Chiron to Sell Diagnostics Unit to Bayer

In a major restructuring, Chiron Corp. announced Thursday the sale of its clinical diagnostics division to Bayer Group of Germany for $1.1 billion.

Chiron officials say they had been looking for a partner for the marginally profitable unit, which accounted for half of the firm’s $1.16 billion in revenue last year and almost half of its work force of about 6,500.

The deal is part of an effort “to refocus the organization and rechannel it into areas we do best,” said Sean Lance, president and chief executive of Chiron, which is headquartered in Emeryville and remains one of the world’s largest biotechnology companies.

Lance said that to raise profit margins at the Massachusetts-based diagnostics unit would have required scaling up sales, and that Chiron was not positioned to do that alone.

After the transaction is completed later this year, the company that remains will include a line of genetically engineered medications and vaccines, which it has developed alone or in partnership with major pharmaceutical companies.

Chiron will also retain its share of two highly profitable blood-testing partnerships, which provide the tests used by blood banks to screen for hepatitis and AIDS. In addition to the upfront purchase price for the diagnostics division, Chiron will receive royalties from Bayer for use of Chiron’s patented hepatitis C and AIDS discoveries.

Lance said the sale price of the diagnostics division was much higher than analysts might have predicted, and showed that Wall Street had undervalued the intellectual property biotech companies have generated. Chiron acquired what became Chiron Diagnostics for less than $400 million in stock as part of a complex deal with Ciba-Geigy, which has since merged into Novartis. (Novartis now holds 45% of Chiron’s stock.)

Analysts consider the sale a positive move for Chiron.

“Now they can refocus again on what their main business was” before the deal with Ciba-Geigy, said Jim McCamant, editor of the Medical Technology Stock Letter, who has long been bullish on Chiron.

Peter Ginsberg, senior analyst at Piper, Jaffray & Hopwood Inc., which has given the stock a “buy” rating since December, said the deal shows the transformation of Chiron, which has now shed its low-margin, slow-growth businesses.

“This is a watershed event,” said Ginsberg. He credits Lance, who joined Chiron earlier this year, for delivering on a promise to transform the company. “He just showed the world that Chiron is going to be action-oriented.”

But some analysts are reserving judgment on the long-term importance of the sale.

Matt Geller, senior analyst with CIBC Oppenheimer, described the sale price as favorable and likely to boost the stock modestly in the short run. But in a bulletin to clients, he said he saw only small growth potential for Chiron drugs now on the market and uncertainty in its product pipeline.

And Lance is vague on what the company plans to do with this sudden infusion of cash. In addition to further investment in research and product development, Chiron is looking for acquisition and merger opportunities, Lance said. It is also considering a share buyback.

Chiron shares rose 56 cents to close at $17.44 on Nasdaq.