical software applications and
has remediated all mission critical and substantially all non-critical
applications in all material respects. Certain non-critical user specific
applications based on compliant software platforms are in testing and will be
completed in November 1999.

With regard to the Company's key facilities and other non-information
technology-related functions, including research, manufacturing, and inventory
management practices, the Company has completed its remediation plans for its
critical systems and substantially completed its remediation plans for its
non-critical systems. Some non-critical embedded systems remediation has been
rescheduled to November 1999 due to manufacturing schedules and vendor changes.

The Company has a facility in Amsterdam, The Netherlands, which is currently
being marketed for sale. Due to the Company's manufacturing requirements, the
Company plans to operate this facility until the end of 1999, at which time, the
Company intends to complete certain upgrades within its embedded systems. The
Company believes that it will be able to sell the facility in its current state
and does not consider this facility to be a significant Year 2000 risk.

The Company is using both internal and external resources to prepare for the
Year 2000. Although the Company believes that it should be able to substantially
complete the implementation of critical internal aspects of its Year 2000 plan
prior to the commencement of the Year 2000, even with substantial completion of
internal remediation plans, the Company's customers, suppliers, and distributors
also present risk of their own Year 2000 compliance over which the Company has
no control. The Company has surveyed and assessed its critical suppliers and
other external relationships to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their own Year 2000 issues. Where
practicable, the Company is attempting to mitigate its risks with respect to the
failure of these entities to be Year 2000 compliant and has prepared contingency
plans accordingly. The Company cannot reasonably estimate the effect, if any,
from the failure of such parties to be Year 2000 compliant. However, the Company
believes that its contingency plans will substantially mitigate all significant
risks resulting from such parties' failure to resolve their Year 2000 issues.

The SEC has requested that companies disclose the most likely worst case
scenario that could occur as a result of the Year 2000. The Company believes
that its most likely worst case scenario would be delays in product shipments
due to a complete or partial manufacturing shutdown. To address the
manufacturing shutdown scenario, the Company plans, among other things, to
increase its inventory and re-prioritize staff assignments, as needed, but does
not believe that such a scenario is likely to occur.

In addition to the Company's remediation efforts, the Company is also
implementing contingency plans and preparing for the year-end rollover and leap
year. The Company's contingency plans include, among other things, the
implementation of specific plans to ensure that the necessary precautions are
taken to prevent and/ or address an unexpected system failure. The Company has
scheduled contingency plan drills for November and December 1999. The Company
also intends to increase certain raw material and finished goods inventories to
mitigate external and internal risks. The Company's plans also include placing
teams in all critical locations to monitor and protect critical systems during
the year-end rollover period. The Company intends to monitor its computer
hardware and communication systems, software applications, and facilities and
other non-information technology-related functions for Year 2000 issues through
March 2000.

The Company may incur significant costs in preparing for the Year 2000.
Costs associated with preparing for the Year 2000 are not expected to exceed
$4.0 million, and include costs related to contingency plans, which may not
require execution. The costs related to the technology refresh program and the
integrated information system are not included in the above estimates as Year
2000 compliance is incidental to the operational benefits expected to be derived
from these programs. As of September 30, 1999, total costs incurred to date have
been funded through operations and approximate $2.7 million. The Company
anticipates funding its remaining Year 2000 expenditures with cash on hand and
cash generated through operations.

EURO CONVERSION

On January 1, 1999, eleven European Union member countries established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The Euro is currently traded on currency exchanges
and can be used in business transactions. The Company believes that its
financial systems are Euro-ready in all material respects. However, the Company
is still in the process of evaluating the effect, if any, that the Euro may have
on its product pricing and gross profit percentages.

FACTORS THAT MAY AFFECT FUTURE RESULTS

As a biotechnology company, Chiron is engaged in a rapidly evolving and
often unpredictable business. The forward-looking statements contained in this
Report and in other periodic reports, press releases and other statements issued
by the Company from time to time reflect management's current beliefs and
expectations concerning objectives, plans, strategies, future performance, and
other future events. The following discussion highlights some of the factors,
many of which are beyond the Company's control, which could cause actual results
to differ.

