How a Promising Venture Fell Ill

For Chiron Corp., it was supposed to be the launchpad for a bold expansion in the risky vaccine business.

The purchase of PowderJect Pharmaceuticals and its factory in Liverpool, England, would give Chiron a strong position in the flu shot market and a platform for rolling out vaccines it was developing for meningitis and other diseases.

“This is an important day in Chiron’s history,” Chief Executive Howard Pien said when the $878-million acquisition was announced in May 2003.

Seventeen months later, at 3 a.m. on Oct. 5, he heard it all come undone.

As Pien listened from his apartment in San Francisco, and Chiron’s in-house lawyers and managers gathered in a conference room at company headquarters in Emeryville across the bay, John Lambert, the British-based head of Chiron’s vaccine business, gave them the news: British health regulators had suspended the license for the Liverpool plant, taking half the U.S. supply of flu vaccine off the market and knocking Chiron out of the business until next year.

Today, Pien is scheduled to appear before the House Government Reform Committee, where he is likely to face questions about what Chiron knew or should have known -- and when -- about bacterial contamination at the factory.

The day after the plant was effectively closed, Pien said Chiron’s own tests had showed that the vaccine was safe to use and called the British action “completely unexpected.” But nearly two weeks later, the U.S. Food and Drug Administration confirmed the British decision after it conducted its own inspection and found evidence of bacteria in the vaccine.

The company has refused to release any documents about its vaccine or conditions at the Liverpool plant. The FDA’s inspection records dating to 2003 are expected to be made public by the congressional committees investigating the matter.

The committee probes are just one of several fronts in Chiron’s legal troubles. Civil lawsuits filed on behalf of shareholders accuse the company of misleading investors about its ability to produce vaccine. The Justice Department has launched a criminal investigation, and the Securities and Exchange Commission has asked Chiron for documents about its vaccine as part of an informal inquiry.

Chiron’s own lawyers have been investigating to figure out what went wrong. Pien himself is leading an effort to fix the manufacturing problems, while Jack Goldstein, head of Chiron’s blood-testing business, has temporarily assumed the post of chief operating officer to oversee day-to-day operations.

Chiron also has made management changes in Liverpool, according to a knowledgeable source.

A company spokesman said Chiron had no comment on the flu vaccine matter.

Pien was unavailable to comment. He arrived in Washington last week to prepare for the House committee hearing with a legal team led by Robert S. Bennett, who represented Enron Corp. and defended former President Clinton in the Paula Jones sexual harassment case.

Pien may be on the defensive now, but he was brimming with confidence in January about Chiron’s flu shot business. The Liverpool plant had shipped 38 million doses to the United States in 2003, up 50% from 2002. Fluvirin had become Chiron’s biggest product, adding $322 million to revenue.

To Pien, the only place to go was up. The company figured that total flu vaccine sales would swell to $480 million by 2006. “We believe the flu vaccine business is growing,” Pien said in a January interview. “We are committed, optimistic and energetic.”

Flu shots offered Chiron a chance to be a player in the U.S. vaccine market. The company’s European operations produced vaccines for diseases including meningitis, measles and encephalitis, but until recently the only one it sold in the United States was for rabies.

Chiron’s timing was right. Several drug companies, including Wyeth, had dropped out of the flu vaccine business because of low profit and tough regulations. As the number of suppliers shrank, prices rose to $7.50 to $8.50 per shot last year from less than $2 a decade ago. Over the same period, annual demand for shots increased to more than 80 million from 20 million as health officials stressed the importance of vaccinations.

But along with the opportunity for growth, the PowderJect purchase brought Chiron potential trouble. The Liverpool factory had been through several owners and had a history of high-profile regulatory problems.

In 1999, FDA inspectors at what was then Medeva Pharma’s factory documented “significant deviations” from what it considered good manufacturing standards, including “failure to clean, maintain and sanitize equipment.” The agency also found “unacceptable” levels of bacteria in unfinished vaccine.

The next year, Medeva Pharma recalled polio vaccine produced at the factory because the company had not taken precautions to prevent possible contamination with mad cow disease.

