With pioneering feats like the discovery of the hepatitis C virus, Chiron became one of the nation’s largest biotech companies. Then some of its academic style research and gambles on technology didn’t pan out commercially, and growth stalled. In 1998, the proud scientists running Chiron reluctantly turned it over to a no nonsense manager from the pharmaceutical industry. Chiron now is seeking a comeback by taking fewer research risks and squeezing more profit from its assets—acting, that is, more like a traditional pharmaceutical company. Recently, chairman and chief executive, Sean Lance, unveiled the first significant research cuts ever at Chiron. The retrenchment, announced only to employees, is part of a plan to cap its bulging R&D budget at $290 million, and could result in layoffs of as many as 90 scientists, or 20% of its research staff. The cuts, mainly in gene therapy and vaccine programs, are designed to help sustain earnings growth, a priority for Mr. Lance. In the first nine months of 1999, earnings from continuing operations, at $102.5 million, leapt 66% over the year earlier period.
a. Assume you are a market analyst for the biotech industry. Discuss how you would evaluate the news (as good or bad) about Chiron making deep cuts in R&D spending.
b. As a finance professional at Chiron, how could you help Mr. Lance identify opportunities for reducing costs and improving profitability?