PROMISING TECHNOLOGIES ULTIMATELY MAY NOT PROVE SUCCESSFUL

The Company focuses its research and development activities on areas in
which it has particular strengths, and on technologies that appear promising.
These technologies often are on the "cutting edge" of modern science. As a
result, the outcome of any research or development program is highly uncertain.
Only a very small fraction of such programs ultimately result in commercial
products or even product candidates. Product candidates that initially appear
promising often fail to yield successful products. In many cases, preclinical or
clinical studies will show that a product candidate is not efficacious (that is,
it does not have the intended therapeutic or prophylactic effect), or that it
raises safety concerns or has other side effects which outweigh the intended
benefit. Success in preclinical or early clinical trials (which generally focus
on safety issues) may not translate into success in large-scale clinical trials
(which are designed to show efficacy), often for reasons that are not fully
understood. And even after a product is approved and launched, general usage or
post-marketing studies may identify safety or other previously unknown problems
with the product which may result in regulatory approvals being suspended,
limited to narrow indications, or revoked, or which may otherwise prevent
successful commercialization.

REGULATORY APPROVALS

The Company is required to obtain and maintain regulatory approval in order
to market most of its products. Generally, these approvals are on a
product-by-product and country-by-country basis, and, in the case of therapeutic
products, a separate approval is required for each therapeutic indication. See
Item 1, "Business--Government Regulation" in the Company's Annual Report on
Form 10-K for the year ended January 3, 1999. Product candidates that appear
promising based on early, and even large-scale, clinical trials may not receive
regulatory approval. The results of clinical trials often are susceptible to
varying interpretations that may delay, limit or prevent approval or result in
the need for post-marketing studies.

MANUFACTURING

Most of the Company's products are biologics. Manufacturing biologic
products is complex. Unlike chemical pharmaceuticals, a biologic product
generally cannot be sufficiently characterized (in terms of its physical and
chemical properties) to rely on assaying of the finished product alone to ensure
that the product will perform in the intended manner. Accordingly, it is
essential to be able to both validate and control the manufacturing process:
that is, to show that the process works, and that the product is made strictly
and consistently in compliance with that process. Slight deviations in the
manufacturing process may result in unacceptable changes in the products that
may result in lot failures. Manufacturing processes which are used to produce
the (smaller) quantities of material needed for research and development
purposes may not be successfully scaled up to allow production of commercial
quantities at reasonable cost or at all. All of these difficulties are
compounded when dealing with novel biologic products that require novel
manufacturing processes. Accordingly, manufacturing is subject to extensive
government regulation. Even minor changes in the manufacturing process require
regulatory approval, which, in turn, may require further clinical studies.

PATENTS HELD BY THIRD PARTIES MAY DELAY OR PREVENT COMMERCIALIZATION

Third parties, including competitors, have patents and patent applications
in the U.S. and other significant markets that may be useful or necessary for
the manufacture, use, or sale of certain of the Company's products and products
in development. It is likely that third parties will obtain other such patents
in the future. Certain of these patents may be sufficiently broad to prevent or
delay Chiron from manufacturing or marketing products important to the Company's
current and future business. The scope, validity, and enforceability of such
patents, if granted, the extent to which Chiron may wish or need to obtain
licenses to such patents, and the cost and availability of such licenses cannot
be accurately predicted. If Chiron does not obtain such licenses, products may
be withdrawn from the market or delays could be encountered in market
introduction while an attempt is made to design around such patents.
Alternatively, Chiron could find that the development, manufacture, or sale of
such products is foreclosed. Chiron could also incur substantial costs in
challenging the validity and scope of such patents.

PRODUCT ACCEPTANCE

The Company may experience difficulties in launching new products, many of
which are novel products based on technologies that are unfamiliar to the
healthcare community. There can be no assurance that healthcare providers and
patients will accept such products. In addition, government agencies as well as
private organizations involved in healthcare from time to time publish
guidelines or recommendations to healthcare providers and patients. Such
guidelines or recommendations can be very influential, and may adversely affect
the usage of the Company's products directly (for example, by recommending a
decreased dosage of the Company's product in conjunction with a concomitant
therapy) or indirectly (for example, by recommending a competitive product over
the Company's product).