In 2002, regulators in Britain and Ireland recalled tuberculosis vaccine made at the factory because it failed to meet potency standards.

Then, one month after Chiron announced the PowderJect deal, the FDA found higher-than-expected levels of bacteria in unfinished batches of flu vaccine. Acting FDA Commissioner Lester Crawford said inspectors faulted PowderJect for “systemic quality-control issues.”

“We found some areas of concern and made some suggestions for correction, and the plant did comply,” he said recently. “We felt everything had been reconciled.”

To be sure, vaccine production can be messy. Flu virus is grown inside chicken eggs, which are ideal breeding grounds for bacteria. After a while, the virus is killed and separated from the eggs so the virus can be made into vaccine. It takes about 50 million eggs to produce an equal number of doses of vaccine.

FDA records show that Aventis Pasteur Inc. and former flu vaccine makers Wyeth and Parkedale Pharmaceuticals Inc. had trouble with contamination at their factories. Parkedale’s difficulties were so severe that in 2000 the FDA ordered the company to stop making flu vaccine.

Chiron figured it could fix the problems in Liverpool. For one thing, the company was familiar with the flu vaccine business and was regarded as a reliable supplier in Europe, said analyst Thomas Shrader of Harris Nesbitt. It supplied flu shots to Austria, Germany, Italy and Spain from two factories in Europe.

The California company, which retained most of the 1,000 PowderJect employees, stepped up training and committed $100 million to expand and upgrade the factory.

“The investment is not just to put up buildings and machines,” Pien said in January. “It also is to enhance the manufacturing process and come up with a better way of making vaccines.”

Pien seemed well suited to the task. The Taiwan-born executive, now 47, arrived at Chiron in 2003 after a successful career at GlaxoSmithKline, one of the world’s largest drug companies.

Among his first jobs had been to launch the U.S. vaccines business for SmithKline Beecham. In a short time, SmithKline became the market leader in shots for hepatitis B, a vaccine produced using technology developed at Chiron. After Glaxo Wellcome acquired SmithKline, Pien continued to climb the corporate ladder. Before leaving the merged company, he was president of its international pharmaceuticals business.

Several veterans of Glaxo and SmithKline followed Pien to Chiron, including John Vavricka, who runs its U.S. flu vaccine business, and Ursula Bartels, the general counsel.

“There are people who would walk through walls for him,” said Argeris “Jerry” Karabelas, Pien’s former boss at SmithKline Beecham and now a venture capitalist. “People trust him to be fair and respect his intelligence. He is the most credible and honest person I have ever worked with.”

The 2004 production season got off to a good start for Chiron. The company announced in July that it had shipped its first 1 million doses to the United States, beating rival Aventis Pasteur to market.

Then, while conducting routine sterility tests in August, Chiron discovered reddish bacteria called Serratia marcescens in some batches of vaccine. The company estimated that it would need to throw out 4 million contaminated doses. Pien said that “human error” was probably to blame but that the company wouldn’t ship vaccine until it confirmed the cause. The delay, he said, meant Chiron would deliver 46 million to 48 million doses in October.

As Chiron traced the source of the bacteria, it held weekly conference calls with the FDA and other parties to keep them informed. Chiron performed a second round of sterility tests on all remaining batches of vaccine. The FDA was satisfied with Chiron’s progress at the time.

“Our expectation, based on conversations with Chiron, was that the problem was being cleared up,” Crawford said in a recent news briefing.

Chiron completed its review Sept. 27. After sifting through “thousands of pieces of data,” Pien said, Chiron concluded that all its remaining vaccine was safe to use.

On Sept. 28, the Medicines and Healthcare Products Regulatory Agency, the British counterpart to the FDA, began a two-day inspection of the Liverpool factory. The same day, Pien appeared before the Senate Committee on Aging in Washington and told lawmakers that hard work by Chiron employees in Liverpool meant vaccine would reach patients soon.

“Despite the delay,” Pien told the committee, “it does not appear that there will be a shortage of influenza vaccine this season.”

One week later, Pien was on the phone with Health and Human Services Secretary Tommy G. Thompson, relaying the bad news from Britain.