COMPETITION

Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
blood testing companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and blood testing companies, have
greater resources than the Company. Accordingly, even if the Company is
successful in launching a product, it

may find that a competitive product dominates the market for any number of
reasons, including the possibility that the competitor may have launched its
product first; the competitor may have greater marketing capabilities; or the
competitive product may have therapeutic or other advantages. The technologies
applied by the Company and its competitors are rapidly evolving, and new
developments frequently result in price competition and product obsolescence.

CHIRON'S PATENTS MAY NOT PREVENT COMPETITION OR GENERATE REVENUES

Chiron seeks to obtain patents on its inventions. Without the protection of
patents, competitors may be able to use the Company's inventions to manufacture
and market competing products without being required to undertake the lengthy
and expensive development efforts made by Chiron and without having to pay
royalties or otherwise compensate Chiron for the use of the invention.

There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the U.S. and other
important markets. It is not known how many of the Company's pending patent
applications will be granted, or the effective coverage of those that are
granted. In the U.S. and other important markets, the issuance of a patent is
neither conclusive as to its validity nor the enforceable scope of its claims.
The Company has engaged in significant litigation to determine the scope and
validity of certain of its patents and expects to continue to do so in the
future.

Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection. The
length of time necessary to successfully resolve patent litigation may allow
infringers to gain significant market advantage. Third parties may be able to
design around the patents and develop competitive products that do not use the
inventions covered by the patents. Many countries, including certain countries
in Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties (for example, the third party's
product is needed to meet a threat to public health or safety in that country,
or the patent owner has failed to "work" the invention in that country, or the
third party has patented improvements) and most countries limit the
enforceability of patents against government agencies or government contractors.
In these countries, the patent owner may be limited to monetary relief and may
be unable to enjoin infringement, which could materially diminish the value of
the patent.

AVAILABILITY OF REIMBURSEMENT; GOVERNMENT AND OTHER PRESSURES ON PRICING

In the U.S. and other significant markets, sales of the Company's products
may be affected by the availability of reimbursement from the government or
other third parties, such as insurance companies. It is difficult to predict the
reimbursement status of newly approved, novel biotechnology products, and
current reimbursement policies for existing products may change. In certain
foreign markets, governments have issued regulations relating to the pricing and
profitability of pharmaceutical companies. There have been proposals in the U.S.
(at both the federal and state level) to implement such controls. The growth of
managed care in the U.S. also has placed pressure on the pricing of healthcare
products. These pressures can be expected to continue.

COSTS ASSOCIATED WITH REFOCUSING AND EXPANDING THE BUSINESS

The Company is refocusing its efforts on its core businesses and on
improving operational efficiencies. In addition, management expects to grow the
business in areas in which the Company can be most competitive, either through
in-licensing, collaborations, or acquisitions of products or companies. In
connection with these efforts, the Company may incur significant charges, costs,
and expenses which could impact the Company's profitability, including
impairment losses, restructuring charges, the write-off of purchased in-process
technology, transaction-related expenses, costs associated with integrating new
businesses, and the cost of amortizing goodwill and other intangibles.

OTHER NEW PRODUCTS AND SOURCES OF REVENUE

Many products in the Company's current pipeline are in relatively early
stages of research or development. The Company's ability to grow earnings in the
near-to medium-term may depend, in part, on its ability to initiate and maintain
other revenue generating relationships with third parties, such as licenses to
certain of the Company's technologies, and on its ability to identify and
successfully acquire rights to later-stage products from third parties. There
can be no assurance that such other sources of revenue will be established.

INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS

In 1998, the Company sold certain businesses for cash, including its IN
VITRO diagnostics and ophthalmics businesses, and as a result has significant
cash balances and short-term investments. The Company's financial results
therefore are sensitive to interest rate fluctuations in the U.S. In addition,
the Company sells products in many countries throughout the world, and its
financial results could be significantly affected by fluctuations in foreign
currency exchange rates or by weak economic conditions in foreign markets.

COLLABORATION PARTNERS

An important part of the Company's business strategy depends upon
collaborations with third parties, including research collaborations and joint
efforts to develop and commercialize new products. As circumstances change, the
Company and its corporate partners may develop conflicting priorities or other
conflicts of interest. The Company may experience significant delays and incur
significant expenses in resolving these conflicts and may not be able to resolve
these matters on acceptable terms. Even without conflicts of interest, the
parties may differ in their views as to how best to realize the value associated
with a current product or a product in development. In some cases, the corporate
partner may have responsibility for formulating and implementing key strategic
or operational plans. Decisions by corporate partners on key clinical,
regulatory, marketing (including pricing), inventory management, and other
issues may prevent successful commercialization of the product or otherwise
impact the Company's profitability.

STOCK PRICE VOLATILITY

The price of the Company's stock, like that of other biotechnology
companies, is subject to significant volatility. Any number of events, both
internal and external to the Company, may affect the stock price. These include,
without limitation, results of clinical trials conducted by the Company or by
its competitors; announcements by the Company or its competitors regarding
product development efforts, including the status of regulatory approval
applications; the outcome of legal proceedings, including claims filed by the
Company against third parties to enforce its patents and claims filed by third
parties against the Company relating to patents held by the third parties; the
launch of competing products; the resolution of (or failure to resolve) disputes
with collaboration partners; corporate restructuring by the Company; licensing
activities by the Company; and the acquisition or sale by the Company of
products, products in development, or businesses.

In connection with its research and development collaborations, from time to
time the Company invests in equity securities of its corporate partners. The
price of these securities also is subject to significant volatility and may be
affected by, among other things, the types of events that affect the Company's
stock. Changes in the market price of these securities may impact the Company's
profitability.

TAX

The Company is taxable principally in the U.S., Germany, Italy, and The
Netherlands. All of these jurisdictions have in the past and may in the future
make changes to their corporate tax rates and other tax laws, which could
increase the Company's tax provision in the future. The Company has negotiated a
number of rulings regarding income and other taxes that are subject to periodic
review and renewal. If such rulings are not renewed or are substantially
modified, taxes payable in particular jurisdictions could increase. While the
Company believes that all material tax liabilities are properly reflected in its
balance sheet, the Company is presently under audit in several jurisdictions,
and there can be no assurance that Chiron will prevail in all cases in the event
the taxing authorities disagree with its interpretations of the tax law. In
addition, the Company has assumed liabilities for all income taxes incurred
prior to the sales of its former subsidiaries, Chiron Vision

Corporation (subject to certain limitations) and Chiron Diagnostics Corporation.
Future levels of research and development spending, capital investment, and
export sales will impact the Company's entitlement to related tax credits and
benefits which have the effect of lowering its effective tax rate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject to
fluctuations due to changes in foreign currency exchange rates, interest rates,
and fair value of equity securities held. The Company attempts to limit its
exposure to some or all of these market risks through the use of various
financial instruments. There were no significant changes in the Company's market
risk exposures through the nine months ended September 30, 1999. For further
discussion of the Company's market risk exposures, refer to Part II, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk" in Chiron's Annual
Report on Form 10-K for the fiscal year ended January 3, 1999.

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is party to certain lawsuits and legal proceedings, which are
described in Part I, Item 3, "Legal Proceedings," of the Company's Annual Report
on Form 10-K for the year ended January 3, 1999, in Part II, Item 1, "Legal
Proceedings", of the Company's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1999 and June 30, 1999. The following is a description of
material developments during the period covered by this Quarterly Report and
should be read in conjunction with the Annual Report on Form 10-K and the first
and second Quarterly Reports on Form 10-Q.

CONNAUGHT LABORATORIES, LIMITED

Chiron is involved in lawsuits in Italy and certain other countries with
Connaught Laboratories Limited ("Connaught") relating to TriAcelluvax-TM-, the
Company's diptheria/tetanus/acellullar pertussis vaccine. Litigation in Milan,
Italy relating to the Italian counterpart of Connaught's European Patent 0 527
753 is currently pending. On October 6, 1999, Connaught filed suit against
Chiron in the Milan court alleging infringement of its European Patent Number
322,115 (the "'115 patent"). The '115 patent contains claims relating to
pertussis toxin mutants. Connaught seeks a declaration of infringement of the
Italian counterpart to the '115 patent and seeks damages and injunctive relief
to prevent the manufacture and sale in Italy of Chiron's vaccines,
Acelluvax-TM-, Acelluvax DTP-TM-, and Triacelluvax-TM-.

FEDERAL EXPRESS

On September 3, 1999, Federal Express Corporation ("Federal Express") filed
suit in the Supreme Court of the State of New York, County of Orange against
Perseptive Biosystems, Inc, Perkin-Elmer Corporation, PE Biosystems Group, and
PE Corporation (together, the "PE Defendants") and Chiron. The matter has been
removed to the United States District Court for the Southern District of New
York. The Federal Express complaint relates to a fire that allegedly destroyed a
Federal Express aircraft and the majority of its cargo in September 1996.
Federal Express claims breach of contract, negligence and product liability with
regard to equipment owned and shipped by Chiron and designed, manufactured,
packaged and prepared for shipping by the PE Defendants and seeks damages,
interest, costs and fees. Federal Express alleges that improper packing and
shipping procedures were a proximate cause of the destruction of the plane. The
National Transportation Safety Board, an agency of the federal government, had
previously investigated the circumstances surrounding the incident and issued a
letter of no determination as to the cause of the fire. It is not known when nor
on what basis this litigation will be concluded.

F. HOFFMANN-LAROCHE AG

Chiron is involved in certain lawsuits in the United States, The
Netherlands, Japan, Germany, and other countries with F. Hoffmann-LaRoche AG and
several of its affiliated companies concerning infringement and/or validity of
certain patents related to HCV and HIV technology.

In January 1998, Chiron initiated an action against F. Hoffmann-LaRoche AG
and several of its affiliated companies (collectively, "Roche") in the United
States District Court for the Northern District of California. The Company
asserted that Roche's manufacture and sale of Amplicor HCV Test and Amplicor HCV
Monitor Test constituted infringement of Chiron's U.S. Patent Nos. 5,712,088
(the "'088 patent"), 5,714,596 (the "'596 patent"), and 5,863,719 (the "'719
patent"). The action sought damages, injunctive relief, and a declaratory
judgment that Chiron is the sole and exclusive owner of the patents in suit. The
parties' cross-motions for summary judgment on Roche defenses based upon prior
licenses were resolved in Chiron's favor in June 1999. In October 1999, Roche
filed counterclaims against Chiron which challenge the validity and
enforceability of the patents in suit. Roche also seeks to recover treble
damages and an injunction against Chiron for alleged breaches of state and
federal antitrust statutes relating to Chiron's HCV licensing practices.

Roche has appealed the injunction granted by the Regional Court in
Dusseldorf, Germany against manufacture or sale by Roche of HCV immunoassay
kits.

A suit filed in October 1998 by Roche AG against Chiron and Ortho is pending
in the Federal Court of Australia, New South Wales District Registry, and is
seeking revocation of Australian patent number 624105, relating to HCV
technology.

In May 1999, Chiron and Gen-Probe, Incorporated ("Gen-Probe") initiated
action in the Tribunal of Milan, Italy, against Roche AG and several of its
European affiliates (together, "Roche"). The lawsuit seeks a cross-border
declaration that Gen-Probe's Transcription Mediated Amplification System ("TMA")
which is used in Chiron/Gen-Probe blood screening kits, does not infringe
Roche's European Patent 0 505 012 (the "'012 patent") which relates to PCR
technology. The plaintiffs also seek an assessment of the '012 patent and a
declaration of nullity of the Italian counterpart of the '012 patent.

It is not known when nor on what basis these matters will be concluded.

ORTHO DIAGNOSTIC SYSTEMS, INC.

On March 31, 1999, Chiron filed a lawsuit against Ortho Diagnostic
Systems, Inc. in the United States District Court for the Northern District of
California. The suit concerns certain issues relating to the conduct of the
parties' joint business and seeks to compel arbitration of those issues. On
November 1, 1999, the Court entered judgment in Chiron's favor, ordering Ortho
to submit the underlying issues to arbitration. It is not known when nor on what
basis this matter will be concluded.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

EXHIBIT
NUMBER EXHIBIT
- --------------------- -------

3.01 Restated Certificate of Incorporation of the Registrant, as
filed with the Office of the Secretary of State of Delaware
on August 17, 1987, incorporated by reference to
Exhibit 3.01 of the Registrant's report on Form 10-K for
fiscal year 1996.

3.02 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the Office of
the Secretary of State of Delaware on December 12, 1991,
incorporated by reference to Exhibit 3.02 of the
Registrant's report on Form 10-K for fiscal year 1996.

3.03 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the Office of
the Secretary of State of Delaware on May 22, 1996,
incorporated by reference to Exhibit 3.04 of the
Registrant's report on Form 10-Q for the period ended
June 30, 1996.

3.04 Bylaws of the Registrant, as amended, incorporated by
reference to Exhibit 3.04 to the Registrant's report on
Form 10-Q for the period ended June 30, 1999.

EXHIBIT
NUMBER EXHIBIT
- --------------------- -------

4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, Trustee (initially
filed as Exhibit 4.01 to the Registrant's report on
Form 10-Q for the period ended September 30, 1994),
incorporated by reference to Exhibit 4.01 of the
Registrant's report on Form 10-Q for the period ended
June 30, 1999.

4.02 First Supplemental Indenture, dated as of December 12, 1991,
by and among the Registrant, Cetus Corporation, and Bankers
Trust Company, incorporated by reference to Exhibit 4.02 of
the Registrant's report on Form 10-K for fiscal year 1997.

4.03 Second Supplemental Indenture, dated as of March 25, 1996,
by and among the Registrant, Cetus Oncology Corporation
(formerly Cetus Corporation), and Bankers Trust Company,
incorporated by reference to Exhibit 4.03 of the
Registrant's report on Form 10-Q for the period ended
June 30, 1996.

4.04 Indenture, dated as of November 15, 1993, between the
Registrant and The First National Bank of Boston, as Trustee
(initially filed as Exhibit 4.03 of the Registrant's report
on Form 10-K for fiscal year 1993), incorporated by
reference to Exhibit 4.04 of the Registrant's report on
Form 10-K for fiscal year 1998.

10.306 HCV Probe License and Option Agreement dated September 26,
1999, between Abbott Laboratories, an Illinois corporation,
and the Registrant. (Certain information has been omitted
from the Agreement and filed separately with the Securities
and Exchange Commission pursuant to a request by Registrant
for confidential treatment pursuant to Rule 24b-2. The
omitted confidential information has been identified by the
following statement "Confidential Treatment Requested".)

10.614 Letter Agreement dated May 28, 1999 between the Registrant
and Paul J. Hastings, as supplemented by Promissory Note
dated July 20, 1999, executed by Mr. Hastings.*

10.707 Amendment dated as of January 3, 1995 among Ciba-Geigy
Limited, Ciba-Geigy Corporation, Ciba Biotech
Partnership, Inc. and the Registrant (initially filed as
Exhibit 10.61 of the Registrant's current report on
Form 8-K dated January 4, 1995).

10.708 Supplemental Agreement dated as of January 3, 1995 among
Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech
Partnership, Inc. and the Registrant (initially filed as
Exhibit 10.61 of the Registrant's current report on
Form 8-K dated January 4, 1995).

10.709 Amendment with Respect to Employee Stock Option Arrangements
dated as of January 3, 1995 among Ciba-Geigy Limited,
Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and
the Registrant (initially filed as Exhibit 10.62 of the
Registrant's current report on Form 8-K dated January 4,
1995).*

10.716 Letter Agreement dated September 30, 1999, between Novartis
Corporation and the Registrant. (Certain information has
been omitted from the Agreement and filed separately with
the Securities and Exchange Commission pursuant to a request
by Registrant for confidential treatment pursuant to
Rule 24b-2. The omitted confidential information has been
identified by the following statement: "Confidential
Treatment Requested".)

27 Financial Data Schedule for the Nine Months ended
September 30, 1999.

27.1 Financial Data Schedule for the Nine Months ended
September 27, 1998.

(b) Reports on Form 8-K

None.

- ------------------------

* Management contract, compensatory plan or arrangement.

CHIRON CORPORATION

SEPTEMBER 30, 1999

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CHIRON CORPORATION

DATE: November 12, 1999 BY: /s/ SEAN P. LANCE
--------------------------------------
Sean P. Lance
Chairman; Chief Executive Officer

DATE: November 12, 1999 BY: /s/ JAMES R. SULAT
--------------------------------------
James R. Sulat
Vice President; Chief Financial Officer

DATE: November 12, 1999 BY: /s/ DAVID V. SMITH
--------------------------------------
David V. Smith
Vice President; Controller and
Principal Accounting Officer